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Filed pursuant to Rule 424(b)(3)
File No. 333-92335
PEOPLES BANCORP THREE RIVERS FINANCIAL CORPORATION
JOINT PROXY STATEMENT/PROSPECTUS
MERGER PROPOSED
YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Peoples Bancorp and Three Rivers Financial
Corporation have unanimously approved an agreement to merge Three Rivers
Financial Corporation with and into Peoples Bancorp.
If we complete the merger, shareholders of Three Rivers Financial Corporation
will receive 1.08 shares of Peoples Bancorp common stock for each share of Three
Rivers Financial Corporation common stock plus cash for any fractional shares.
We estimate that, upon completion of the merger, current Three Rivers Financial
Corporation shareholders will beneficially own approximately 20.33% of the
outstanding Peoples Bancorp common stock. Peoples Bancorp common stock is listed
on the Nasdaq National Market System under the symbol "PFDC." The closing price
of Peoples Bancorp's common stock was $15.75 per share on December 23, 1999.
This document gives you detailed information about the merger and includes a
copy of the Plan of Reorganization and Agreement and Plan of Merger, and you
should read it carefully. It is a joint proxy statement that both companies are
using to solicit proxies for use the Three Rivers special shareholder meeting
and the Peoples Bancorp annual shareholder meeting. It is also a prospectus
relating to Peoples Bancorp's issuance of shares of common stock of Peoples
Bancorp in connection with the merger.
BEFORE YOU MAKE A DECISION ON HOW TO VOTE ON THE MERGER, YOU SHOULD CONSIDER
THE "RISK FACTORS" BEGINNING ON PAGE 15 OF THE ATTACHED JOINT PROXY
STATEMENT/PROSPECTUS.
We are enthusiastic about the merger and the strength and capabilities we expect
from the combined company. We join all the other members of each company's Board
of Directors in recommending that you vote in favor of the merger.
Roger J. Wertenberger G. Richard Gatton
Chairman of the Board President and Chief
Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS DECEMBER 27, 1999 AND IT
IS FIRST BEING MAILED TO SHAREHOLDERS ON OR ABOUT JANUARY 7, 2000.
<PAGE>
PEOPLES BANCORP
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 16, 2000 AT 2:00 P.M.
AT THE RAMADA LIMITED AND SUITES, LOCATED AT 306 TOURING DRIVE, AUBURN, INDIANA
PURPOSES:
- To vote on the merger of Three Rivers Financial Corporation and
Peoples Bancorp and related matters.
- To elect two directors.
- To approve the appointment of Olive LLP, independent certified
public accountants, as the auditors of the Company for the
fiscal year ending September 30, 2000.
- To approve a proposal to adjourn the meeting to permit further
solicitation of proxies in the event that an insufficient
number of shares is present in person or by proxy to approve
the merger.
Only shareholders of Peoples Bancorp as of the close of business on
December 27, 1999 may vote at the annual meeting.
By signing the enclosed proxy, you are permitting the proxy holders to vote, in
their discretion, upon other matters that may come before the meeting. As of the
date of mailing, the Board of Directors is not aware of any other matters that
may come before the meeting.
John E. Weigel, III
Corporate Secretary
Auburn, Indiana
January 7, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, WE URGE YOU TO
DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE.
YOU MAY REVOKE YOUR PROXY PRIOR TO ITS EXERCISE IN THE MANNER PROVIDED IN THE
ACCOMPANYING DOCUMENT.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 15, 2000 AT 9:00 A.M.
AT THE THREE RIVERS COMMUNITY CENTER
LOCATED AT 103 SOUTH DOUGLAS AVENUE,
THREE RIVERS, MICHIGAN
PURPOSES:
- To vote on the merger of Three Rivers Financial Corporation
and Peoples Bancorp and related matters. In the merger, you
will receive 1.08 shares of Peoples Bancorp common stock for
each share of Three Rivers Financial Corporation common stock
you own before the merger. You will also receive cash in lieu
of receiving any fractional shares of Peoples Bancorp common
stock.
- To approve a proposal to adjourn the meeting to permit further
solicitation of proxies in the event that an insufficient
number of shares is present in person or by proxy to approve
the merger.
Only shareholders of Three Rivers Financial Corporation as of the close of
business on December 27, 1999 may vote at the Three Rivers Financial
Corporation special meeting.
By signing the enclosed proxy, you are permitting the proxy holders to vote, in
their discretion, upon other matters that may come before the meeting. As of the
date of mailing, the Board of Directors is not aware of any other matters that
may come before the meeting.
Martha Romig
Corporate Secretary
Three Rivers, Michigan
January 7, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, WE URGE YOU TO
DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE.
YOU MAY REVOKE YOUR PROXY PRIOR TO ITS EXERCISE IN THE MANNER PROVIDED IN THE
ACCOMPANYING DOCUMENT.
2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
Questions and Answers About the Merger...................................................................... 1
Summary ................................................................................................... 3
Market Price and Dividend Information....................................................................... 8
Selected Financial Data..................................................................................... 9
Risk Factors................................................................................................ 15
A Warning about Forward-Looking Information................................................................. 16
The Three Rivers Special Meeting............................................................................ 17
The Peoples Bancorp Annual Meeting.......................................................................... 19
The Merger.................................................................................................. 30
The Plan of Reorganization and Agreement and Plan of Merger................................................. 49
Description of Peoples Bancorp Common Stock and Three Rivers Common Stock................................... 56
Experts ................................................................................................... 60
Legal Matters............................................................................................... 61
Peoples Bancorp Stockholders' Proposals..................................................................... 61
Unaudited Pro Forma Condensed Combined Financial Information................................................ 61
Notes to Unaudited Pro Forma Condensed Combined Financial Statements........................................ 66
Where You Can Find More Information......................................................................... 67
</TABLE>
<TABLE>
<CAPTION>
Annexes
<S> <C>
Annex A Plan of Reorganization and Agreement and Plan Of Merger
Annex B Opinion of JMP Financial, Inc.
Annex C Opinion of Trident Securities
Annex D Annual Report on Form 10-K for the Year Ended September 30, 1999 for
Peoples Bancorp
Annex E Annual Report to Shareholders for the Year Ended September 30, 1999
for Peoples Bancorp.
Annex F Annual Report on Form 10-KSB for The Year Ended June 30, 1999 for
Three Rivers Financial Corporation.
Annex G Annual Report to Shareholders for the Year Ended June 30, 1999 for
Three Rivers Financial Corporation.
Annex H Quarterly Report on Form 10-QSB for the Quarter Ended September 30,
1999 for Three Rivers Financial Corporation.
</TABLE>
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: For each outstanding share of Three Rivers you own before the merger,
you will receive 1.08 shares of Peoples Bancorp common stock.
Peoples Bancorp will not issue fractional shares in the merger. Instead, you
will receive a check, equal to the amount of any fractional share of Peoples
Bancorp common stock that you would otherwise be entitled to receive based upon
the average market value of a share of Peoples Bancorp common stock before the
merger.
For each outstanding share of Peoples Bancorp you own before the merger, you
will continue to own one share of Peoples Bancorp common stock following the
merger. If the merger had occurred on September 30, 1999, Three Rivers' former
shareholders would have owned approximately 20.33% of Peoples Bancorp's
outstanding shares of common stock and current Peoples Bancorp shareholders
would have owned approximately 79.67% of Peoples Bancorp's outstanding shares of
common stock. These figures assume that no vested stock options of Three Rivers
are exercised.
Q: WHAT RISKS SHOULD I CONSIDER BEFORE I VOTE ON THE MERGER?
A: You should review "Risk Factors" on page 15.
Q: WHAT HAPPENS AS THE MARKET PRICE OF PEOPLES BANCORP COMMON STOCK
FLUCTUATES?
A: The value of the merger consideration will fluctuate. We have fixed the
merger consideration at 1.08 shares of Peoples Bancorp common stock for each
share of Three Rivers common stock. However, since the market value of Peoples
Bancorp common stock will fluctuate before and after the closing of the merger,
the value of the Peoples Bancorp common stock that Three Rivers shareholders
will receive in the merger could increase or decrease. You should obtain current
market prices for shares of Peoples Bancorp common stock and Three Rivers common
stock. Peoples Bancorp common stock is listed on the Nasdaq National Market
under the symbol "PFDC." Three Rivers common stock is traded on the American
Stock Exchange under the symbol "THR."
Q: WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A: We are working to complete the merger at the beginning of the first
quarter of 2000. We must first obtain the necessary regulatory approvals and the
approvals of our shareholders at the meetings. We cannot assure you as to when
or if all the conditions to the merger will be met, and it is possible we will
not complete the merger.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: We expect that the exchange of shares by Three Rivers shareholders
generally will be tax-free to Three Rivers shareholders for U.S. federal income
tax purposes. Shareholders will, however, have to pay taxes on cash received for
fractional shares.
There will be no tax consequences to shareholders of Peoples Bancorp.
Your tax consequences will depend on your personal situation. You should consult
your tax advisor for a full understanding of the tax consequences of the merger
to you.
Q: HOW DO THE DIRECTORS PLAN TO VOTE?
A: All of your directors of Peoples Bancorp and Three Rivers have
indicated that they intend to vote their shares in favor of the merger. The
Three Rivers officers and directors collectively hold 80,390 shares or
approximately 11.44% of the outstanding Three Rivers common stock as of the
voting record date. The Peoples Bancorp officers and directors collectively
hold 305,720 shares or approximately 9.66% of the outstanding Peoples
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Bancorp common stock as of the voting record date.
Q: WILL I BE ABLE TO DISSENT?
A: There will be no dissenters rights in connection with the merger.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: No. Your broker will vote your shares of Three Rivers common stock or
Peoples Bancorp common stock only if you provide instructions on how to vote.
You should instruct your broker how to vote your shares, following the
directions your broker provides. If you do not provide instructions to your
broker, your broker will not be able to vote your shares on the proposed merger
and this will have the effect of voting against the merger.
Q: IF I AM A THREE RIVERS SHAREHOLDER, SHOULD I SEND IN MY STOCK
CERTIFICATES NOW?
A: No. After the merger is completed, The Fifth Third Bank will send
Three Rivers shareholders written instructions for exchanging their stock for
shares of Peoples Bancorp. Peoples Bancorp shareholders will keep their existing
stock certificates.
WHO CAN HELP ANSWER YOUR QUESTIONS
The address of the principal executive offices of Peoples Bancorp
and Three Rivers is set forth below. If you want additional copies of this
document, or if you want to ask any questions about the merger, you should
contact:
For Peoples Bancorp shareholders:
MAURICE F. WINKLER, III
President, Chief Executive Officer, and Chief Operating Officer
Peoples Bancorp.
212 West 7th Street
Auburn, Indiana 46706
Telephone: (219) 925-2500
For Three Rivers shareholders:
MR. G. RICHARD GATTON
President and Chief Executive Officer
Three Rivers Financial Corporation
123 Portage Avenue
Three Rivers, Michigan 49093
Telephone: (616) 279-5117
Please see "WHERE CAN I FIND MORE INFORMATION" on page 67 where you can
find more important information about Peoples Bancorp and Three Rivers.
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY
NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE
UNDERSTANDING OF THE MERGER AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL
TERMS OF THE MERGER, YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY, AS WELL AS
THE ADDITIONAL DOCUMENTS WE REFER YOU TO, INCLUDING THE PLAN OF REORGANIZATION
AND AGREEMENT AND PLAN OF MERGER WHICH WE HAVE ATTACHED AS ANNEX A. SEE "WHERE
YOU CAN FIND MORE INFORMATION" (PAGE 67).
GENERAL
We are proposing a merger between Three Rivers and Peoples Bancorp. The
merger will combine Three Rivers with Peoples Bancorp and will create
opportunities for the combined company to realize enhanced revenues through
asset growth and operating efficiencies.
In the merger, each Three Rivers shareholder will receive 1.08 shares
of Peoples Bancorp common stock for each share of Three Rivers common stock.
Peoples Bancorp will pay cash in lieu of issuing fractional shares of Peoples
Bancorp common stock
THE COMPANIES
Peoples Bancorp is a unitary savings and loan holding company that
primarily conducts business through its wholly-owned subsidiary, Peoples Federal
Savings Bank of DeKalb County. At September 30, 1999, Peoples Bancorp had $328.0
million in total assets, $271.0 million in total deposits, $297.9 million in
total loans, and shareholders' equity of $45.5 million.
Peoples Federal provide its services through a branch network comprised
of eight full-service banking offices. Peoples Federal has historically
concentrated its business activities in northeastern Indiana.
Peoples Federal 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 and construction loans; multi-family
residential real estate loans; and secured and unsecured consumer loans. Peoples
Federal also provides credit card services, as well as enhancements to its loan
and deposit products designed to provide customers with added conveniences.
Three Rivers is a unitary savings and loan holding company that
primarily conducts business through its wholly-owned subsidiary, First Savings
Bank, A Federal Savings Bank. At September 30, 1999, Three Rivers had $99.5
million in total assets, $64.7 million in total deposits, $70.0 million in total
loans, and shareholders' equity of $10.9 million.
First Savings provides its services through a branch network comprised
of six full-service banking offices. First Savings' primary market area consists
of St. Joseph and Cass Counties, Michigan, the southwest portion of Kalamazoo
County, Michigan, La Grange County, Indiana, and the eastern portion of Elkhart
County, Indiana. First Savings offers a wide range of consumer and commercial
financial products including consumer demand deposit accounts; NOW accounts;
regular and term savings accounts and savings certificates; residential,
multi-family, construction, and commercial real estate loans; and secured and
unsecured consumer loans.
THE THREE RIVERS SPECIAL MEETING (PAGE 17)
The Three Rivers special shareholders' meeting will be held at the
Three Rivers Community Center located at 103 South Douglas Avenue, Three
Rivers, Michigan, at 9:00 a.m., local time, on February 15, 2000. At the
meeting,
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Three Rivers shareholders will vote upon a proposal to approve the merger and a
proposal to adjourn or postpone the meeting to allow additional time to solicit
additional proxies should there not be sufficient votes in favor of the merger.
THE PEOPLES BANCORP ANNUAL MEETING (PAGE 19)
The Peoples Bancorp annual shareholders' meeting will be held at The
Ramada Limited and Suites, located at 306 Touring Drive, Auburn, Indiana, at
2:00 p.m., local time, on February 16, 2000. At the meeting, Peoples Bancorp
shareholders will vote upon:
- - a proposal to approve the merger;
- - the election of two directors;
- - the ratification of the appointment of Olive LLP as independent auditors
for the fiscal year ending September 30, 2000; and
- - a proposal to adjourn or postpone the meeting to allow additional time to
solicit additional proxies should there not be sufficient votes in favor of
the merger.
RECORD DATE; VOTING POWER (PAGES 19 AND 21)
You are entitled to vote at the Peoples Bancorp annual meeting if
you owned shares of Peoples Bancorp on December 27, 1999, the Peoples Bancorp
record date. As of that date, there were 3,164,706 shares of Peoples Bancorp
common stock issued and outstanding held by approximately 1,100 shareholders.
Each holder of Peoples Bancorp common stock will be entitled to one vote per
share on any matter that may properly come before the meeting.
You are entitled to vote at the Three Rivers special meeting if you
owned shares of Three Rivers on December 27, 1999, the Three Rivers record
date. As of that date, there were 702,734 shares of Three Rivers common stock
issued and outstanding held by approximately 900 shareholders. Each holder of
Three Rivers common stock will be entitled to one vote per share on any
matter that may properly come before the meeting.
VOTE REQUIRED (PAGES 17 AND 21)
Approval by the Peoples Bancorp shareholders of the proposal to approve
and adopt the Plan of Reorganization and Agreement and Plan of Merger requires
the affirmative vote of a majority of the outstanding shares of Peoples Bancorp
common stock. A plurality of the votes cast by shareholders in person or by
proxy at the annual meeting will be necessary for the election of directors.
Approval by the Peoples Bancorp shareholders of the ratification of the
appointment of auditors and the proposal to adjourn or postpone the meeting to
allow extra time to solicit proxies requires the affirmative vote of a majority
of the shares of Peoples Bancorp present at the meeting in person or by proxy
and entitled to vote.
Approval by the Three Rivers shareholders of the proposal to approve
and adopt the Plan of Reorganization and Agreement and Plan of Merger requires
the affirmative vote of a majority of the outstanding shares of Three Rivers
common stock. Approval by the Peoples Bancorp shareholders of the proposal to
adjourn or postpone the meeting to allow extra time to solicit proxies requires
the affirmative vote of a majority of the shares of Three Rivers present at the
meeting in person or by proxy and entitled to vote.
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RECOMMENDATION OF BOARD OF DIRECTORS (PAGES 18 AND 30)
The Peoples Bancorp Board of Directors has unanimously approved and
adopted the Plan of Reorganization and Agreement and Plan of Merger, and
recommends a vote "FOR" approval of the merger. You also should refer to the
reasons that the Peoples Bancorp Board of Directors considered in determining
whether to approve and adopt the Plan of Reorganization and Agreement and
Plan of Merger on page 31. The Peoples Bancorp Board of Directors also
recommends a vote "FOR" the nominees proposed for directors, the ratification
of the appointment of auditors, and the proposal to adjourn or postpone the
meeting to allow extra time to solicit proxies.
The Three Rivers Board of Directors has unanimously approved and
adopted the Plan of Reorganization and Agreement and Plan of Merger, and
recommends a vote "FOR" approval of the merger. You also should refer to the
reasons that the Three Rivers Board of Directors considered in determining
whether to approve and adopt the Plan of Reorganization and Agreement and
Plan of Merger on page 32. The Three Rivers Board of Directors also
recommends a vote "FOR" the proposal to adjourn or postpone the meeting to
allow extra time to solicit proxies.
OPINION OF JMP FINANCIAL, INC., FINANCIAL ADVISORS TO PEOPLES BANCORP (PAGE 42)
JMP Financial, Inc., financial advisor to Peoples Bancorp, rendered a
written fairness opinion dated October 16, 1999 to the Peoples Bancorp Board of
Directors that as of that date, the merger consideration to be paid was fair to
the Peoples Bancorp shareholders from a financial point of view. JMP Financial
subsequently confirmed its October 16, 1999 opinion by delivery to the Peoples
Bancorp Board of Directors a written confirmation of its prior opinion dated as
of the date of this document. A copy of the fairness opinion, setting forth the
information reviewed, assumptions made and matters considered by JMP Financial,
is attached to this document as Annex B. Peoples Bancorp shareholders should
read the fairness opinion in its entirety.
OPINION OF TRIDENT SECURITIES, A DIVISION OF MCDONALD INVESTMENTS, INC.,
FINANCIAL ADVISORS TO THREE RIVERS (PAGE 37)
Trident Securities, A Division of McDonald Investments, Inc., financial
advisor to Three Rivers, rendered an opinion dated as of September 21, 1999 to
the Three Rivers Board of Directors that as of that date, the merger
consideration was fair to the Three Rivers shareholders from a financial point
of view. Trident Securities subsequently confirmed its September 21, 1999
opinion by delivery to the Three Rivers Board of Directors of a written
confirmation of its prior opinion dated as of the date of this document. A copy
of the fairness opinion, setting forth the information reviewed, assumptions
made and matters considered by Trident Securities, is attached to this document
as Annex C. Three Rivers shareholders should read the fairness opinion in its
entirety.
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TERMS OF THE PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF MERGER (PAGE 49)
THE PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF MERGER IS ATTACHED
TO THIS DOCUMENT AS ANNEX A. WE ENCOURAGE YOU TO READ THE PLAN OF REORGANIZATION
AND AGREEMENT AND PLAN OF MERGER IN ITS ENTIRETY. IT IS THE LEGAL DOCUMENT THAT
GOVERNS THE MERGER. WE ALSO ENCOURAGE YOU TO READ THE RISK FACTORS BEGINNING ON
PAGE 15.
GENERAL. The Plan of Reorganization and Agreement and Plan of Merger
provides that Three Rivers will merge with and into Peoples Bancorp, with
Peoples Bancorp as the surviving corporation. As a result of the merger, First
Savings will become a wholly-owned subsidiary of Peoples Bancorp. Peoples
Bancorp does not intend to merge First Savings and Peoples Federal.
MERGER CONSIDERATION. For each outstanding share of Three Rivers common
stock, Three Rivers shareholders will receive 1.08 shares of Peoples Bancorp
common stock. Peoples Bancorp will not issue fractional shares. Instead, Three
Rivers shareholders will receive a check equal to the amount of any fractional
share based on the average closing price of Peoples Bancorp common stock over
the five trading days preceding the closing date of the merger.
COMPLETION OF THE MERGER. The merger will become effective when we file
both a Certificate of Merger with the Secretary of State of Delaware and
Articles of Merger with the Secretary of State of Indiana.
CONDITIONS TO THE MERGER. The completion of the merger depends upon the
satisfaction of a number of conditions, including:
- approval of the Plan of Reorganization and Agreement and Plan of
Merger by both the Three Rivers and Peoples Bancorp shareholders;
- notification to the Nasdaq Stock Market regarding the Peoples
Bancorp common stock we will issue in the merger;
- receipt of all necessary authorizations, orders, and consents of
governmental authorities and the expiration of any regulatory waiting periods;
- receipt of an opinion of Manatt, Phelps & Phillips, LLP that the
merger will be treated for U.S. federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code and that no
gain or loss will be recognized by Three Rivers shareholders in the merger
(except with respect to cash paid in lieu of issuing fractional shares);
- other customary conditions and obligations of the parties set
forth in the Plan of Reorganization and Agreement and Plan of Merger.
Unless prohibited by law, either Peoples Bancorp or Three Rivers could
elect to waive a condition that has not been satisfied and complete the merger
anyway.
FEES AND EXPENSES. Peoples Bancorp and Three Rivers will pay their own
fees, costs, and expenses incurred in connection with the merger except that
printing costs associated with this document will be shared. In addition, Three
Rivers and Peoples Bancorp have agreed that if the Plan of Reorganization and
Agreement and Plan of Merger is terminated under certain circumstances prior to
the effective time of the merger, and within 12 months of the date of
termination, Three Rivers agrees to be acquired by, merged, or otherwise
combined with any third party, First Savings will pay Peoples Bancorp the amount
of $250,000.
TERMINATION. Either Three Rivers or Peoples Bancorp may call off the
merger under certain circumstances, including if:
- we both consent in writing;
- the merger is not completed before March 31, 2000;
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- we are not able to obtain required governmental approvals;
- the Three Rivers or Peoples Bancorp shareholders do not approve
the Plan of Reorganization and Agreement and Plan of Merger;
- the other party breaches in a material manner any of the
representations or warranties or any covenant or agreement it has made under the
Plan of Reorganization and Agreement and Plan of Merger and the breach is not
cured within 30 days; or
- any condition to a party's obligations under the Plan of
Reorganization and Agreement and Plan of Merger has not been met or waived.
In addition, Peoples Bancorp and Three Rivers may call off the merger
if the other party's Board of Directors withdraws, modifies, or changes in an
adverse manner the recommendation of the Board of Directors with respect to the
merger or the Plan of Reorganization and Agreement and Plan of Merger.
INTERESTS OF CERTAIN DIRECTORS AND EXECUTIVE OFFICERS OF THREE RIVERS IN THE
MERGER (PAGE 46)
When you consider the Three Rivers Board of Director's recommendation,
you should be aware that a number of directors and executive officers of Three
Rivers have interests in the merger as employees and/or directors that are
different from, and may conflict with, the interests of Three Rivers
shareholders. The Three Rivers Board of Directors recognized these interests and
determined that they did not affect the benefits of the merger to the Three
Rivers shareholders.
DIRECTORS OF PEOPLES BANCORP AND FIRST SAVINGS FOLLOWING THE MERGER (PAGE 45)
Upon completion of the merger, the current directors of Peoples Bancorp
will remain directors of Peoples Bancorp and the current directors of First
Savings will remain directors of First Savings. In addition, and subject to the
approval of the Peoples Bancorp Board of Directors, Mr. G. Richard Gatton,
President and Chief Executive Officer of Three Rivers and First Savings, and one
other representative of Three Rivers will be added to the Board of Directors of
Peoples Bancorp. Furthermore, subject to the approval of the First Savings Board
of Directors, two representatives of Peoples Bancorp will be added to the Board
of Directors of First Savings.
ACCOUNTING TREATMENT (PAGE 48)
We expect the merger to be accounted for as a purchase of assets and
not as a pooling of interests. This means that all of the assets and liabilities
of Three Rivers will be marked to fair market value. Any excess payment by
Peoples Bancorp over the fair market value of the net assets of Three Rivers
will be recorded as goodwill on the financial statements of Peoples Bancorp.
RESALES OF PEOPLES BANCORP COMMON STOCK (PAGE 54)
Shares of Peoples Bancorp common stock which Three Rivers shareholders
receive in the merger will be freely transferable by the holders, except for
those shares held by holders who may be "affiliates." Affiliates generally
include directors, certain executive officers, and
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holders of 10% or more of Three Rivers common stock. Three Rivers has provided
to Peoples Bancorp the written agreement of each of its "affiliates" that such
"affiliate" will not dispose of its shares of Three Rivers common stock and, to
the extent applicable, Peoples Bancorp common stock, except in compliance with
the Securities Act of 1933.
REGULATORY APPROVALS (PAGE 55)
We must make filings with or obtain approvals from regulatory
authorities to effect the merger. These include, without limitation, the
approval of or notice to the Office of Thrift Supervision and the Indiana
Department of Financial Institutions. In addition, Peoples Bancorp must
notify the Nasdaq Stock Market of the common stock issued to Three Rivers
shareholders.
We cannot predict whether or when we will obtain all required
regulatory approvals.
DIFFERENCES IN THE RIGHTS OF SHAREHOLDERS (PAGE 58)
There are differences in the rights of shareholders of Three Rivers
once they become shareholders of Peoples Bancorp. Three Rivers is organized
under the laws of the State of Delaware while Peoples Bancorp is organized
under the laws of the State of Indiana. Three Rivers shareholders, upon
completion of the merger, will become Peoples Bancorp shareholders, and their
rights will be governed by Indiana law and Peoples Bancorp's articles of
incorporation and bylaws.
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MARKET PRICE AND DIVIDEND INFORMATION
COMPARATIVE MARKET PRICE INFORMATION
The following table presents quotation information for Peoples
Bancorp common stock on the Nasdaq National Market System and trading
information for Three Rivers common stock on the American Stock Exchange on
September 20, 1999 and December 23, 1999. September 20, 1999 was the last day
prior to our announcement of the signing of the Plan of Reorganization and
Agreement and Plan of Merger. December 23, 1999 was the last practicable
trading day for which information was available prior to the date of this
document.
<TABLE>
<CAPTION>
Peoples Bancorp Common Stock Three Rivers Common Stock
(dollars per share) (dollars per share)
---------------------------------------- ----------------------------------------
High Low Close High Low Close
---------- ---------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
September 20, 1999...... $17.75 $17.00 $17.00 $11.00 $11.00 $11.00
December 23, 1999...... $15.88 $15.75 $15.75 $15.69 $15.69 $15.69
</TABLE>
Also set forth below for each of the closing prices of Peoples Bancorp
common stock on September 20, 1999 and December 23, 1999 is the equivalent pro
forma price of Three Rivers stock, which we determined by multiplying the
applicable price of Peoples Bancorp common stock by the number of shares of
Peoples Bancorp common stock we are issuing for each share of Three Rivers
common stock (1.08).
<TABLE>
<CAPTION>
Three Rivers Equivalent Pro Forma
<S> <C>
Closing price on September 20, 1999 $18.36
Closing price on December 23, 1999 $17.01
</TABLE>
We urge you to obtain current market quotations for Peoples Bancorp
common stock and Three Rivers common stock. We expect that the market price of
Peoples Bancorp common stock will fluctuate between the date of this document
and the date on which the merger is completed and thereafter. Because the market
price of Peoples Bancorp common stock is subject to fluctuation, the value of
the shares of Peoples Bancorp common stock that Three Rivers shareholders will
receive in the merger may increase or decrease prior to and after the merger.
In addition, as a result of this fluctuation, the amount of cash Three
Rivers Financial Corporation shareholders will receive in lieu of Peoples
Bancorp's fractional shares will also fluctuate.
HISTORICAL MARKET PRICES AND DIVIDEND INFORMATION
PEOPLES BANCORP. Peoples Bancorp common stock is listed on the
Nasdaq National Market System under the symbol "PFDC." On the Peoples Bancorp
record date, there were approximately 1,100 shareholders of Peoples Bancorp
common stock. The following table sets forth for the calendar quarter
indicated the high and low bid prices per share of Peoples Bancorp common
stock as reported on the Nasdaq National Market System, and the dividends per
share of Peoples Bancorp common stock.
9
<PAGE>
<TABLE>
<CAPTION>
Dividends
QUARTER ENDED High Low Declared
- --------------------------------------------------- --------------- ------------- --------------------------
FISCAL 1998:
<S> <C> <C> <C>
December 31 $25.00 $20.83 $0.11
March 31 23.25 21.50 0.11
June 30 23.00 21.13 0.11
September 30 22.75 20.13 0.12
FISCAL 1999:
December 31 20.88 19.50 0.12
March 31 20.63 19.75 0.12
June 30 20.00 18.50 0.12
September 30 19.13 15.50 0.13
FISCAL 2000:
Through December 23 15.88 15.75 N/A
</TABLE>
THREE RIVERS. Three Rivers common stock is listed on the American
Stock Exchange under the symbol "THR." On the Three Rivers record date there
were approximately 900 shareholders of Three Rivers common stock. The
following table sets forth for the calendar quarter indicated the high and
low sales prices per share of Three Rivers common stock as reported on the
American Stock Exchange, and the dividends per share of Three Rivers common
stock. The prices per share of Three Rivers common stock set forth below have
been adjusted to reflect a 10% stock dividend declared on in October 1998.
<TABLE>
<CAPTION>
Dividends
QUARTER ENDED High Low Declared
- --------------------------------------------------- --------------- ------------- --------------------------
FISCAL 1998:
<S> <C> <C> <C>
September 30 $15.28 $14.20 $0.090
December 31 19.77 15.11 0.090
March 31 21.70 18.98 0.100
June 30 19.55 17.39 0.100
FISCAL 1999:
September 30 17.73 13.64 0.121
December 31 14.66 12.68 0.115
March 31 14.25 13.00 0.115
June 30 14.38 12.50 0.115
FISCAL 2000:
September 30 16.50 10.75 0.115
Through December 23 15.69 15.69 N/A
</TABLE>
SELECTED FINANCIAL DATA
We are providing the following information to aid you in your analysis
of the financial aspects of the merger. The following tables show financial
results actually achieved by each of Peoples Bancorp and Three Rivers (the
"historical" figures). The tables also show results as if the companies had
consummated the merger on the first day of the period presented (the "pro forma
combined" figures).
10
<PAGE>
The pro forma combined figures are presented using the purchase method of
accounting and are simply the arithmetical combinations of Peoples Bancorp's and
Three Rivers' separate financial results. The pro forma combined figures have
been adjusted to reflect the purchase accounting adjustment in order to assist
you in analyzing the future prospects of Peoples Bancorp. The pro forma combined
figures illustrate the possible scope of the change in Peoples Bancorp's
historical figures caused by the merger. You should not assume that Peoples
Bancorp and Three Rivers would have achieved the pro forma combined results if
the merger had actually occurred during the periods presented. These pro forma
presentations treat our companies as if Peoples Bancorp had purchased all of the
assets and assumed all of the liabilities of Three Rivers, which is how we plan
to account for the merger. When you read this information, you should also read
the information under the heading "Unaudited Pro Forma Condensed Combined
Financial Information" (page 64).
Peoples Bancorp's annual historical figures are derived from financial
statements audited by Olive LLP, independent auditors of Peoples Bancorp. Three
Rivers' annual historical figures are derived from financial statements audited
by Crowe, Chizek and Company, LLP, independent public accountants of Three
Rivers. The annual historical information presented below should be read
together with the consolidated audited financial statements and related notes of
Peoples Bancorp and of Three Rivers, incorporated in this document by reference
or attached to this document. To find this information, see "Where You Can Find
More Information" (page 67). We have retroactively adjusted all per share
information to reflect stock dividends and stock splits. In addition, we have
annualized information of Three Rivers on net loan charge-off amounts and return
on equity, return on average equity, and return on average assets for September
30, 1999 and September 30, 1998.
We expect to incur restructuring and merger-related expenses as a
result of combining our companies. We also anticipate that the merger will
provide the combined company with financial benefits such as reduced operating
expenses and the opportunity to earn additional revenue. However, none of these
anticipated expenses or benefits has been factored into the pro forma combined
income statement information. For that reason, the pro forma combined
information, while helpful in illustrating the financial attributes of the
combined company under one set of assumptions, does not attempt to predict or
suggest future results.
11
<PAGE>
<TABLE>
<CAPTION>
PEOPLES BANCORP HISTORICAL CONSOLIDATED FINANCIAL DATA
(dollars in thousands except per share amounts)
At and For The Year Ended September 30,
1999 1998 1997 1996 1995
------------------------------------------------------------------------
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net interest income.............. $ 11,766 $ 10,867 $ 10,430 $ 10,506 $ 9,957
Provision for losses on loans.... 89 75 50 9 50
Other operating income........... 854 758 644 641 630
Other operating expenses......... 5,459 4,747 4,228 5,930 4,146
------- ------- ------- ------- -----
Earnings before income taxes..... 7,072 6,803 6,796 5,208 6,391
Income taxes..................... 2,485 2,596 2,594 1,996 2,492
------- ----- ------- ------- -----
Net income......................... $ 4,587 $ 4,207 $ 4,202 $ 3,212 $ 3,899
======= ======= ======= ======= =====
Basic earnings per common
share ........................ $ 1.42 $ 1.25 $ 1.22 $ 0.91 $ 1.10
Diluted earnings per common
share ........................ 1.42 1.25 1.22 0.91 1.10
Cash dividends declared per
share ........................ 0.49 0.45 0.41 0.37 0.31
Dividend payout ratio........... 34.51% 36.00% 33.61% 40.66% 41.82%
FINANCIAL POSITION:
Total assets.................... $327,563 $304,937 $290,602 $280,012 $276,608
Loans receivable, net........... 296,870 266,659 235,256 223,011 218,664
Deposits........................ 270,994 248,545 241,790 235,081 232,747
FHLB advances................... 5,000 5,000 0 0 0
Stockholders' equity............ 45,456 44,671 44,298 42,677 41,624
Book value per share ........... 14.28 13.62 13.06 12.23 11.74
Average equity to average
assets ....................... 14.12% 15.08% 15.22% 15.37% 14.84%
FINANCIAL PERFORMANCE:
Return on:
Beginning equity.............. 10.27% 9.50% 9.85% 7.72% 10.07%
Average equity................ 10.19% 9.31% 9.69% 7.50% 9.66%
Return on average assets........ 1.44% 1.40% 1.47% 1.15% 1.43%
CREDIT QUALITY:
Allowance for loan losses....... $1,015 $947 $887 $887 $912
Allowance for loan losses to
total loans................... 0.34% 0.35% 0.38% 0.40% 0.42%
Total non-performing loans...... $1,556 $752 $722 $1,012 $911
Non-performing loans to total
loans......................... 0.52% 0.28% 0.31% 0.45% 0.42%
Allowance for loan losses to
non-performing loans.......... 65.2% 125.9% 122.9% 87.7% 100.1%
Net charge-offs................. $31 $14 $51 $34 $172
Net charge-offs to average
loans......................... 0.01% 0.01% 0.02% 0.02% 0.08%
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
THREE RIVERS HISTORICAL CONSOLIDATED FINANCIAL DATA
(dollars in thousands except per share amounts)
At and For the Three
Months Ended At and For The Year Ended
September 30, June 30,
------------------- ----------------------------------------------------------
1999 (1) 1998 (1) 1999 1998 1997 1996 1995 (2)
-------- -------- ---- ---- ---- ---- --------
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income................. $ 875 $ 814 $ 3,289 $ 3,400 $3,358 $ 3,086 $ 2,702
Provision for loan losses.......... 15 15 60 60 60 65 87
Other operating income.............. 160 174 752 658 528 497 365
Other operating expenses............ 831 797 3,185 2,856 3,047 2,504 2,014
------- ------- -------- ------- ------- ------ -------
Earnings before income taxes........ 189 176 796 1,142 779 1,014 966
Income taxes from continuing
operations....................... 37 33 198 320 269 344 314
------- ------- -------- ------- ------- ------ -------
Net income............................ $ 152 $ 143 $ 598 $ 822 $ 510 $ 670 $ 652
======= ======= ======== ======= ======= ====== =======
Basic earnings per common
share .......................... $ 0.24 $ 0.18 $ 0.84 $ 1.00 $ 0.61 $ 0.72 N/A
Diluted earnings per common
share .......................... 0.24 0.18 0.83 0.97 0.61 0.72 N/A
Cash dividends declared per share .. 0.115 0.11 0.466 0.38 0.314 0.315 N/A
Dividend payout ratio............... 47.91% 61.11% 55.48 38.18 51.49 28.48 N/A
FINANCIAL POSITION:
Total assets........................ $99,499 $99,724 $100,406 $98,885 $95,130 $87,151 $73,300
Loans receivable, net............... 69,490 62,809 68,706 62,120 61,813 56,043 54,377
Deposits............................ 64,677 64,278 67,160 61,516 60,345 63,724 63,138
FHLB advances....................... 22,582 21,157 20,657 22,744 20,344 9,211 3,845
Stockholders' equity................ 10,898 12,701 10,789 12,688 12,803 12,786 5,395
Book value per share ............... 15.51 15.35 16.20 15.55 15.02 N/A
Average equity to average assets.... 10.95% 12.73% 11.82% 13.58% 12.59% 15.38% 6.91%
FINANCIAL PERFORMANCE:
Return on:
Beginning equity................. 5.63% 4.54% 4.71% 6.42% 3.99% 12.42% N/A
Average equity................... 5.60% 4.54% 5.12% 6.28% 4.50% 5.19% 13.00%
Return on average assets............ 0.61% 0.58% 0.60% 0.85% 0.57% 0.80% 0.90%
CREDIT QUALITY:
Allowance for loan losses........... $535 $520 $520 $489 $487 $441 $382
Allowance for loan losses to total
loans............................ 0.77% 0.83% 0.75% 0.78% 0.78% 0.78% 0.70%
Total non-performing loans.......... $416 $525 $623 $682 $571 $602 $555
Non-performing loans to total
loans............................ 0.60% 0.84% 0.90% 1.09% 0.92% 1.07% 1.01%
Allowance for loan losses to
non-performing loans............. 1.29% 99.05% 83.47% 71.70% 85.29% 73.26% 68.83%
Net charge-offs (recoveries)........ $1 $(1) $30 $58 $14 $6 $16
Net charge-offs (recoveries) to
average loans.................... 0.00% 0.00% 0.09% 0.08% 0.02% 0.01% 0.03%
</TABLE>
- ------------------
(1) Annualized where appropriate
(2) Three Rivers was formed in August 1995 in connection with the
conversion of First Savings from the mutual to stock form of
organization.
13
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
At and For The Year
Ended
September 30, 1999
-------------------
OPERATIONS DATA:
<S> <C>
Net interest income..................... $15,051
Provision for credit losses............ 149
Other operating income.................. 1,605
Other operating expenses................ 8,822
-------
Earnings before income taxes............ 7,685
Income taxes from continuing operations. 2,671
-------
NET INCOME................................. $ 5,014
=======
Basic earnings per common share ........ $1.26
Diluted earnings per common............. 1.25
Cash dividends declared per share ...... 0.48
Dividend payout ratio................... 38.10%
FINANCIAL POSITION:
Assets.................................. $429,665
Net loans............................... 365,910
Deposits................................ 335,352
FHLB advances........................... 27,442
Stockholders' equity.................... 59,118
Book value per share ................... 14.99
Average equity to average assets........ 13.96%
FINANCIAL PERFORMANCE:
Return on equity........................ 8.48%
Return on assets........................ 1.20%
CREDIT QUALITY:
Allowance for loan losses............... $1,511
Allowance for loan losses to total loans 0.41%
Total non-performing loans.............. $1,972
Non-performing loans to total .......... 0.54%
Net charge-offs......................... $61
Net charge-offs to average loans........ 0.02%
</TABLE>
14
<PAGE>
COMPARATIVE PER SHARE DATA
The table below shows the earnings, book value, and dividends per share
for Peoples Bancorp and Three Rivers both on an historical and a pro forma
basis. We derived the Peoples Bancorp pro forma data as we describe under
"Unaudited Pro Forma Condensed Combined Financial Data" on page 64. We derived
the Three Rivers equivalent pro forma data by multiplying the Peoples Bancorp
pro forma data by the number of shares of Peoples Bancorp common stock we will
issue for each share of Three Rivers common stock.
You should read the respective audited and unaudited historical
consolidated financial statements and related notes of Peoples Bancorp and Three
Rivers incorporated by reference into this joint proxy statement/prospectus. See
"Where You Can Find More Information" on page 67.
<TABLE>
<CAPTION>
PEOPLES BANCORP HISTORICAL AT OR FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 1999
Earnings per share:
<S> <C>
Basic................................ $1.42
Diluted.............................. 1.42
Book value per share...................... 14.28
Dividends per share....................... 0.49
THREE RIVERS HISTORICAL AT SEPTEMBER 30,
1999 AND FOR THE FISCAL YEAR ENDED JUNE
30, 1999
Earnings per share:
Basic................................ 0.84
Diluted.............................. 0.83
Book value per share...................... 15.51
Dividends per share....................... 0.466
PEOPLES BANCORP UNAUDITED PRO FORMA
Earnings per share:
Basic................................ 1.26
Diluted.............................. 1.25
Book value per share...................... 14.99
Dividends per share....................... 0.48
THREE RIVERS EQUIVALENT PRO FORMA (1)
Earnings per share:
Basic................................ 1.36
Diluted.............................. 1.35
Book value per share...................... 16.19
Dividends per share....................... 0.52
</TABLE>
- --------------------
(1) Calculated by multiplying Pro Forma Combined by the assumed conversion ratio
of 1.08.
15
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS DOCUMENT,
INCLUDING THE MATTERS ADDRESSED IN "A WARNING ABOUT FORWARD-LOOKING
INFORMATION," YOU SHOULD CONSIDER THE MATTERS DESCRIBED BELOW CAREFULLY IN
DETERMINING WHETHER TO APPROVE THE PLAN OF REORGANIZATION AND AGREEMENT AND PLAN
OF MERGER. WHERE "WE" AND "OUR" IS USED IN THIS SECTION, IT IS MEANT TO REFER TO
BOTH PEOPLES BANCORP BEFORE THE MERGER AND TO PEOPLES BANCORP FOLLOWING ITS
PROPOSED ACQUISITION OF THREE RIVERS.
THE MERGER CONSIDERATION IS FIXED DESPITE POTENTIAL CHANGES IN
RELATIVE STOCK PRICES. This means Three Rivers shareholders will not know the
value of the Peoples Bancorp common stock they are receiving in the merger
until the date we consummate the merger. For each outstanding share of Three
Rivers stock, shareholders of Three Rivers will receive 1.08 shares of
Peoples Bancorp common stock. We urge you to obtain current market quotations
for Peoples Bancorp common stock and Three Rivers common stock because the
value of what you receive may be more or less than the value as of the date
of this proxy statement/prospectus.
THERE ARE UNCERTAINTIES IN INTEGRATING OUR BUSINESS OPERATIONS AND
REALIZING ENHANCED EARNINGS. If we are unable to integrate our businesses
successfully, this could hurt our business. The merger involves the integration
of companies that have previously operated independently. Successful integration
of Three Rivers' consolidated operations will depend primarily on Peoples
Bancorp's ability to consolidate operations, systems, and procedures and to
eliminate redundancies and costs. Further problems may arise as a result of the
fact that we intend to keep First Savings as a separate wholly-owned subsidiary.
No assurance can be given that Peoples Bancorp and Three Rivers will be able to
integrate their operations without encountering difficulties including, without
limitation, the loss of key employees and customers, the disruption of their
respective ongoing businesses, or possible inconsistencies in standards,
controls, procedures, and policies.
AN ECONOMIC SLOWDOWN IN NORTHEASTERN INDIANA AND SOUTHWESTERN MICHIGAN
COULD HURT OUR BUSINESS. We focus our business in northeastern Indiana and
southwestern Michigan in DeKalb, Whitley, Noble, LaGrange, and the eastern
portion of Elkhart counties, Indiana and St. Joesph, Cass, and the southwest
portion of Kalamazoo counties, Michigan. An economic slowdown in this area could
have the following consequences, any of which could hurt our business:
- Loan delinquencies may increase;
- Problem assets and foreclosures may increase;
- Demand for the products and services of Peoples Federal or First
Savings may decline;
- Collateral for loans made by Peoples Federal or First Savings,
especially real estate, may decline in value, in turn reducing
customers' borrowing power, and reducing the value of assets
and collateral associated with existing loans of Peoples
Federal or First Savings.
16
<PAGE>
WE HAVE YEAR 2000 RISKS BECAUSE OF OUR DEPENDENCE AND OUR VENDORS'
AND CUSTOMERS' DEPENDENCE ON TECHNOLOGY. If we, our vendors, customers, or
other third parties with whom we do business suffer a computer or systems
failure, it could hurt our business. Peoples Federal and First Savings have
taken steps to make their own information and environmental systems Year 2000
compliant prior to January 1, 2000. However, First Savings uses an outside
data processing vendor and each also relies heavily on the information
systems of other vendors, customers, and third parties. These third parties
may not become Year 2000 compliant soon enough. Moreover, the contingency and
remediation efforts may not succeed.
A WARNING ABOUT FORWARD-LOOKING INFORMATION
Peoples Bancorp and Three Rivers have each made forward-looking
statements in this document, and in documents that we refer to in this
document, that are subject to risks and uncertainties. These statements are
based on the beliefs and assumptions of each respective company's management,
and on information currently available to such management. Forward-looking
statements include the information concerning possible or assumed future
results of operations of Peoples Bancorp and/or Three Rivers set forth under
"Questions and Answers About the Merger," "Summary," "The Merger - Background
of and Reasons for the Merger," and "Unaudited Pro Forma Condensed Combined
Financial Statements," and statements preceded by, followed by, or that
include the words "will," "believes," "expects," "anticipates," "intends,"
"plans," "estimates" or similar expressions.
17
<PAGE>
In particular, we have made statements in this document regarding
expected cost savings from the merger, the anticipated effect of the merger
and Peoples Bancorp's anticipated performance in future periods. With respect
to estimated cost savings, Peoples Bancorp has made assumptions regarding,
among other things, the extent of operational overlap between Peoples Bancorp
and Three Rivers, the amount of general and administrative expense
consolidation, costs relating to converting First Savings' bank operations
and outside data processing to Peoples Bancorp's systems, the amount of
severance expenses, and the costs related to the merger. The realization of
cost savings is subject to the risk that the foregoing assumptions are not
accurate.
Moreover, any statements in this document regarding the anticipated
effect of the merger and Peoples Bancorp's anticipated performance in future
periods are subject to risks relating to, among other things, the following:
- Peoples Bancorp may not realize expected cost savings from the
merger within the expected time frame;
- Peoples Bancorp's revenues following the merger may be lower
than expected, or deposit attrition, operating costs, or
customer loss and business disruption following the merger may
be greater than expected;
- competitive pressures among depository and other financial
institutions may increase significantly;
- Peoples Bancorp may experience greater than expected costs or
difficulties relating to the integration of the businesses of
Peoples Bancorp and Three Rivers;
- changes in the interest rate environment may reduce profits;
- there may be less than favorable general economic or business
conditions, either nationally or in northeastern Indiana and
southwestern Michigan, resulting in, among other things, a
deterioration in credit quality or a reduced demand for
credit; and
- competitors of Peoples Bancorp and Three Rivers may have
greater financial resources and develop products that enable
such competitors to compete more successfully than Peoples
Bancorp and Three Rivers
Management of Peoples Bancorp and Three Rivers believe these
forward-looking statements are reasonable; however, you should not place undue
reliance on such forward-looking statements, which are based on current
expectations.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties, and assumptions. The future results and
shareholder values of Peoples Bancorp following completion of the merger may
differ materially from those expressed in these forward-looking statements. Many
of the factors that will determine these results and values are beyond Peoples
Bancorp's and Three Rivers' ability to control or predict. For those statements,
Peoples Bancorp and Three Rivers claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
18
<PAGE>
THE THREE RIVERS SPECIAL MEETING
GENERAL
We are furnishing this document to shareholders of Three Rivers in
connection with the solicitation of proxies by the Three Rivers Board of
Directors for use at the special meeting of Three Rivers shareholders including
any meeting adjournments or postponements, to be held on February 15, 2000.
The purpose of the special meeting is for you to consider and vote upon
the Agreement and Plan of Reorganization, dated as of September 21, 1999,
providing for the merger of Three Rivers with and into Peoples Bancorp. The Plan
of Reorganization and Agreement and Plan of Merger is attached to this document
as Annex A and is incorporated in this document by this reference. For a
description of the Plan of Reorganization and Agreement and Plan of Merger, see
"Plan of Reorganization and Agreement and Plan of Merger."
The Plan of Reorganization and Agreement and Plan of Merger provides
that Three Rivers will merge with and into Peoples Bancorp. In the merger, for
each outstanding share of Three Rivers common stock, you will receive 1.08
shares of common stock of Peoples Bancorp. Peoples Bancorp will pay cash in lieu
of any fractional shares.
THREE RIVERS MEETING
TIME AND PLACE. Three Rivers will hold its special meeting on
February 15, 2000 at 9:00 a.m., local time, at the Three Rivers Community
Center located at 103 South Douglas Avenue, Three Rivers, Michigan.
RECORD DATE; VOTING POWER. If you were a Three Rivers shareholder at
the close of business on December 27, 1999, you may vote at the meeting. As
of December 27, 1999, there were 702,734 issued and outstanding shares of
Three Rivers common stock held by approximately 900 shareholders. These
shareholders have one vote per share on any matter that may properly come
before the special meeting. Brokers who hold shares of Three Rivers common
stock as nominees will not have discretionary authority to vote these shares
without instructions from the beneficial owners. Any shares of Three Rivers
common stock for which a broker has submitted an executed proxy but for which
the beneficial owner has not given instructions on voting to such broker are
referred to as "broker non-votes."
VOTE REQUIRED. The presence in person or by proxy of the holders of a
majority of the shares of Three Rivers common stock outstanding on the record
date will constitute a quorum for the transaction of business at the special
meeting. Three Rivers will count abstentions and broker non-votes for purposes
of establishing the presence of a quorum at the meeting. The approval of the
proposal to approve the Plan of Reorganization and Agreement and Plan of Merger
requires the affirmative vote of a majority of the shares of Three Rivers common
stock outstanding on the Three Rivers record date. The proposal to adjourn or
postpone the Three Rivers special meeting for the purpose of allowing additional
time for the solicitation of proxies from Three Rivers shareholders to approve
the Plan of Reorganization and Agreement and Plan of Merger requires the
affirmative vote of a majority of the shares of Three Rivers common stock
present in person or by proxy at the meeting. Because broker non-votes and
abstentions are not affirmative votes, they will have the effect of a vote
against the proposals to approve the Plan of Reorganization and Agreement and
Plan of Merger to adjourn or postpone the meeting for the purpose of allowing
additional time for the solicitation of proxies.
On the Three Rivers record date, the executive officers and
directors of Three Rivers, including their affiliates, had voting power with
respect to an aggregate of 80,390 shares of Three Rivers common stock or
approximately 11.44% of the shares of Three Rivers common stock then
outstanding. We
19
<PAGE>
currently expect that such directors and officers will vote all of their shares
in favor of the proposals to approve the Plan of Reorganization and Agreement
and Plan of Merger. In addition, on the record date, the directors and executive
officers of Peoples Bancorp did not beneficially own any shares of Three Rivers
common stock.
RECOMMENDATION OF THE THREE RIVERS BOARD OF DIRECTORS. The Three Rivers
Board of Directors has unanimously approved and adopted the Plan of
Reorganization and Agreement and Plan of Merger. The Three Rivers Board of
Directors believes that the merger is fair to and in the best interests of Three
Rivers and the Three Rivers shareholders and unanimously recommends that you
vote "FOR" approval of the Plan of Reorganization and Agreement and Plan of
Merger and the transactions contemplated thereby. In addition, the Three Rivers
Board of Directors unanimously recommends that you vote "FOR" the proposal to
adjourn or postpone the meeting to allow extra time to solicit proxies requires
the affirmative vote of a majority of the shares of Three Rivers present at the
meeting in person or by proxy.
SOLICITATION AND REVOCATION OF PROXIES. We have enclosed a form of
proxy with this document. Shares represented by a proxy will be voted at the
special meeting as specified in the proxy. Proxies that are properly signed and
dated but which do not have voting instructions will be voted by the proxy
holders FOR the merger and FOR the proposal to adjourn or postpone the meeting
for the purpose of allowing additional time for the solicitation of proxies.
Properly signed and dated proxies will also confer on the proxy holder the power
to vote in the discretion of the proxy holder as to any other matter which may
properly come before the special meeting, which the proxy holder was not aware
of a reasonable time before the meeting, and in the discretion of the proxy
holder as to any matter incident to the conduct of the meeting.
THREE RIVERS ASKS YOU TO VOTE BY COMPLETING, DATING AND SIGNING THE
ACCOMPANYING THREE RIVERS PROXY CARD AND RETURNING IT PROMPTLY TO THREE RIVERS
IN THE ENCLOSED, POSTAGE-PAID ENVELOPE. THREE RIVERS SHAREHOLDERS SHOULD NOT
SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
If you are a Three Rivers shareholder who delivers a properly executed
proxy, you may revoke your proxy at any time before its exercise. You may revoke
your proxy by
- filing with the Secretary of Three Rivers prior to the special
meeting, at Three Rivers' principal executive offices, either
a written revocation of your proxy or a duly executed proxy
bearing a later date or
- attending the special meeting and voting in person. Presence
at the special meeting will not revoke your proxy unless you
vote in person. If your shares are held in the name of your
broker, bank, or other nominee, and you wish to vote in
person, you must bring an account statement and authorization
from your nominee so that you can vote your shares.
Three Rivers is soliciting proxies for use at its special meeting.
Three Rivers will bear the cost of solicitation of proxies from its own
shareholders. Three Rivers and Peoples Bancorp will share equally the cost of
printing and mailing this document. In addition to solicitation by mail, Three
Rivers directors, officers, and employees may solicit proxies from shareholders
by telephone, in person or through other means. These persons will not receive
additional compensation, but they will be reimbursed for the reasonable
out-of-pocket expenses they incur in connection with this solicitation. Three
Rivers will also make arrangements with brokerage firms, fiduciaries, and other
custodians who hold shares of record to forward solicitation materials to the
beneficial owner of these shares. Three Rivers will reimburse these brokerage
firms, fiduciaries, and other custodians for their reasonable out-of-pocket
expenses in connection with this solicitation.
20
<PAGE>
OTHER MATTERS. Three Rivers is unaware of any matter to be presented at
the special meeting other than the proposals to approve the Plan of
Reorganization and Agreement and Plan of Merger and if necessary, to oadjour or
postpone the meeting for the purpose of soliciting additional proxies. If other
matters are properly presented at the special meeting, the persons named in the
proxy will have authority to vote all properly executed proxies in accordance
with their judgment on any such matter, including, without limitation, any
proposal to adjourn or postpone the special meeting for any purpose other than
to allow time for the solicitation of additional proxies. Proxies that have been
designated to vote against approval of the Plan of Reorganization and Agreement
and Plan of Merger will not be voted in favor of any proposal to adjourn or
postpone the special meeting for the purpose of soliciting additional proxies to
approve the Plan of Reorganization and Agreement and Plan of Merger unless the
shareholder so indicates on the proxy.
THE PEOPLES BANCORP ANNUAL MEETING
GENERAL
We are furnishing this document to shareholders of Peoples Bancorp in
connection with the solicitation of proxies by the Peoples Bancorp Board of
Directors for use at the annual meeting of Peoples Bancorp shareholders,
including any meeting adjournments or postponements, to be held on
February 16, 2000.
The purpose of the Peoples Bancorp annual meeting is for you to
consider and vote upon the Agreement and Plan of Reorganization, dated as of
September 21, 1999, providing for the merger of Three Rivers into Peoples
Bancorp. Peoples Bancorp shareholders will also vote upon the election of two
directors, the ratification of the appointment of auditors, and a proposal to
adjourn or postpone the annual meeting for the purpose of allowing additional
time for the solicitation of proxies from Peoples Bancorp shareholders to
approve the Plan of Reorganization and Agreement and Plan of Merger.
The Plan of Reorganization and Agreement and Plan of Merger provides
that Three Rivers will merge with and into Peoples Bancorp. In the merger, for
each outstanding share of common stock of Three Rivers, Three Rivers
shareholders will receive 1.08 shares of Peoples Bancorp common stock. Peoples
Bancorp will pay cash in lieu of fractional shares. The Plan of Reorganization
and Agreement and Plan of Merger is attached to this document as Annex A and is
incorporated in this document by this reference. For a description of the Plan
of Reorganization and Agreement and Plan of Merger, see "The Plan of
Reorganization and Agreement and Plan of Merger."
INFORMATION ABOUT THE ANNUAL MEETING
TIME AND PLACE. Peoples Bancorp will hold its annual meeting on
February 16, 2000 at 2:00 p.m., local time, at The Ramada Limited and Suites,
located at 306 Touring Drive, Auburn, Indiana.
RECORD DATE; VOTING POWER. If you were a Peoples Bancorp shareholder
at the close of business on December 27, 1999, you may vote at the Peoples
Bancorp annual meeting. As of December 27, 1999, there were 3,164,706 issued
and outstanding shares of Peoples Bancorp common stock held by approximately
1,100 shareholders. These shareholders have one vote per share on any matter
that may properly come before the annual meeting. Brokers who hold shares of
Peoples Bancorp common stock as nominees will not have discretionary
authority to vote such shares without instructions from the beneficial
owners. Any shares of Peoples Bancorp common stock for which a broker has
submitted an executed proxy but for which the beneficial owner has not given
instructions on voting to such broker are referred to as "broker non-votes."
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<PAGE>
VOTE REQUIRED. The presence in person or by proxy of the holders of a
majority of the shares of Peoples Bancorp common stock outstanding on the
Peoples Bancorp record date will constitute a quorum for the transaction of
business at the annual meeting. Peoples Bancorp will count abstentions and
broker non-votes will be counted for purposes of establishing the presence of a
quorum at the meeting. The approval of the proposal to approve the Plan of
Reorganization and Agreement and Plan of Merger requires the affirmative vote of
a majority of the shares of Peoples Bancorp common stock outstanding on the
Peoples Bancorp record date. Directors are elected by a plurality of the votes
cast in person or by proxy and entitled to vote. The ratification of the
appointment off auditors and the proposal to adjourn or postpone the Peoples
Bancorp annual meeting for the purpose of allowing additional time for the
solicitation of proxies from Peoples Bancorp shareholders to approve the Plan of
Reorganization and Agreement and Plan of Merger require the affirmative vote of
a majority of shares of Peoples Bancorp present in person or by proxy at the
meeting and entitled to vote. Broker non-votes and abstentions are not
affirmative votes. They will have the effect of a vote against the proposals to
approve the Plan of Reorganization and Agreement and Plan of Merger. Abstentions
will have the effect of a vote against the ratification of the appointment of
auditors and the proposal to adjourn or postpone the meeting to allow additional
time to solicit proxies; however, broker non-votes will not be deemed entitled
to vote and will have no effect on the votes in these matters.
On the Peoples Bancorp record date, the executive officers and
directors of Peoples Bancorp, including their affiliates, had voting power with
respect to an aggregate of 305,720 shares of Peoples Bancorp common stock or
approximately 9.66% of the shares of the Peoples Bancorp common stock then
outstanding. We currently expect that the Peoples Bancorp directors and officers
will vote all of their shares in favor of the proposal to approve the Plan of
Reorganization and Agreement and Plan of Merger, in favor of the nominees for
directors, in favor of the ratification of the appointment of auditors, and in
favor of the proposal to adjourn or postpone the Peoples Bancorp annual meeting
for the purpose of allowing additional time for the solicitation of proxies from
Peoples Bancorp shareholders to approve the Plan of Reorganization and Agreement
and Plan of Merger. In addition, on the record date, the directors and executive
officers of Three Rivers did not beneficially own any shares of Peoples Bancorp
common stock.
SOLICITATION AND REVOCATION OF PROXIES. We have enclosed a form of
proxy with this document. Proxies will be voted in accordance with the voting
instructions contained therein. Proxies that are properly signed and dated but
which do not have voting instructions will be voted FOR the merger, FOR the
election of the nominees for director, FOR the ratification of the appointment
of auditors, and FOR the proposal to adjourn or postpone meeting for the purpose
of allowing additional time for the solicitation of proxies. Properly signed and
dated proxies will also confer on the proxy holder the power to vote in the
discretion of the proxy holder as to any other matter that may properly come
before the annual meeting for which Peoples Bancorp did not have notice at least
45 days before the date on which Peoples Bancorp first mailed its proxy material
for the January 1999 annual meeting of shareholders, and in the discretion of
the proxy holder as to any matter incident to the conduct of the meeting.
PEOPLES BANCORP ASKS YOU TO VOTE BY COMPLETING, DATING AND SIGNING THE
ACCOMPANYING PEOPLES BANCORP PROXY CARD AND RETURNING IT PROMPTLY TO PEOPLES
BANCORP IN THE ENCLOSED, POSTAGE-PAID ENVELOPE.
If you are a Peoples Bancorp shareholder who delivers a properly
executed proxy, you may revoke such proxy at any time before its exercise. You
may revoke your proxy by
- filing with the Secretary of Peoples Bancorp prior to the annual
meeting, at Peoples Bancorp's principal executive offices, either
a written revocation of such proxy or a duly executed proxy
bearing a later date or
22
<PAGE>
- attending the annual meeting and voting in person. Presence at
the annual meeting will not revoke your proxy unless you vote in
person. If your shares are held in the name of your broker, bank,
or other nominee, and you wish to vote in person, you must bring
an account statement and authorization from your nominee so that
you can vote your shares.
Peoples Bancorp's Board of Directors is soliciting proxies for use at
its annual meeting. Peoples Bancorp will bear the cost of solicitation of
proxies from its own shareholders. Three Rivers and Peoples Bancorp will share
equally the cost of printing and mailing this document. In addition to
solicitation by mail, Peoples Bancorp directors, officers and employees may
solicit proxies from shareholders by telephone, in person or through other
means. These persons will not receive additional compensation, but they will be
reimbursed for the reasonable out-of-pocket expenses they incur in connection
with this solicitation. Peoples Bancorp will also make arrangements with
brokerage firms, fiduciaries, and other custodians who hold shares of record to
forward solicitation materials to the beneficial owner of these shares. Peoples
Bancorp will reimburse these brokerage firms, fiduciaries, and other custodians
for their reasonable out-of-pocket expenses in connection with this
solicitation.
ELECTION OF DIRECTORS
Two directors will be elected at the annual meeting of Peoples Bancorp
to serve for a three-year period. Unless authority is withheld, all proxies
received in response to this solicitation will be voted for the election of the
nominees listed below. Each nominee has indicated a willingness to serve if
elected. However, if any nominee becomes unable to serve, the proxies received
in response to this solicitation will be voted for a replacement nominee
selected in accordance with the best judgment of the proxy holders named
therein.
The following table lists the directors and their terms for Peoples
Bancorp. Each director of Peoples Bancorp also serves as a director of Peoples
Federal for an identical term. The table also sets forth the number of shares of
Peoples Bancorp Common Stock beneficially owned by the directors and by the
directors and executive officers of Peoples Bancorp as a group as of November 1,
1999.
<TABLE>
<CAPTION>
Shares of
Common Stock
Director Present Beneficially Percent
Name Age (1) Since (2) Term Expires Owned (3) of Class (4)
- --------------------------- ---------- --------------- -------------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
NOMINEES FOR A THREE YEAR TERM EXPIRING 2003:
Douglas D. Marsh 58 1990 2000 25,500(5) 0.81%
Maurice F. Winkler III 43 1993 2000 53,418(6) 1.69%
DIRECTORS CONTINUING IN OFFICE:
Bruce S. Holwerda 51 1998 2001 1,500(7) 0.05%
John C. Harvey 68 1990 2001 50,429(8) 1.60%
John C. Thrapp 65 1990 2002 34,257(9) 1.08%
Roger J. Wertenberger 67 1990 2002 136,085(10) 4.31%
All executive officers and directors of
Peoples Bancorp as a group (8 persons) 304,689 9.65%
</TABLE>
(1) As of September 30, 1999.
(2) Indicates the year the director first became a director of Peoples Bancorp.
(3) Unless otherwise indicated, includes all shares held directly by the named
individuals as well as by spouses, minor children in trust, and other forms of
indirect ownership, over which shares the named individual effectively exercises
sole voting and investment power with respect to the indicated shares. Excludes
any unallocated shares of Peoples Bancorp common stock held under the Peoples
Bancorp employee stock ownership plan for which such individuals may serve as a
member of the committee administering the plan. Also includes securities that
the person has the right to acquire within 60 days of the voting record date.
(4) Computed based upon a total of 3,158,717 issued and outstanding shares of
Peoples Bancorp common stock as of November 1, 1999.
23
<PAGE>
(5) Includes 9,000 shares held by Mr. Marsh's wife for which Mr. Marsh does not
exercise any voting and investment power and for which Mr. Marsh disclaims
beneficial ownership.
(6) Includes 16,664 shares held by Mr. Winkler's wife for which Mr. Winkler does
not exercise any voting and investment power and for which Mr. Winkler disclaims
beneficial ownership.
(7) All of the shares owned by Mr. Holwerda are owned jointly with Mr.
Holwerda's wife with shared voting and investment power.
(8) Includes 3,835 shares held by Dr. Harvey's wife for which Mr. Harvey does
not exercise any voting and investment power and for which Mr. Harvey disclaims
beneficial ownership.
(9) Includes 976 shares held by Mr. Thrapp's wife for which Mr. Thrapp does not
exercise any voting and investment power and for which Mr. Thrapp disclaims
beneficial ownership.
(10) Includes 48,000 shares held by Mr. Wertenberger's wife for which Mr.
Wertenberger does not exercise any voting and investment power and for which Mr.
Wertenberger disclaims beneficial ownership, and 3,000 shares are held jointly
by Mr. Wertenberger's wife and mother-in-law with shared voting and investment
power for which Mr. Wertenberger does not exercise any voting and investment
power and for which Mr. Wertenberger disclaims beneficial ownership.
The following table lists the executive officers of Peoples Bancorp.
<TABLE>
<CAPTION>
Name Age Position with Peoples Bancorp
- ---- --- -----------------------------
<S> <C> <C>
Maurice F. Winkler III 43 President, Chief Executive Officer, and Chief Operating
Officer
Roger J. Wertenberger 67 Chairman of the Board
John E. Weigel III 39 Secretary
Deborah K. Stanger 43 Treasurer
</TABLE>
The principal occupation during the past five years of each director,
nominee for director, and executive officer is set forth below. All directors,
the nominee, and executive officers have held their present positions for at
least five years, unless otherwise stated.
MR. MARSH, has served as a director of Peoples Federal since 1982. He
currently serves as Chairman of the Board of Applied Innovations Inc. in
Chicago, Illinois, President of Bridgewater Golf Club in Auburn, Indiana,
Regional Director Excel Communications in Dallas, Texas, and Associate of Auburn
Reality in Auburn, Indiana. From 1991 to 1996, Mr. Marsh served as Vice
President of Sales for Superior Chaircraft, which is a division of JSJ Seating
Corporation, Belton, Texas. Mr. Marsh also serves as a director of Peoples
Financial Services, Inc., a wholly-owned service corporation subsidiary of
Peoples Federal.
MR. WINKLER was appointed to the Board of Directors of Peoples Bancorp
and Peoples Federal in June 1993. Mr. Winkler joined Peoples Federal as an
accountant in 1979. From 1981 to 1985, he served as Controller and in December
1985 became Vice President-Operations. From May 1987 to September 1996, Mr.
Winkler assumed responsibilities as Peoples Federal's Vice President-Finance.
Mr. Winkler is the son-in-law of Roger J. Wertenberger. Mr. Winkler also serves
as a director of Peoples Financial. Mr. Winkler assumed the duties of President
and Chief Operating Officer of Peoples Bancorp, Peoples Federal, and Peoples
Financial Services effective October 1, 1996 and Chief Executive Officer on
October 1, 1999.
MR. HOLWERDA was elected a director of Peoples Federal and Peoples
Bancorp in 1998. Mr. Holwerda is co-owner of Ambassador Steel Corporation
Auburn, Indiana, and serves as Vice President and Chief Operating Officer,
positions he has held since 1990. Mr. Holwerda has worked at Ambassador Steel in
various capacities since 1979.
DR. HARVEY has served as a director of Peoples Federal since 1979. He
is a self-employed physician engaged in private practice in Auburn, Indiana. Dr.
Harvey also serves as a director of Peoples Financial Services.
24
<PAGE>
MR. THRAPP served as a director and officer of First Federal Savings
and Loan Association of Kendallville, which merged with Peoples Federal in
August 1990, when he became a director of Peoples Bancorp and Peoples Federal.
Since 1962, Mr. Thrapp has been an attorney with the firm of Thrapp & Thrapp in
Kendallville, Indiana.
MR. WERTENBERGER has served as a director of Peoples Federal since
joining Peoples Federal in 1954. Mr. Wertenberger became President of Peoples
Federal in January 1964 and Chairman of the Board in January 1979. Mr.
Wertenberger serves as a director and Chief Executive Officer of Peoples
Financial Services. Mr. Wertenberger became President, Director, and Chairman of
the Board of Peoples Bancorp upon its inception in 1990. Mr. Wertenberger
relinquished the title of President for Peoples Bancorp, Peoples Federal Savings
Bank, and Peoples Financial Services effective October 1, 1996, and the title of
Chief Executive Officer effective October 1, 1999.
JOHN E. WEIGEL III, joined Peoples Federal in 1993 as Internal
Auditor/Compliance Officer, and Mr. Weigel was appointed Corporate Secretary of
Peoples Federal and of Peoples Bancorp in May 1998. Prior to his employment at
Peoples Federal, Mr. Weigel was a Bank Examiner with the Department of Treasury
from 1985 to 1993.
DEBORAH K. STANGER, joined Peoples Federal in 1989 as Controller. Mrs.
Stanger was promoted to Vice President and Chief Financial Officer of Peoples
Federal in 1996. Mrs. Stanger was named Treasurer of Peoples Bancorp in January
1999.
CORPORATE GOVERNANCE AND OTHER MATTERS. The Board of Directors of
Peoples Bancorp held thirteen meetings during the fiscal year ended September
30, 1999. All directors have attended at least 75% of all Board of Directors'
and committee meetings.
Four regular members of the Board of Directors are members of the
Executive Committee, which is permitted to act with any three members present in
the absence of regularly scheduled Board of Directors meetings. The Executive
Committee of Peoples Bancorp exercises all the authority of the Board of
Directors to the extent permitted by the Company's Bylaws. The Executive
Committee consists of Roger J. Wertenberger, Chairman, Maurice F. Winkler, John
C. Thrapp, Douglas D. Marsh, and John C. Harvey. This Committee meets when
needed and held one meeting during the fiscal year ended September 30, 1999. The
Board of Directors of Peoples Bancorp has standing Budget, Audit, and Nominating
Committees.
The Budget Committee of Peoples Bancorp also serves as the Budget
Committee of Peoples Federal. The Budget Committee establishes policies and
objectives relating to compensation, reviews compensation costs, and recommends
salaries, bonuses, and employee stock ownership plan contributions for all
employees and executive officers. The members of the Budget Committee are John
C. Harvey, Chairman, Douglas D. Marsh, John C. Thrapp, and Bruce S. Holwerda.
The Budget Committee held four meetings during the fiscal year ended September
30, 1999.
The Audit Committee of Peoples Bancorp also serves as the Audit
Committee of Peoples Federal. The Audit Committee reviews and approves the scope
of the audit procedures employed by Peoples Bancorp's independent auditors and
meets with the auditors to discuss the results of their examination of the
financial statements. The committee reviews the operations of Peoples Bancorp's
internal audits performed by management and the results of its audit procedures.
In addition, the committee reviews all reports prepared in connection with
Peoples Bancorp's annual examinations by the regulatory authorities. The members
of the Audit Committee are Lawrence R. Bowmar, Chairman, John C. Harvey and
Bruce S. Holwerda. The committee held one meeting(s) during the fiscal year
ended September 30, 1999.
25
<PAGE>
The Nominating Committee of the Board of Directors of Peoples Bancorp
meets when director vacancies occur and recommends individuals for nomination to
the Board of Directors of Peoples Bancorp and to the governing bodies of its
subsidiary corporations. The Nominating Committee consists of the Board of
Directors. The committee held one meeting during the fiscal year ended September
30, 1999. The Nominating Committee does not consider nominees recommended by
stockholders. Under Peoples Bancorp's Bylaws, however, nominations may be made
by stockholders and voted upon at an annual meeting if made in writing and
delivered to the Secretary of Peoples Bancorp at least 20 days prior to the date
of the annual meeting. No nominations for directors except those made by the
Nominating Committee or by the stockholders in accordance with the Bylaws may be
voted upon at the annual meeting.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. There are no persons
known to Peoples Bancorp who own beneficially more than 5% of the Peoples
Bancorp common stock as of September 30, 1999.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a)
of the Securities Exchange Act of 1934 requires directors and executive officers
of Peoples Bancorp, and persons who own more than 10% of a registered class of
equity securities of Peoples Bancorp, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
equity securities. Officers, directors, and greater than 10% shareholders are
required by Securities and Exchange Commission regulations to furnish Peoples
Bancorp with copies of all Section 16(a) forms they file.
To the knowledge of Peoples Bancorp, based solely on a review of the
copies of such reports furnished to Peoples Bancorp and written representations
that no other reports were required, during the fiscal year ended September 30,
1999, all Section 16(a) filing requirements applicable to officers and directors
of Peoples Bancorp were met.
CERTAIN RELATIONSHIPS AND RELATEAD TRANSACTIONS. Peoples Federal has
followed the policy of offering loans to directors, officers, and employees
of Peoples Bancorp and Peoples Federal for the financing of their principal
residences. These loans are made in the ordinary course of business on
substantially the same terms and collateral, including interest rates, as
those of comparable transactions prevailing at the time and do not involve
more than the normal risk of collectibility or present other unfavorable
features. Peoples Federal grants consumer loans to directors, officers, and
employees at rates and terms applicable to its other customers. Outstanding
loans to executive officers and directors of Peoples Federal and Peoples
Bancorp as of September 30, 1999 totaled $1,208,955 or 2.7% of stockholders'
equity.
EXECUTIVE OFFICER COMPENSATION. Executive officers of Peoples Bancorp
are not compensated for serving as executive officers of Peoples Bancorp. All
compensation of executive officers is paid by Peoples Federal. The following
table sets forth information concerning compensation paid or accrued to or on
behalf of the Peoples Bancorp's Chief Executive Officer for the periods
indicated. Effective October 1, 1999, Mr. Wertenberger no longer served as the
Chief Executive Officer of Peoples Bancorp. No other executive officers of
Peoples Bancorp had an annual salary and bonus that exceeded $100,000 during
each of the last three fiscal years.
<TABLE>
<CAPTION>
Annual Compensation
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation (1) Compensation (2)
- --------------------------- ------- ------------ ------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Roger J. Wertenberger 1999 $125,863 $8,603 $12,000 $ 1,598
Chairman and 1998 120,000 6,000 12,000 6,000
Chief Executive Officer 1997 121,000 6,050 10,800 6,050
</TABLE>
- -------------------
26
<PAGE>
(1) The amount shown represents director's fees. Does not include personal
use of an automobile provided by Peoples Federal, which use was valued
at approximately $2,000 for each of the periods indicated.
(2) Represents employer's contribution allocated to the account of Mr.
Wertenberger under the Peoples Bancorp employee stock ownership plan for
1997 and 1998 and to the 401(k) plan for 1999.
STOCK OPTION PLAN. On November 10, 1998, the Board of Directors of
Peoples Bancorp adopted the Peoples Bancorp 1998 Stock Option and Incentive Plan
which permits the granting of shares of Peoples Bancorp common stock through
incentive and non-incentive stock options, as well as stock appreciation rights.
Stockholders approved the Stock Option and Incentive Plan on January 13, 1999.
The Stock Option and Incentive Plan replaced the option plan adopted by the
Board of Directors of Peoples Federal on May 19, 1987, which expired in May
1997. As of September 30, 1999, no options remained outstanding under the
expired option plan.
Under the Stock Option and Incentive Plan, the maximum number of shares
of Peoples Bancorp common stock that may be issued pursuant to awards is 200,000
(subject to adjustment to prevent dilution). The Stock Option and Incentive Plan
will continue in effect for a term of ten years following its adoption unless
sooner terminated. A committee of two or more directors appointed by the Board
of Dirctors administers the Stock Option and Incentive Plan. Pursuant to the
Stock Option and Incentive Plan, officers, directors, key employees, and
consultants of Peoples Bancorp or any affiliate may be granted options at an
exercise price not less than 100% of the fair market value of the Peoples
Bancorp common stock on the date of the grant. During the year ended September
30, 1999, options to purchase 30,000 shares of Peoples Bancorp common stock were
granted and no shares of common stock were issued in connection with the
exercise of options. At September 30, 1999, options to purchase 30,000 shares of
Peoples Bancorp common stock were outstanding.
During the year ended September 30, 1999, Roger J. Wertenberger, the
Chief Executive Officer of Peoples Bancorp for the year ended September 30,
1999, did not own or exercise any stock options relating to shares of Peoples
Bancorp common stock.
DEFINED BENEFIT PENSION PLAN. Peoples Federal maintains a defined
benefit pension plan or retirement plan in which all eligible employees are
participants. In order to be eligible to participate, an employee must attain
age 21 and complete 1,000 hours of credited service during an eligibility
computation period. The retirement plan is funded solely by Peoples Federal
contributions and generally provides for vested benefits to participants with
100% vesting after five years of credited service. Total retirement plan
expenses for the fiscal year ended September 30, 1999, were $4,143. At September
30, 1999, the retirement plan was fully funded.
A participant's benefit at normal retirement age (65) is dependent upon
the participant's total years of credited service and the participant's average
annual salary for the five consecutive years of highest salary during credited
service. However, the benefit so determined is subject to proportionate
reduction for credited service of fewer than 30 years at normal retirement age,
and is also subject to actuarial reduction for commencement of benefit payment
prior to normal retirement age. The retirement plan also provides a death
benefit payment in the event of death prior to retirement.
The table below shows estimated annual benefits (computed on the normal
life annuity basis) payable under the retirement plan to any employee upon
retirement in 1999 at age 65 after selected periods of service. There is no
benefit reduction for Social Security or other offset amounts. As of September
30, 1999, Roger J. Wertenberger had 45 years of credited service.
27
<PAGE>
<TABLE>
<CAPTION>
Average of
Highest Five
Years of Years of Service
----------------------------------------------------------------------------------------------
Compensation 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years 45 Years
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 50,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000
75,000 15,000 22,500 30,000 37,500 45,000 52,500 60,000 67,500
100,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000
150,000 30,000 45,000 60,000 75,000 90,000 105,000 120,000 135,000
200,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000
250,000 50,000 75,000 100,000 125,000 150,000 175,000 200,000 225,000
</TABLE>
DEFINED CONTRIBUTION PLAN. On November 15, 1988, the Board of Directors
of Peoples Federal adopted an Employee Stock Ownership Plan (commonly known as
an "ESOP") which was approved by the stockholders on January 11, 1989. The ESOP
invested primarily in the common stock of Peoples Bancorp. ESOP assets are held
in trust by Norwest Bank, Fort Wayne, Indiana, as trustee pursuant to a trust
agreement. The trustee is authorized to invest in and hold up to 100% of the
trust in shares of Peoples Bancorp but is not required to hold a minimum
percentage of ESOP assets in shares of Peoples Bancorp. The trustee is also
authorized to invest in other securities, such as certificates of deposit,
equity stocks, bonds, and other investments.
From time to time, the ESOP purchased shares of Peoples Bancorp common
stock in open market transactions. To purchase Peoples Bancorp common stock, the
ESOP was authorized to borrow funds from an unrelated third-party lender secured
by the purchased shares. Any loan must be repaid with funds from Peoples
Federal's contributions to the ESOP and earnings on ESOP assets. The ESOP did
not borrow funds as of September 30, 1999 to purchase shares. Contributions from
Peoples Federal to the ESOP are made out of net operating profits in amounts
established by the Board of Directors in its sole discretion. These
contributions may be made either in cash or in shares of Peoples Bancorp common
stock.
The ESOP was administered by a committee appointed by the Board of
Directors. The members of the committee that administers the ESOP are Robert D.
Ball, John C. Thrapp, Douglas D. Marsh, and Dr. John C. Harvey.
On May 1, 1999, the ESOP was amended to convert it into a 401(k) plan.
The 401(k) plan provides for employee contributions of between 1% and 15% of
salary on a pre-tax basis with matching employer contributions equal to 50% of a
participant's contributions up to 6% of salary. The vesting schedule is the same
as the vesting schedule under the ESOP. All shares originally contributed to the
ESOP were allocated to participants' accounts under the 401(k) plan. Withdrawals
under the 401(k) plan are permitted upon the attainment of age 59 1/2 or
hardship. Participants are allowed to choose from a variety of investment
vehicles to invest their 401(k) accounts and in the absence of a choice by a
participant are invested in a money market fund account.
The ESOP maintained an account for each participant in the ESOP, which
was allocated to each participant's 401(k) plan account. With respect to shares
of Peoples Bancorp common stock allocated to a participant's account, each
participant is entitled to direct the trustee as to the manner of voting the
shares. If the Participant fails to direct the trustee, the unvoted shares are
voted by the trustee only upon instructions from the committee. Similarly,
unallocated shares are voted by the trustee only upon instructions from the
committee. In either case, the voting of unvoted or unallocated shares is in the
committee's sole discretion. The committee currently intends to instruct the
trustee to vote unvoted and unallocated shares of Peoples Bancorp common stock
held in the 401(k) plan for all of the proposals set forth herein.
28
<PAGE>
The 401(k) plan may be considered an anti-takeover device, because the
401(k) plan may become the owner of a sufficient percentage of the total
outstanding common stock of Peoples Bancorp so that the vote of the trustee (or
of plan participants) may serve as a defense in a hostile takeover.
As of September 30, 1999, the ESOP held 60,300 shares (1.9%) of Peoples
Bancorp's outstanding common stock, 100% of which has been allocated to
participant accounts. No contributions were made to the ESOP during the fiscal
year ended September 30, 1999. The ESOP incurred expenses of $7,240 which, under
the terms of the ESOP, were paid by the Bank. Peoples Bancorp contributed
$24,588 for the benefit of participants under the 401(k) plan during the fiscal
year ended September 30,1999 and assumed expensess of $2,893 for 401(k) plan
administration.
CONSULTING AGREEMENT. Effective December 1, 1999, Peoples Federal
entered into a one year consulting agreement with Mr. Wertenberger, Chairman of
the Board of Peoples Federal. This consulting agreement is intended to ensure
that Peoples Federal will be able to maintain a stable and competent management
base. The consulting arrangement provides for an annual payment of $60,000.
DIRECTOR COMPENSATION. Directors do not receive any fees for serving as
directors of the Company. Directors of Peoples Federal currently receive $12,000
per year. For the fiscal year ended September 30, 1999, directors' fees totaled
$84,000. In addition, Directors Emeritus of Peoples Federal are paid for each
meeting at a monthly fee equal to the fee they received at the time of
retirement from the Board of Directors. For the fiscal year ended September 30,
1999, Director Emeritus fees totaled $43,800.
Directors are also eligible to receive awards under the Peoples Bancorp
1998 Stock Option and Incentive Plan. For the fiscal year ended September 30,
1999, directors were not granted any options to purchase shares of Peoples
Bancorp common stock pursuant to the Stock Option and Incentive Plan.
REPORT OF THE BUDGET COMMITTEE. The Budget Committee of Peoples Federal
establishes policies and objectives relating to compensation, reviews
compensation costs, and recommends salaries and bonuses for all employees and
executive officers. All decisions of the Budget Committee are subject to
approval by the full Board of Directors. For the fiscal year ending September
30, 1999, the Board of Directors made no modifications to the Budget Committee's
compensation recommendations. In recommending the salaries of the executive
officers, the Budget Committee has access to and reviews compensation data for
comparable financial institutions. The officers are also evaluated as to their
performance during the year and compared to the performance Peoples Federal.
In making recommendations with respect to executive compensation, the
Budget Committee attempts to achieve the following objectives while furthering a
policy of cost containment by controlling expenses:
1. Provide compensation comparable to that which is offered by
other similarly situated financial institutions in order to
attract and retain talented executives who are critical to the
success of Peoples Bancorp and Peoples Federal;
2. reward executive officers based upon their ability to achieve
both short- and long-term strategic goals and to enhance
shareholder value; and
3. align the interests of the executive officers with the
long-term interests of the stockholders by granting stock
options and setting matching amounts for employee 401K
contributions.
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At September 30, 1999, the executive compensation program was comprised
of base salary, annual incentive bonuses. Reasonable base salaries are awarded
based on salaries paid by comparable financial institutions and individual
performance. Annual incentive bonuses are tied to Peoples Bancorp's net income
performance for the current fiscal year.
The Budget Committee recommended, and the Board of Directors approved,
a consulting arrangement for Mr. Wertenberger providing for an annual payment of
$60,000 and a bonus of $8,603 for the fiscal year ended September 30, 1999 for
Mr. Wertenberger.
Dated: September 21, 1999 BUDGET COMMITTEE
Bruce S. Holwerda Douglas D. Marsh
John C. Thrapp John C. Harvey
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. No person
who served as a member of the Budget Committee during the fiscal year ended
September 30, 1999 has ever been an officer or employee of Peoples Bancorp or
any of its subsidiaries, except for John Thrapp, who serves as Assistant Trust
Officer of Peoples Federal. During the fiscal year ended September 30, 1999, no
executive officer of Peoples Bancorp or Peoples Federal served as a director or
member of the compensation committee of another entity, one of whose directors
or executive officers served as a director or member of the Budget Committee of
Peoples Bancorp or Peoples Federal.
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PERFORMANCE GRAPH. The following graph compares the yearly percentage
change in Peoples Bancorp's cumulative total shareholder return on the Peoples
Bancorp common stock with
1. the cumulative total return of the Nasdaq market index, and
2. the cumulative total return of the SNL Midwest Thrift Index
comprised of all mid-west publicly traded savings and loan
associations and savings and loan holding companies over the
periods indicated.
The graph assumes an initial investment of $100 and reinvestment of
dividends. The graph is not necessarily indicative of future price performance.
[GRAPHIC]
<TABLE>
<CAPTION>
PERIOD ENDING
-------------------------------------------------------
INDEX 9/30/94 9/30/95 9/30/96 9/30/97 9/30/98 9/30/99
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Peoples Bancorp 100.00 109.79 98.83 153.32 166.43 138.80
NASDAQ - Total US* 100.00 138.07 163.85 224.97 228.77 371.52
SNL Midwestern Thrift Index 100.00 131.56 155.13 244.73 243.79 238.13
</TABLE>
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors of Peoples Bancorp has appointed the firm of Olive
LLP, independent certified public accountants, to audit the consolidated
financial statements of Peoples Bancorp for the fiscal year ending September 30,
2000. A proposal to ratify the appointment of Olive LLP, will be presented to
Peoples Bancorp stockholders at the annual meeting. Representatives of Olive
LLP, are
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expected to be present at the Meeting and to be available to respond to
appropriate questions. The representatives will also be provided an opportunity
to make a statement, if they desire.
RECOMMENDATION OF THE PEOPLES BANCORP BOARD OF DIRECTORS
The Peoples Bancorp Board of Directors has unanimously approved and
adopted the Plan of Reorganization and Agreement and Plan of Merger. The Peoples
Bancorp Board of Directors believes that the merger is fair to and in the best
interests of Peoples Bancorp and the Peoples Bancorp shareholders and
unanimously recommends that you, as a Peoples Bancorp shareholder, vote "FOR"
approval of the merger and the Plan of Reorganization and Agreement and Plan of
Merger and the transactions contemplated thereby. The Peoples Bancorp Board of
Directors also recommends a that you, as a Peoples Bancorp shareholder, vote
"FOR" the nominees for director, the ratification of the appointment of
auditors, and the proposal to adjourn or postpone the Peoples Bancorp annual
meeting for the purpose of allowing additional time for the solicitation of
proxies from Peoples Bancorp shareholders to approve the Plan of Reorganization
and Agreement and Plan of Merger.
OTHER MATTERS
Peoples Bancorp is unaware of any matter to be presented at the annual
meeting other than the proposal to approve the Plan of Reorganization and
Agreement and Plan of Merger, the election of two directors, the ratification of
the appointment of auditors, and if necessary, a proposal to adjourn or postpone
the meeting to solicit addition proxies in favor of the merger should there not
be enough votes present in person or by proxy at the meeting to approve the
merger. If other matters are properly presented at the annual meeting, the proxy
holders will have authority to vote all properly executed proxies in accordance
with their judgment on any matter, including, without limitation, any proposal
to adjourn or postpone the annual meeting for any purpose other than to allow
time for the solicitation of additional proxies. Proxies that are voted against
approval of the Plan of Reorganization and Agreement and Plan of Merger will not
be voted in favor of any proposal to adjourn or postpone the meeting for the
purpose of soliciting additional proxies to approve the Plan of Reorganization
and Agreement and Plan of Merger, unless the shareholder so indicates on the
proxy.
THE MERGER
THE DETAILED TERMS OF THE MERGER ARE CONTAINED IN THE PLAN OF
REORGANIZATION AND AGREEMENT AND PLAN OF MERGER ATTACHED AS ANNEX A TO THIS
DOCUMENT. THE FOLLOWING DISCUSSION AND THE DISCUSSION UNDER "THE PLAN OF
REORGANIZATION AND AGREEMENT AND PLAN OF MERGER" DESCRIBE THE MORE IMPORTANT
ASPECTS OF THE MERGER AND ALL OF THE MATERIAL TERMS OF THE PLAN OF
REORGANIZATION AND AGREEMENT AND PLAN OF MERGER. THESE DESCRIPTIONS ARE
QUALIFIED BY REFERENCE TO THE PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF
MERGER, WHICH IS ATTACHED AS ANNEX A. WE ENCOURAGE YOU TO READ THE PLAN OF
REORGANIZATION AND AGREEMENT AND PLAN OF MERGER CAREFULLY.
STRUCTURE OF THE MERGER
GENERAL. The Plan of Reorganization and Agreement and Plan of Merger
provides that, after approval by the Three Rivers shareholders and the Peoples
Bancorp shareholders and the satisfaction or waiver of the other conditions to
the merger, Three Rivers will merge with and into Peoples Bancorp. Immediately
after the merger, First Savings will become a wholly-owned subsidiary of Peoples
Bancorp. The Articles of Incorporation and Bylaws of Peoples Bancorp, as in
effect immediately prior to the merger, will be the Articles of Incorporation
and Bylaws of Peoples Bancorp after the merger. The directors and officers of
Peoples Bancorp immediately prior to the merger will be the directors and
officers of Peoples Bancorp after the merger until they resign or until their
respective successors are duly
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elected and qualified. In addition, Mr. G. Richard Gatton, President and Chief
Executive Officer of Three Rivers and First Savings, and one other
representative from Three Rivers will join the Board of Directors of Peoples
Bancorp immediately following the merger, subject to approval of the Board of
Directors of Peoples Bancorp. The directors and officers of First Savings
immediately prior to the merger will be the directors and officers of First
Savings after the merger until they resign or until their respective successors
are duly elected and qualified. In addition, two representative from Peoples
Bancorp will join the Board of Directors of First Savings immediately following
the merger, subject to approval of the Board of Directors of First Savings.
TIMING OF CLOSING. The closing of the merger will occur not later than
the first business day of the first full calendar month commencing at least five
full trading days after the satisfaction or waiver of all conditions to the Plan
of Reorganization and Agreement and Plan of Merger and after all regulatory
approvals have been obtained, or such other day mutually agreed to by Peoples
Bancorp and Three Rivers after the satisfaction or waiver of all conditions and
after all regulatory approvals have been obtained. The parties anticipate that
the merger will be completed during the first quarter of 2000.
CONVERSION OF SHARES. At the completion of the merger, each issued and
outstanding share of Three Rivers common stock will convert into the right to
receive 1.08 shares of Peoples Bancorp common stock. Peoples Bancorp will pay
cash in lieu of issuing fractional shares of Peoples Bancorp common stock in an
amount equal to such fraction multiplied by the applicable average closing sale
price of Peoples Bancorp common stock. The applicable average closing sale price
is the average price of Peoples Bancorp common stock on the Nasdaq National
Market System, as reported in THE WALL STREET JOURNAL, for the five consecutive
trading days immediately prior to the merger. Assuming that the holders of Three
Rivers exercise their vested stock options before the merger, Peoples Bancorp
will issue approximately 804,940 shares of Peoples Bancorp common stock in the
merger, and the current shareholders of Three Rivers will own approximately
20.33% of Peoples Bancorp after the merger.
If Peoples Bancorp changes the number of outstanding shares of Peoples
Bancorp common stock before the merger through any stock split or other
combination, or if Peoples Bancorp declares a stock dividend, then Peoples
Bancorp will adjust the conversion ratio appropriately.
Three Rivers and Peoples Bancorp shareholders may obtain current market
quotations for Peoples Bancorp common stock and Three Rivers common stock. We
expect that the market price of Peoples Bancorp common stock will fluctuate
between the date of this document and the date of the merger and thereafter.
Because the number of shares of Peoples Bancorp common stock Three Rivers
shareholders will receive in the merger is fixed and the market price of Peoples
Bancorp common stock fluctuates, the value of the shares of Peoples Bancorp
common stock that Three Rivers shareholders receive in the merger may increase
or decrease prior to and after the merger.
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER - PEOPLES BANCORP. Peoples Bancorp's assets
have increased from $251.1 million at September 30, 1993 to $327.6 million at
September 30, 1999. During this period, Peoples Bancorp has pursued a strategy
of internal growth. Peoples Bancorp has a strategic objective of increasing its
assets and earnings, and intends to achieve these objectives through internal
growth and, where appropriate, acquisitions. Over the past year, Peoples Bancorp
analyzed potential candidates for acquisitions and received inquiries on several
more.
In June 1999, Peoples Bancorp was approached by Three Rivers regarding
a possible combination. At this time, Peoples Bancorp began to consider the
possibility of a business combination with Three Rivers. Peoples Bancorp
management made a presentation to the Board of Directors of
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Peoples Bancorp on June 22, 1999 at the regularly scheduled Board of Directors
meeting, regarding the prospect of acquiring Three Rivers.
Peoples Bancorp submitted a written nonbinding expression of interest
to Three Rivers on August 2, 1999. The letter outlined proposed terms of Peoples
Bancorp's offer to acquire Three Rivers. Peoples Bancorp and Three Rivers then
began independent due diligence of each other. This on-site process involved
analyzing the assets and liabilities of Three Rivers and Peoples Bancorp,
respectively.
Maurice F. Winkler, III, President and Chief Operating Officer of
Peoples Bancorp, held a number of discussions with G. Richard Gatton, President
and Chief Executive Officer of Three Rivers and First Savings, regarding the
merger. They reviewed the benefits of merging both organizations from the
perspective of shareholders, employees, and communities.
On June 14, 1999, Peoples Bancorp engaged its investment banker, JMP
Financial, Inc., to begin a preliminary analysis of the proposed merger. JMP
Financial delivered a preliminary analysis to Peoples Bancorp on June 22, 1999.
This analysis indicated that the transaction would be beneficial to the
shareholders of Peoples Bancorp on a going forward basis despite a potential
reduction of the earnings per share of Peoples Bancorp in the year of the
acquisition as a result of acquisition costs.
The Board of Directors of Peoples Bancorp met on September 21, 1999 and
approved the Plan of Reorganization and Agreement and Plan of Merger between
Peoples Bancorp and Three Rivers. JMP Financial presented its preliminary
opinion on the fairness of the merger to the shareholders of Peoples Bancorp
from a financial point of view. JMP Financial reviewed financial projections,
potential costs and savings associated with the merger, and historical and
projected methods with the Peoples Bancorp Board of Directors in the context of
presenting its oral fairness opinion.
On September 21, 1999, Peoples Bancorp executed the Plan of
Reorganization and Agreement and Plan of Merger.
BACKGROUND OF THE MERGER - THREE RIVERS. On July 16, 1999, Three Rivers
retained Trident Securities, a Division of McDonald Investments Inc. to advise
it about ways to enhance shareholder value and improve the performance of Three
Rivers. Trident Securities was also involved in discussions which had been
initiated by Three Rivers with Peoples Bancorp.
To enhance Three Rivers' strength in such discussions and to continue
to enhance shareholder value, the Three Rivers Board of Directors reviewed
potential strategic alternatives for improving the performance of First Savings.
Three Rivers reviewed strategies to accomplish the following goals:
- strengthen Three Rivers' position in the communities it served;
- grow and increase profitability; and
- achieve greater operating efficiencies.
As Three Rivers considered the implementation of programs aimed at
growth and increased profitability of First Savings, the Board of Directors of
Three Rivers considered possible strategies for enhancing Three Rivers' ability
to achieve those strategic objectives. In that connection, Three Rivers
considered the possibility of affiliating with a larger, more diversified
holding company with a similar strategic focus. The management of Three Rivers
determined that it would be in the interest of Three Rivers shareholders to
pursue a combination merger or other business.
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In the course of their explorations of various ways to increase
shareholder value, the Three Rivers Board of Directors explored a number of
alternatives, including a business combination with another institution. The
nonbinding letter proposal from a small bank holding company proposed a merger
of Three Rivers into the bank holding company and a merger of First Savings into
its subsidiary commercial bank. In considering pursuing a transaction with this
company, the Three Rivers Board of Directors evaluated the compatibility of
management and business plans pursued by the two institutions, the value to
Three Rivers' shareholders of the proposal presented by the institution, and the
uncertainty as to future performance of the company's stock
On June 11, 1999, Mr. Gatton met with Mr. Winkler regarding a potential
merger of the companies. Mr. Gatton and Mr. Winkler subsequently met to explore
the potential transaction structure and value of a merger between Three Rivers
and Peoples Bancorp
After various discussions and negotiations among certain directors,
officers, and financial and legal advisors, Three Rivers received a
nonbinding expression of interest letter from Peoples Bancorp on August 2,
1999. Each party then conducted due diligence examination of the other. Upon
completion of due diligence examinations and after additional discussions and
negotiations, the Board of Directors of Three Rivers held a meeting to
discuss and evaluate the proposed transaction on September 21, 1999.
Representatives of Trident Securities and Manatt, Phelps & Phillips, LLP,
Three Rivers' legal counsel, met with the Boards of Directors of Three Rivers
on September 21, 1999 to review the draft of the merger document.
On September 21, 1999, the Three Rivers Board of Directors received an
oral opinion from Trident Securities to the effect that the consideration to be
received in the merger was fair to its shareholders, from a financial point of
view. After further discussion and evaluation, the Three Rivers Board of
Directors approved the Plan of Reorganization and Agreement and Plan of Merger.
On September 21, 1999, Three Rivers executed the Plan of Reorganization and
Agreement and Plan of Merger.
REASONS FOR THE MERGER - THREE RIVERS. The Three Rivers Board of
Directors believes that the Plan of Reorganization and Agreement and Plan of
Merger and the merger are in the best interest of Three Rivers and the Three
Rivers shareholders. Accordingly, the Three Rivers Board of Directors has
unanimously approved and adopted the Plan of Reorganization and Agreement and
Plan of Merger and recommends approval of the Plan of Reorganization and
Agreement and Plan of Merger by the Three Rivers shareholders. In reaching its
decision, the Board of Directors consulted with Three Rivers' management, legal
counsel, and Trident Securities, Three Rivers' financial advisor. The Board of
Directors considered a number of factors, including the following:
- the Three Rivers Board of Directors' familiarity with and review
of First Savings' business, operations, financial condition, and
earnings;
- the Three Rivers Board of Directors' familiarity with and review
of First Savings' prospects, and factors which might affect First
Savings' ability to enhance revenues and obtain revenue source
diversification on a stand-alone basis, including:
- the effect on First Savings' operating margins in a higher
interest rate environment in light of the highly competitive
banking business in southeastern Michigan and northeastern
Indiana and the market areas served by First Savings;
- the dominance in the market by a relatively small number of major
financial institutions with many offices operating over a wide
geographic area;
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- the competition for loans and deposits products by First Savings
with commercial banks, savings associations, finance companies,
credit unions, brokerage houses, and other financial
institutions, including many which are much larger and have many
more resources than First Savings; and
- the ability of larger financial institutions to offer larger
loans based on substantially higher lending limits due to a
larger capital base;
- the current and prospective economic and regulatory environment
facing financial institutions, including Three Rivers and First
Savings;
- the review by the Board of Directors of Three Rivers, based in
part on the advice of Trident Securities, of the range of
possible values to Three Rivers' stockholders that might be
obtained in the future if other alternative proposals were chosen
and the timing and likelihood of actually receiving such values.
This review included consideration of the alternatives of
remaining independent or engaging in a merger or a similar
transaction with companies other than Peoples Bancorp;
- the review by the Board of Directors of Three Rivers, based in
part on the advice of Trident Securities and reports from
management, of (a) the business, operations, earnings, and
financial condition of Three Rivers on both an historical and a
prospective basis and (b) the historical market price and
potential future value of Three Rivers common stock;
- the anticipated cost savings and operating efficiencies available
to the combined institution from the merger;
- the belief of the Board of Directors of Three Rivers that the
terms of the Plan of Reorganization and Agreement and Plan of
Merger are attractive in that the agreement allows Three Rivers
shareholders to become shareholders in a combined institution
with more assets, a larger geographic base, and a more liquid
security;
- the financial presentations of Trident Securities and the
September 21, 1999 opinion of Trident Securities as to the
fairness of the merger consideration from a financial point of
view;
- the expectation that the merger will generally be a tax-free
transaction to Three Rivers and its shareholders;
- the terms of the Plan of Reorganization and Agreement and Plan of
Merger and other information regarding the merger, including
the terms and structure of the merger, the proposed arrangements
with respect to the Boards of Directors of Peoples Bancorp and
First Savings, and the management structure following the merger;
and
- the effect of the merger on Three Rivers' and First Savings'
other constituencies, including its management, employees, and
the communities it serves.
The foregoing discussion of the information and factors considered by
Board of Directors is not intended to be exhaustive but is believed to include
all material factors considered by the Three Rivers Board of Directors. In
reaching its determination to approve the merger, the Three Rivers
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Board of Directors did not assign any relative or specific weights to the
foregoing factors, and individual directors may have given differing weights to
different factors.
REASONS FOR THE MERGER - PEOPLES BANCORP. The Peoples Bancorp Board of
Directors believes that the terms of the Plan of Reorganization and Agreement
and Plan of Merger and the merger are fair from a financial point of view to,
and are in the best interests of, Peoples Bancorp and the Peoples Bancorp
shareholders. Accordingly, the Peoples Bancorp Board of Directors has
unanimously approved and adopted the Plan of Reorganization and Agreement and
Plan of Merger and recommends approval of the Plan of Reorganization and
Agreement and Plan of Merger by the Peoples Bancorp shareholders. In reaching
its decision, the Peoples Bancorp Board of Directors consulted with Peoples
Bancorp's management, legal counsel and JMP Financial, Peoples Bancorp's
financial advisor, and considered a number of factors, to which relative weights
were not assigned, including the following:
- The Peoples Bancorp Board of Directors' review of:
- the business, operations, financial condition, and earnings of
Peoples Bancorp on an historical and a prospective basis and of
the combined company on a pro forma basis;
- the anticipated cost savings, operating efficiencies, and
opportunities for revenue enhancement available to the combined
company as a result of the merger;
- the historical and prospective stock price performance of Peoples
Bancorp common stock, including the anticipated impact of the
merger on the earnings per share and the price of Peoples Bancorp
common stock over the short term and the long term.
- The compatibility of the respective businesses, operating philosophies
and strategic objectives of Peoples Bancorp and Three Rivers,
including their respective decentralized management structures, the
growth of their respective fee-based businesses and the superior
credit quality of their respective loan portfolios.
- Review of the combined earnings of Peoples Bancorp and Three Rivers,
including anticipated cost savings.
- The current and prospective economic and competitive environment
facing the financial services industry generally, and Peoples Bancorp
in particular, including the continued pace of consolidation in the
industry and the perceived importance of operational scale in
enhancing efficiency and profitability and remaining competitive over
the long term.
- The Peoples Bancorp Board of Directors' familiarity with and review of
Three Rivers' business, operations, financial condition and earnings
on an historical and a prospective basis.
- JMP Financial delivered to the Peoples Bancorp Board of Directors on
September 21, 1999, an analysis of the merger and delivered a written
fairness opinion dated October 16, 1999 that, as of such date, the
merger was fair from a financial point of view to the holders of
Peoples Bancorp common stock.
- The expectation that the merger will generally be tax-free, for
federal income tax purposes to Peoples Bancorp.
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- The generally favorable impact that the merger could be expected to
have on the constituencies served by Peoples Bancorp, including its
customers, employees, and communities.
There are numerous factors other than the merger that could cause
Peoples Bancorp's results of operations, including, among other things, earnings
per share, to increase or decrease after the merger. Therefore, we cannot assure
you that the anticipated benefits of the merger discussed in the previous
paragraphs will happen. You should read "Risk Factors" on page 15 for a
discussion of the factors that could affect Peoples Bancorp's future operations
and financial condition.
The foregoing discussion of the information and factors considered by
the Peoples Bancorp Board of Directors is not intended to be exhaustive but is
believed to include all material factors considered by the Peoples Bancorp Board
of Directors.
EFFECTS OF THE MERGER AND RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Among the Three Rivers and Peoples Bancorp's reasons for recommending
approval of the merger is their belief that, over the long-term, the merger will
be beneficial to Peoples Bancorp shareholders, including Three Rivers
shareholders who will become Peoples Bancorp shareholders if the merger is
completed. Peoples Bancorp believes that one of the potential benefits of the
merger is that the cost savings which may be realized by combining the two
companies will enhance Peoples Bancorp's earnings.
Peoples Bancorp currently expects to reduce expenses by eliminating
external data-processing costs of First Savings and by combining accounting,
data processing, retail and lending support, and other functions after the
merger, which will enable Peoples Bancorp to achieve economies of scale in these
areas. Promptly following the completion of the merger, which is expected to
occur during the first quarter of 2000, Peoples Bancorp plans to begin the
process of eliminating redundant functions, such as external data processing,
and identifying and eliminating duplicative expenses.
Because Peoples Bancorp believes that this process will take the
remainder of 2000 to complete, it has not attempted to quantify what cost
savings might be achieved during 2000. The amount of any cost savings Peoples
Bancorp may realize in 2000 will depend upon how quickly and efficiently Peoples
Bancorp is able to implement the processes outlined above during the year.
Peoples Bancorp believes that it will achieve cost savings based on the
assumption that it will be able to:
- reduce external data processing costs;
- achieve economies of scale in advertising and marketing budgets;
- reduce legal and accounting fees; and
- achieve other savings through reduction or elimination of
miscellaneous items such as insurance premiums, travel and
automobile expense, and investor relations expenses.
We have based these assumptions on our present assessment of where
savings could be realized based upon the present independent operations of the
two companies. Our actual savings in some or all of these areas could be higher
or lower than we currently expect.
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The companies have prepared financial statements that show the combined
operations and financial condition of the two companies as if the merger had
occurred on September 30, 1999. These are known as "pro forma" financial
statements. The pro forma financial statements are set forth beginning on page
64. The pro forma financial statements do not reflect the following anticipated
effects of the merger:
- Peoples Bancorp and Three Rivers expect to incur merger-related
costs of approximately $435,000. Three Rivers will expense costs
as incurred, while Peoples Bancorp will capitalize a portion of
the costs. These costs are explained in greater detail in Note 3
to the pro forma financial statements on page 66.
- Peoples Bancorp also believes the merger will create
opportunities for increasing its revenues through mortgage and
consumer loan growth. Peoples Bancorp has not quantified the
increase in revenues which it hopes to achieve and so we cannot
predict what effect it will have on our post-merger results of
operations if we achieve the increase.
The pro forma financial statements show that the merger would have
caused a "dilution" (reduction) in Peoples Bancorp's earnings per share. This
dilution is reflected in the pro forma financial statements and can be seen in
the table under "Comparative Per Share Data" on page 14 by comparing the section
labeled "Peoples Bancorp Historical" with the selection labeled "Peoples Bancorp
Unaudited Pro Forma."
Each of the Peoples Bancorp Board of Directors and the Three Rivers
Board of Directors believes the merger to be in the best interests of their
respective institutions, shareholders, and banking customers. Each Board of
Directors believes that the merger will position Peoples Bancorp, on a
consolidated basis, to achieve its strategic objective of becoming a preeminent
independent financial services provider in northeastern Indiana and Southeastern
Michigan and strengthen Peoples Bancorp, on a consolidated basis, in terms of
management, growth opportunities, and profitability. Furthermore, each Board of
Directors believes that Peoples Bancorp, as a larger independent financial
institution, will be better able to compete with major financial institutions in
its service communities. The parties also anticipate that the merger will
present revenue enhancement opportunities for the combined entity. These
opportunities result from, among other factors:
- an increased ability to offer a wider variety of banking products
and services;
- the ability to generate increased loan and fee income from
Peoples Federal and First Savings customers as a result of the
higher lending limits available to the combined entity; and
- the potential to increase overall market share in the communities
presently served by Peoples Federal and First Savings as a result
of the wider range of products and services to be offered through
the combined entity.
Each Board of Directors recommends a vote FOR the merger and the
transactions contemplated thereby.
OPINION OF THREE RIVERS' FINANCIAL ADVISOR
MERGER - GENERAL. Three Rivers retained Trident Securities, a Division
of McDonald Investments Inc., to act as its sole financial advisor in connection
with the merger and related matters. As part of its engagement, Trident
Securities agreed, if requested by Three Rivers, to render an opinion with
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respect to the fairness, from a financial point of view, to the holders of Three
Rivers common stock, of the exchange ratio. Three Rivers selected Trident
Securities because Trident Securities is a nationally recognized
investment-banking firm with substantial experience in transactions similar to
the merger and is familiar with Three Rivers and its business as the placement
agent in First Savings' conversion from the mutual to stock form of organization
in 1995. As part of its investment banking business, Trident Securities is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions.
On September 21, 1999, Trident Securities delivered to the Three Rivers
Board of Directors its oral opinion, which Trident Securities subsequently
confirmed in writing, that the exchange ratio was fair to Three Rivers
shareholders, from a financial point of view, as of the date of such opinion.
Trident Securities has also delivered to the Three Rivers Board of Directors a
written opinion as of the date of this document, which is substantially similar
to the opinion delivered on September 21, 1999. No limitations were imposed by
Three Rivers on Trident Securities with respect to the investigations made or
the procedures followed in rendering its opinion.
The full text of the Trident Securities opinion, which sets forth the
assumptions made, matters considered and extent of review by Trident Securities,
is attached as Annex C to this document and is incorporated herein by reference.
It should be read carefully and in its entirety in conjunction with this
document. The following summary of the Trident Securities opinion is qualified
in its entirety by reference to the full text of the opinion. The Trident
Securities opinion is addressed to the Three Rivers Board of Directors and does
not constitute a recommendation to any shareholder of Three Rivers as to how
such shareholder should vote at the three rivers special meeting described in
this document.
Trident Securities, in connection with rendering its opinion:
- Reviewed, among other things,
- the Plan of Reorganization and Agreement and Plan of Merger,
including exhibits;
- certain publicly available financial statements of Three
Rivers and Peoples Bancorp;
- certain other public and non-public information, primarily
financial in nature, relating to the respective businesses,
earnings, assets and prospects of Three Rivers and Peoples
Bancorp provided to Trident Securities or publicly
available;
- participated in meetings and telephone conferences with members
of senior management of Three Rivers and Peoples Bancorp
concerning the financial condition, business, assets, financial
forecasts, and prospects of the respective companies, as well as
other matters Trident Securities believed relevant to its
inquiry;
- reviewed stock market information for the Three Rivers common
stock and Peoples Bancorp common stock and compared it with
similar information for companies, the securities of which
are publicly traded;
- compared the results of operations and financial condition of
Three Rivers and Peoples Bancorp with that of certain companies
which Trident Securities deemed to be relevant for purposes of
its opinion;
- reviewed the financial terms, to the extent publicly available,
of certain acquisition transactions which Trident Securities
deemed to be relevant for purposes of its opinion;
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<PAGE>
- performed such other reviews and analyses as Trident Securities
deemed appropriate.
The oral and written opinions provided by Trident Securities to Three
Rivers were necessarily based upon economic, monetary, financial market, and
other relevant conditions as of the dates thereof.
In connection with its review and arriving at its opinion, Trident
Securities relied upon the accuracy and completeness of the financial
information and other pertinent information provided by Three Rivers to Trident
Securities for purposes of rendering its opinion. Trident Securities did not
assume any obligation to independently verify any of the provided information as
being complete and accurate in all material respects. With regard to the
financial forecasts established and developed for Three Rivers and Peoples
Bancorp with the input of the respective managements, as well as projections of
cost savings, revenue enhancements and operating synergies, Trident Securities
assumed that this material had been reasonably prepared on bases reflecting the
best available estimates and judgments of Three Rivers and Peoples Bancorp as to
the future performance of the separate and combined entities and that the
projections provided a reasonable basis upon which Trident Securities could
formulate its opinion. Three Rivers does not publicly disclose such internal
management projections of the type utilized by Trident Securities in connection
with Trident Securities' role as financial advisor to Three Rivers with respect
to review of the merger. Therefore, such projections cannot be assumed to have
been prepared with a view toward public disclosure. The projections were based
upon numerous variables and assumptions that are inherently uncertain,
including, among others, factors relative to the general economic and
competitive conditions facing Three Rivers and Peoples Bancorp. Accordingly,
actual results could vary significantly from those set forth in the respective
projections.
Trident Securities does not claim to be an expert in the evaluation of
loan portfolios or the allowance for loan losses with respect thereto and
therefore assumes that such allowances for Three Rivers and Peoples Bancorp are
adequate to cover such losses. In addition, Trident Securities does not assume
responsibility for the review of individual credit files, did not make an
independent evaluation, appraisal or physical inspection of the assets or
individual properties of Three Rivers or Peoples Bancorp, nor was Trident
Securities provided with such appraisals. Furthermore, Trident Securities
assumed that the merger will be consummated in accordance with the terms set
forth in the Plan of Reorganization and Agreement and Plan of Merger, without
any waiver of any material terms or conditions by Three Rivers, and that
obtaining the necessary regulatory approvals for the merger will not have an
adverse effect on either separate institution or the combined entity. Moreover,
in each analysis that involves per share data for Three Rivers, Trident
Securities adjusted the data to reflect full dilution (I.E., the effect of the
exercise of outstanding options and/or warrants utilizing the treasury stock
method).
In connection with rendering its opinion to the Three Rivers Board of
Directors, Trident Securities performed a variety of financial and comparative
analyses, which are briefly summarized below. This summary of analyses does not
purport to be a complete description of the analyses performed by Trident
Securities. Moreover, Trident Securities believes that these analyses must be
considered as a whole and that selecting portions of these analyses and the
factors considered by it, without considering all of the analyses and factors,
could create an incomplete understanding of the scope of the process underlying
the analyses and, more importantly, the opinion derived from them. The
preparation of a financial advisor's opinion is a complex process involving
subjective judgments and is not necessarily susceptible to partial analyses or a
summary description of the analyses. In its full analysis, Trident Securities
also included assumptions with respect to general economic, financial market,
and other financial conditions. Furthermore, Trident Securities drew from its
past experience in similar transactions, as well as its experience in the
valuation of securities and its general knowledge of the banking industry as a
whole. Any estimates in Trident Securities' analyses were not necessarily
indicative of future results or values, which may significantly diverge
favorably or adversely from the
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<PAGE>
estimates. Estimates of company valuations do not purport to be appraisals nor
do they necessarily reflect the prices at which companies or their respective
securities actually may be sold. None of the analyses performed by Trident
Securities were assigned a greater significance by Trident Securities than any
other in deriving its opinion.
TRANSACTION SUMMARY. Trident Securities calculated the merger
consideration to be paid pursuant to the exchange ratio as a multiple of Three
Rivers' book value and 1999 estimated earnings. This computation was based on
the Three Rivers' estimated earnings per share of $0.84 in 1999. Based on those
assumptions and the closing Peoples Bancorp stock price of $17.00, this analysis
indicated that Three Rivers shareholders would receive shares of Peoples Bancorp
common stock worth $18.36 for each share of Three Rivers Common Stock held, and
that this amount would represent a ratio of price to book value of 125%, and
21.8 times estimated 1999 earnings per share.
CONTRIBUTION ANALYSIS. Trident Securities analyzed the contribution of
each company to the pro forma company relative to their approximate ownership of
the pro forma company. The analysis indicated that Three Rivers' shareholders
would hold approximately 20.6% of the pro forma diluted shares. Three Rivers'
approximate contributions are listed below by category:
Three Rivers Contribution To:
<TABLE>
<S> <C>
Assets.................................................. 23.2%
Loans................................................... 18.6%
Deposits................................................ 19.5%
Stockholders' equity.................................... 20.1%
Tangible stockholders' equity........................... 20.0%
Last twelve months net income........................... 13.7%
1999 estimated net income............................... 12.6%
2000 estimated net income............................... 15.3%
</TABLE>
ACCRETION/DILUTION ANALYSIS. On the basis of financial projections and
estimates of on-going cost savings accruing to the pro forma company over the
period 1999 through 2001 provided to Trident Securities by Three Rivers and
Peoples Bancorp, Trident Securities compared pro forma equivalent per share
calculations with respect to net income, cash dividends, book value, and
tangible book value to the stand-alone per share projections for Three Rivers.
The accretion/dilution analysis implied that the merger would result
in:
- accretion to earnings per share for Three Rivers' shareholders
over the period of the analysis;
- higher cash dividends per share for Three Rivers' shareholders,
assuming Peoples maintained its dividend policy;
- accretion to book value per share over the period of the
analysis; and
- initial dilution to tangible book value per share for Three
Rivers' shareholders becoming accretive.
DISCOUNTED CASH FLOW ANALYSIS. Trident Securities performed a
discounted cash flow analysis with regard to Three Rivers on a stand-alone
basis. This analysis utilized of earnings growth assumptions ranging from 6% to
12%, a range of discount rates of 14% to 18% and a range of earnings terminal
multiples of 12.0x to 21.0x. The analysis resulted in a range of present values
of $6.73 to $16.77 for
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<PAGE>
Three Rivers on a stand-alone basis. This analysis is not necessarily indicative
of actual values or actual future results and does not purport to reflect the
prices at which any securities may trade at the present or at any time in the
future. Trident Securities noted that the discounted cash flow analysis was
included because it is a widely used valuation methodology, but noted that the
results of such methodology are highly dependent upon the numerous assumptions
that must be made, including earnings growth rates, dividend pay-out rates,
terminal values and discount rates.
COMPARABLE TRANSACTION ANALYSIS. Trident Securities reviewed and
compared actual information for comparable pending and completed transactions
for thrifts with assets less than $200 million. The multiples for Three Rivers
were based on Peoples Bancorp's closing share price of $17.00, using an exchange
ratio of 1.08, which equates to a Three Rivers share price of $18.36.
The following table represents a summary analysis based on the announced
transaction values.
<TABLE>
<CAPTION>
Peoples Bancorp/
Mean Median Three Rivers
----- ------ ----------------
<S> <C> <C> <C>
Tangible equity to assets................... 13.1% 10.7% 11.5%
Year to date return on average assets....... 0.56% 0.80% 0.61%
Price to book value......................... 162% 162% 125%
Price to tangible book value................ 164% 164% 125%
Price to trailing 4 quarter earnings........ 22.6x 20.8x 20.6x
Price to assets............................. 21.0% 19.3% 14.4%
Premium to market price..................... 39.4% 29.8% 54.0%
Premium to deposits......................... 11.9% 9.5% 4.3%
</TABLE>
COMPARABLE COMPANY ANALYSIS. Trident Securities reviewed and compared
actual stock market data and actual and estimated selected financial information
for Peoples Bancorp with corresponding peer group information for 23 publicly
traded thrifts with assets between $200 million and $400 million.
The table below represents a summary analysis of the Peoples Bancorp
peer group based on market prices as of September 20, 1999, and the latest
publicly available financial data as of or for the twelve months ended June 30,
1999:
<TABLE>
<CAPTION>
Mean Median Peoples Bancorp
---- ------ ---------------
<S> <C> <C> <C>
Price to last twelve months earnings per share.... 17.2x 15.3x 12.6x
Price to 1999 estimated earnings per share........ 16.5x 15.6x 12.1x
Price to 2000 estimated earnings per share........ 12.6x 11.9x 12.7x
Price to book value per share..................... 103% 104% 121%
Price to tangible book value per share............ 99% 99% 121%
Dividend yield.................................... 2.87% 2.95% 2.82%
Return on core average assets..................... 0.78% 0.73% 1.40%
Return on core average equity..................... 5.89% 5.59% 9.77%
Leverage ratio.................................... 13.3% 11.1% 13.9%
Efficiency ratio.................................. 64% 65% 41%
</TABLE>
OTHER ANALYSES. Trident Securities also reviewed other information
including pro forma estimated balance sheet composition and pro forma
financial performance.
No other company used as a comparison in the above analyses is
identical to Three Rivers, Peoples Bancorp or the combined entity and no other
transaction is identical to the merger. Accordingly, an analysis of the results
of the foregoing is not purely mathematical; rather, such analyses involves
complex considerations and judgements concerning differences in financial market
and operating
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<PAGE>
characteristics of the companies and other factors that could affect the public
trading volume of the companies to which Three Rivers, Peoples Bancorp and the
combined entity are being compared.
In connection with its opinion dated as of the date of this joint proxy
statement/prospectus, Trident Securities performed procedures to update, as
necessary, certain of the analyses described above. Trident Securities reviewed
the assumptions on which the analyses described above were based and the factors
considered in connection therewith.
TRIDENT SECURITIES. The Three Rivers Board of Directors has retained
Trident Securities as an independent contractor to act as financial adviser to
Three Rivers regarding the merger. As part of its investment banking business,
Trident is customarily engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate, and other purposes.
Trident Securities has experience in, and knowledge of, the valuation of
financial institutions enterprises. In the ordinary course of its business,
Trident Securities may actively trade securities of Peoples Bancorp and Three
Rivers for its own account and for the accounts of customers and accordingly,
may at any time have a long or short position in the equity securities of Three
Rivers and Peoples Bancorp.
Three Rivers and Trident Securities have entered into an agreement
relating to the services to be provided by Trident Securities in connection with
the merger. Three Rivers has agreed to pay Trident Securities, at the time of
closing, a cash fee equal to 1.15% of the market value of the aggregate
consideration offered in exchange for the outstanding shares of common stock of
Three Rivers in the merger less a fee of $50,000 previously paid. Pursuant to
the Trident Securities engagement agreement, Three Rivers also agreed to
reimburse Trident Securities for reasonable out-of-pocket expenses and
disbursements incurred in connection with its retention and to indemnify Trident
Securities against certain liabilities, including liabilities under the federal
securities laws.
OPINION OF PEOPLES BANCORP FINANCIAL ADVISOR
The Peoples Bancorp Board of Directors has retained JMP Financial to
act as financial adviser to Peoples Bancorp regarding the merger. As part of its
investment banking business, JMP Financial is customarily engaged in the
valuation of businesses and their securities, and of financial institutions in
particular, in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate, and other purposes. JMP
Financial has experience in, and knowledge of, the valuation of financial
institution enterprises.
Peoples Bancorp and JMP Financial have entered into an agreement
relating to the services to be provided by JMP Financial in connection with the
merger. Peoples Bancorp has agreed to pay JMP Financial, at the time of closing,
a cash fee equal to $25,000. Pursuant to the JMP Financial engagement agreement,
Peoples Bancorp also agreed to reimburse JMP Financial for reasonable
out-of-pocket expenses and disbursements incurred in connection with its
retention and to indemnify JMP Financial against certain liabilities, including
liabilities under the federal securities laws.
JMP Financial rendered a written opinion that dated October 16, 1999,
that as of that date, the exchange of 1.08 shares of Peoples Bancorp common
stock for each share of Peoples Bancorp common stock was fair to Peoples Bancorp
and its shareholders from a financial point of view.
The full text of JMP Financial's written opinion dated the date of this
joint proxy statement/prospectus is attached as Annex B hereto and is
incorporated herein by reference. Peoples
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<PAGE>
Bancorp shareholders are urged to read the opinion in its entirety for a
description of the procedures followed, assumptions made, matters considered,
and qualifications and limitations on the review undertaken by JMP Financial.
JMP Financial's opinion is directed to the Peoples Bancorp Board of
Directors and addresses only the merger consideration. It does not address the
underlying business decision to proceed with the merger and does not constitute
a recommendation to any shareholder as to how the shareholder should vote at the
special meeting with respect to the merger or any related matter.
In rendering its opinion, JMP Financial reviewed material it deemed
necessary and appropriate under the circumstances, including;
- Audited consolidated financial statements of Three Rivers and
Peoples Bancorp for the three years ended June 30, 1999 and
September 30, 1998, respectively;
- Unaudited financial statements of Peoples Bancorp for the nine
months ended June 30, 1999 and internal financial reports of
Peoples Bancorp and Three Rivers as of August 31, 1999;
- Other publicly available information concerning Three Rivers and
Peoples Bancorp;
- Publicly available information with respect to other bank
holding companies, which JMP Financial deemed, appropriate,
including competitors of Three Rivers and Peoples Bancorp;
- Publicly available information with respect to the nature and
terms of other thrift merger and acquisition transactions
which JMP Financial considered relevant;
- The Plan of Reorganization and Agreement and Plan of Merger;
- Reviewed and discussed with representatives of management of Three
Rivers its large or over 60 day delinquent loans;
- Reviewed and discussed with representatives of management of
Three Rivers and Peoples Bancorp, information of a business and
financial nature regarding Three Rivers and Peoples Bancorp,
including financial forecast and related assumptions, provided by
Three Rivers or Peoples Bancorp or otherwise publicly available;
- Reviewed the Plan of Reorganization and Agreement and Plan of
Merger, including Exhibits, and
- Reviewed historical market prices and trading volumes of
Three Rivers and Peoples Bancorp common stock.
In conducting its review and arriving at its opinion, JMP Financial
assumed and relied upon the accuracy and completeness of all of the financial
and other information reviewed by it and have relied upon the accuracy and
completeness of the representations, warranties, and covenants of Peoples
Bancorp and Three Rivers contained in the Plan of Reorganization and Agreement
and Plan of Merger. JMP Financial did not undertake, and did not assume any
responsibility for, nor have they conducted, an independent investigation or
verification of any matters. JMP Financial was not engaged to and did not
conduct a physical inspection of any of the assets, properties, or facilities of
either Peoples Bancorp or Three Rivers, nor did they make or obtain, or were
they furnished with an independent valuation or appraisal of any of the assets,
properties, or facilities or any of the liabilities of Peoples Bancorp or Three
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<PAGE>
Rivers. With respect to financial forecasts used in JMP Financial analysis, JMP
Financial assumed that the forecasts had been reasonably prepared or reviewed by
management of Peoples Bancorp and Three Rivers, as the case may be, on a basis
reflecting the best currently available estimates and judgments of management of
Peoples Bancorp and Three Rivers, as to the future performance of Peoples
Bancorp, Three Rivers, and Peoples Bancorp and Three Rivers combined. JMP
Financial expressed no view as to the financial forecasts used by it or the
assumptions on which the forecasts were based. JMP Financial assumed that all
the conditions to the consummation of the merger, as set forth in the Plan of
Reorganization and Agreement and Plan of Merger, including the tax-free
treatment of the merger to the holders of Three Rivers common stock, would be
satisfied and that the merger would be consummated in a timely basis in the
manner contemplated by the Plan of Reorganization and Agreement and Plan of
Merger. This opinion is necessarily based on economic, market and other
conditions in effect on, and the information made available to us as of, the
date hereof. It should be understood that subsequent developments may affect the
opinion and that JMP does not have any obligation to update, revise or reaffirm
it.
The following is a summary of the material analyses performed by JMP
Financial related to its written opinion rendered to Peoples Bancorp on October
16, 1999
TRANSACTION SUMMARY. JMP Financial calculated the merger consideration
to be paid pursuant to the exchange ratio as a multiple of Peoples Bancorp's
book value, and 1999 estimated earnings. This computation was based on Three
Rivers' estimated earnings per share $0.84 in 1999, a book value per share of
$15.35, and an exchange ratio of 1.08 Peoples Bancorp shares for each Three
Rivers share. Based on those assumptions and the closing Peoples Bancorp stock
price of $17 as of the date of this analysis Three Rivers' shareholders would
receive shares of Peoples Bancorp common stock worth $18.36 for each share of
Three Rivers Common Stock held, and that this amount would represent a ratio of
price to book value of 125%, and 21.8 times estimated 1999 earnings per share.
JMP Financial reviewed financial data related to thrift mergers and
acquisitions over the past 12 months.
JMP Financial compared multiples of price to various factors for the
Peoples Bancorp-Three Rivers merger to the same multiples for the comparable
group's mergers at the time those mergers were completed. The results were as
follows:
<TABLE>
<CAPTION>
Multiple of Price to Factor
----------------------------------------------
Three Rivers -
Comparable Peoples Bancorp
Factor Considered Group Average Merger
- ------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Tangible equity to assets, target................... 10.6% 11.5%
Return on average equity, target.................... 8.28% 5.48%
Year to date return on average assets, target....... 0.87% 0.67%
Price to book value, paid........................... 177% 111%
Price to fourth quarter earnings per share, paid.... 23.1X 20.3X
Price to assets, paid............................... 23.8% 13.3%
</TABLE>
JMP also consider subset groups which focused on transactions with
aggregate values less than $50 million and transactions in which the relative
size of the acquirer to the target was similar to that of Peoples Bancorp and
Three Rivers. It did not find a material difference in the ratios paid existed.
Based on the data provided herein, JMP Financial determined that the
pricing ratios paid by Peoples Bancorp to Three Rivers were considerably less
then the median ratios paid in other related transactions.
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<PAGE>
No company or transaction used as a comparison in the above analysis is
identical to Peoples Bancorp, Three Rivers, or the merger. Accordingly, an
analysis of these results is not mathematical. Rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which they are being compared.
CONTRIBUTION ANALYSIS. JMP Financial analyzed the relative
contribution of each of Peoples Bancorp and Three Rivers to pro forma balance
sheet and income statement items of the combined entity. The contribution
analysis showed:
<TABLE>
<S> <C>
Three Rivers Contribution To:
Combined Deposits.................................................. 20%
Combined Common Equity............................................. 20%
Combined 1999 Estimated Net Income without Cost Savings............ 13%
Combined Total Assets.............................................. 23%
Three Rivers Estimated Pro Forma Ownership............................. 21%
</TABLE>
JMP Financial compared the relative contribution of the balance sheet
and income statement items with the estimated pro forma ownership for Peoples
Bancorp shareholders based on a conversion ratio of 1.08.
Based on the above analysis, Three Rivers shareholders would acquire
approximately 21 percent of the pro forma shares outstanding of the combined
entity. This represented essentially no change of control premium based on
deposits, equity, or assets, but represents a premium based on income. This
premium is prior to consideration for prospective economies of scale and costs
savings that may be expected to materialize from the combination.
DILUTION ANALYSIS. JMP Financial analyzed the relative dilution of
Peoples Bancorp per share book value, both in relation to book value under
generally accepted accounting principles (commonly referred to as GAAP) and on a
tangible basis, and earnings per share, on both a GAAP and cash basis. The
dilution analysis showed:
<TABLE>
<CAPTION>
As of As of
September 21, 1999 October 6, 1999
---------------------- ----------------------
<S> <C> <C>
GAAP book value...................... (4.4)% (2.5)%
Tangible book value.................. 0.2% 0.2%
GAAP earnings per share.............. 7.5% 9.7%
Cash earnings per share.............. 6.5% 6.5%
</TABLE>
It is noted that on a GAAP basis, the transaction is anti-dilutive to
shareholders of Peoples Bancorp. On a tangible book value basis the transaction
is essentially non-dilutive. The transaction is dilutive to earnings of Peoples
on both a GAAP and cash basis. However, the dilution is fair and reasonable
after consideration for change of control and prospective economies of scale and
cost savings that could prospectively eliminate the dilution.
DIRECTORS AND EXECUTIVE OFFICERS OF PEOPLES BANCORP AND FIRST SAVINGS FOLLOWING
THE MERGER; PRINCIPAL SHAREHOLDERS OF PEOPLES BANCORP
Upon completion of the merger, the current directors and executive
officers of Peoples Bancorp will remain directors and executive officers of
Peoples Bancorp and the current directors and executive officers of First
Savings will remain directors and executive officers of First Savings. In
addition, and subject to the approval of the Peoples Bancorp Board of Directors,
Mr. G. Richard Gatton, President and Chief Executive Officer of Three Rivers and
First Savings, and one other representative of Three Rivers
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<PAGE>
will be added to the Board of Directors of Peoples Bancorp. Furthermore, subject
to the approval of the First Savings Board of Directors, two representatives of
Peoples Bancorp will be added to the Board of Directors of First Savings.
You should read the Form 10-KSB of Three Rivers for more information
concerning the directors and executive officers of Three Rivers, which
information is incorporated by reference into this joint proxy
statement/prospectus. See "Where You Can Find More Information" on page 67.
INTERESTS OF CERTAIN DIRECTORS AND EXECUTIVE OFFICERS OF THREE RIVERS IN THE
MERGER
When considering the recommendations of the Three Rivers Board of
Directors, you should be aware that some of the employees of Three Rivers and
First Savings and members of the Three Rivers Board of Directors and management
have interests that are different from, or in conflict with, your interests. The
Board of Directors was aware of these interests when they approved the merger
and the Plan of Reorganization and Agreement and Plan of Merger. Except as
described below, to the knowledge of Three Rivers, the executive officers and
directors of Three Rivers do not have any material interest in the merger apart
from their interests as shareholders.
CHANGE IN CONTROL SEVERANCE AGREEMENTS. Three Rivers and First Savings
have entered into severance agreements with Martha Romig, Senior Vice President,
Secretary, Treasurer, and Chief Financial Officer of Three Rivers and First
Savings, and R. Orville Poling, Vice President of First Savings. The severance
agreements contain provisions that provide severance benefits under certain
circumstances following a change in control. The aggregate payments that would
be made pursuant to the severance agreements, assuming termination of employment
under the foregoing circumstances at September 30, 1999, would have been
approximately $280,000. Mr. Poling's agreement terminates by its terms on
January 5, 2000.
SPECIAL ARRANGEMENT FOR THREE RIVERS' PRESIDENT AND CHIEF EXECUTIVE
OFFICER. Mr. G. Richard Gatton, a current director and President and Chief
Executive Officer of Three Rivers and First Savings, will enter into an
employment agreement with People Bancorp in connection with the merger. The
employment agreement provides for full-time employment for at least three years
and a part-time employment for three years at a reduced salary. Each of these
periods may be extended upon agreement of the parties. Mr. Gatton will receive a
base salary of $104,000 under the employment agreement, which will be reduced to
$75,000 upon entering the part time phase of the agreement if Mr. Gatton works
full time for three years following the merger and $60,000 if he does not. If
Mr. Gatton works for the term provided in the employment agreement, he will
receive additional retirement benefits equal to the lost retirement benefits he
would have received under the First Savings retirement plan had he remained
employed with First Savings until age 65. Moreover, under the employment
agreement, Mr. Gatton's unvested stock options will vest upon his termination of
employment for any reason. Mr. Gatton will remain President and Chief Executive
Officer of First Savings and immediately following the merger will be appointed
to the Board of Directors of Peoples Bancorp, subject to the approval of Peoples
Bancorp's Board of Directors. Mr. Gatton will receive no cash compensation for
his service on the Board of Directors of Peoples Bancorp, however, he will be
eligible to receive awards under the Peoples Bancorp 1998 Stock Option and
Incentive Plan.
APPOINTMENT OF ONE ADDITIONAL REPRESENTATIVE OF THREE RIVERS TO PEOPLES
BANCORP BOARD OF DIRECTORS. Subject to approval of the Peoples Bancorp Board of
Directors, one additional representative of Three Rivers will become a member of
the Board of Directors of Peoples Bancorp immediately following completion of
the merger. It is expected that the representative will be chosen from the
members of the existing Board of Directors of Three Rivers or First Savings. As
a director of Peoples Bancorp, this representative will receive no cash
compensation for his or her service on the Board
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<PAGE>
of Directors of Peoples Bancorp, however, he or she will be eligible to receive
awards under the Peoples Bancorp 1998 Stock Option and Incentive Plan.
NASDAQ NATIONAL MARKET LISTING
Peoples Bancorp will file a notification with the Nasdaq National
Market System regarding the issuance of Peoples Bancorp common stock in the
merger. This notification must be made to the Nasdaq National Market System for
the merger to proceed.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Peoples Bancorp and Three Rivers have obtained the opinion of Manatt,
Phelps & Phillips LLP that, for federal income tax purposes, the merger is a
tax-deferred reorganization within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code and will not result in gain or loss for federal income tax
purposes to Peoples Bancorp or Three Rivers. In addition, the opinion states
that the issuance of Peoples Bancorp's common stock in the merger will not
result in the recognition of gain or loss by the holders of Three Rivers common
stock who receive Peoples Bancorp common stock in the merger.
Based upon this opinion, the additional federal income tax consequences
to the merger include the following:
- Three Rivers will not recognize any gain or loss on the
transfer of its assets to Peoples Bancorp solely in exchange
for Peoples Bancorp common stock and the assumption of Three
Rivers' liabilities;
- Peoples Bancorp will not recognize any gain or loss on
receiving the assets of Three Rivers in exchange for Peoples
Bancorp common stock;
- the shareholders of Three Rivers will not recognize any gain
or loss on the transfer of their Three Rivers common stock
solely in exchange for Peoples Bancorp common stock;
- Three Rivers shareholders who receive cash in lieu of
fractional shares of Peoples Bancorp will recognize gain or
loss as a result of receipt of such cash;
- the basis of Peoples Bancorp common stock received by the
Three Rivers shareholders in the merger will be the same as
the basis of their Three Rivers common stock surrendered in
the merger;
- the holding period of the Peoples Bancorp common stock the
Three Rivers shareholders receive in the merger will include
the holding period of the Three Rivers common stock
surrendered in the merger so long as their Three Rivers common
stock is held as a capital asset;
- the holding period of the assets of Three Rivers in the hands
of Peoples Bancorp will include the period during which such
assets were held by Three Rivers;
- the basis of Three Rivers assets in the hands of Peoples
Bancorp will be the same as the basis of such assets in the
hands of Three Rivers immediately prior to the merger;
- because stock options to purchase Three Rivers common stock
and options to purchase Peoples Bancorp common stock into
which they will convert do not have a readily
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ascertainable fair market value because they are not publicly
traded, and therefore conversion of the Three Rivers options
into Peoples Bancorp options will not result in income, gain
or loss to the holders of such stock options; and
- Three Rivers and Peoples Bancorp will not recognize gain or
loss on the issuance of Peoples Bancorp common stock to an
optionee pursuant to the optionee's exercise of a stock option
issued by Three Rivers and converted into an option to acquire
Peoples Bancorp common stock.
This discussion is for general information only. The opinion of Manatt,
Phelps & Phillips, LLP is based on current law and assumes that the merger is
consummated as described herein. Neither this discussion nor the opinion of
Manatt, Phelps & Phillips is binding on the IRS and no ruling from the IRS has
been sought or will be sought with respect to the tax consequences of the
merger.
The foregoing discussion is limited to the material federal income tax
consequences of the proposed merger and does not discuss state, local, or
foreign tax consequences or all of the tax consequences that might be relevant
to an individual shareholders of Three Rivers or Peoples Bancorp. Each
shareholder is urged to consult with his or her own tax advisor concerning the
specific tax consequences of the merger to the shareholder, including the
applicability and effect of foreign, state, local, or other tax laws and of any
future changes in the Internal Revenue Code, the Treasury Regulations, tax
rulings or court decisions or other laws concerning taxes.
ACCOUNTING TREATMENT OF THE MERGER
The merger is expected to be treated as a purchase of assets for
accounting and financial reporting purposes. Accordingly, in connection with the
merger, the assets and liabilities of Three Rivers will be marked to their fair
market value prior to being added to the corresponding balance sheet categories
of Peoples Bancorp, subject to any adjustments required to conform the
accounting policies and financial statement classifications of the two
companies. Any amount remaining after allocating the purchase price to the Three
Rivers' assets and liabilities will be classified as goodwill and will be
amortized over future periods. In future financial statements, the results of
operations of Peoples Bancorp will include the results of both Three Rivers and
Peoples Bancorp only for the periods beginning after the effective date of the
merger. Peoples Bancorp must treat certain expenses incurred to effect the
merger as current charges against income rather than as adjustments to its
balance sheet.
The unaudited pro forma condensed combined financial information
contained in this document has been prepared using the purchase method of
accounting to account for the merger. See "Summary -- Selected Unaudited Pro
Forma Combined Financial Data" beginning on page 9 and "Unaudited Pro Forma
Condensed Combined Financial Statements" beginning on page 61.
EXCHANGE OF THREE RIVERS COMMON STOCK FOR PEOPLES BANCORP COMMON STOCK
Promptly after the completion of the merger, Peoples Bancorp will
instruct The Fifth Third Bank to send to each holder of Three Rivers common
stock transmittal material for use in exchanging all of their certificates
representing shares of Three Rivers common stock for a certificate or
certificates representing shares of Peoples Bancorp common stock and a check for
any fractional share interest. The transmittal material will contain information
and instructions with respect to the surrender of certificates of shares of
Three Rivers common stock in exchange for certificates representing shares of
Peoples Bancorp common stock.
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THREE RIVERS SHAREHOLDERS SHOULD NOT SEND IN THEIR SHARE CERTIFICATES
UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
Following the completion of the merger and upon surrender of all of the
certificates representing shares of Three Rivers common stock registered in the
name of Three Rivers common stock shareholders, or a satisfactory indemnity if
any of the certificates are lost, stolen, or destroyed, together with a properly
completed letter of transmittal, The Fifth Third Bank will mail to each holder a
certificate or certificates for the number of shares of Peoples Bancorp common
stock they are entitled, together with all undelivered dividends or
distributions, less the amount of any withholding taxes that may be required for
the shares and, where applicable, a check in the amount of any cash to be paid
in lieu of fractional shares. We will pay no interest on any cash.
Declaration of dividends by Peoples Bancorp after the completion of the
merger will include dividends on all Peoples Bancorp common stock issued in the
merger, but no dividend or other distribution payable to the holders of record
of Peoples Bancorp common stock at or as of any time after the completion of the
merger will be paid to holders of Three Rivers common stock until they
physically surrender all certificates as described above. After the completion
of the merger, the stock transfer books of Three Rivers will close and there
will be no transfers on the transfer books of Three Rivers.
THE PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF MERGER
CONDITIONS TO THE MERGER
The obligation of Peoples Bancorp and Three Rivers to consummate the
merger is subject to the satisfaction or waiver on or before the completion of
the merger of many conditions, including the following:
- no judgment, decree, injunction, order or proceeding will be
outstanding or threatened by any governmental authority which
prohibits or restricts or threatens to invalidate or set aside
the merger;
- the Plan of Reorganization and Agreement and Plan of Merger
must receive all required approvals of governmental
authorities, and the shareholders of Three Rivers and Peoples
Bancorp. The Boards of Directors of Peoples Bancorp and Three
Rivers have already unanimously approved the Plan of
Reorganization and Agreement and Plan of Merger;
- no stop order suspending the effectiveness of the registration
statement, of which this joint proxy statement/prospectus is a
part, has been issued and no proceedings for that purpose has
been initiated or then threatened by the Securities and
Exchange Company;
- the Nasdaq National Market System shall have been notified of
the shares of Peoples Bancorp common stock issuable to Three
Rivers shareholders in connection with the merger; and
- Peoples Bancorp and Three Rivers have received an opinion from
Manatt, Phelps & Phillips, LLP, that as of the closing date of
the merger, the merger will not result in the recognition of
gain or loss for federal income tax purposes, and that the
issuance of Peoples Bancorp common stock will not result in
the recognition of gain or loss to Three Rivers shareholders
who receive Peoples Bancorp common stock in the merger.
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The obligation of Peoples Bancorp to consummate the merger is also
subject to fulfillment of other conditions, including the following:
- The representations and warranties of Three Rivers set forth
in the Plan of Reorganization and Agreement and Plan of Merger
are true and correct in all material respects as of the
effective time of the merger;
- Three Rivers and First Savings performed and complied in all
material respects with each agreement, covenant, obligation,
and condition required by the Plan of Reorganization and
Agreement and Plan of Merger to be performed or complied with
by them at or prior to the effective time of the merger;
- Peoples Bancorp, at its expense, received letters from Crowe,
Chizek and Company LLP, independent public accountants to
Three Rivers, regarding the financial statements and
other matters related to the business of Three Rivers; and
- Each Person who may be at the effective time of the merger or
was on the date of the Plan of Reorganization and Agreement
and Plan of Merger an "affiliate" of Three Rivers for purposes
of Rule 145 under the Securities Act executed and delivered to
Three Rivers written undertakings.
The obligations of Three Rivers to consummate the merger are also
subject to the fulfillment of other conditions, including the following:
- The representations and warranties of Peoples Bancorp set
forth in the Plan of Reorganization and Agreement and Plan of
Merger are true and correct in all material respects as of the
effective time of the merger; and
- Peoples Bancorp and Peoples Federal performed and complied in
all material respects with each agreement, covenant,
obligation, and condition required by the Plan of
Reorganization and Agreement and Plan of Merger to be
performed or complied with by them at or prior to the
effective time of the merger.
Additionally, the completion of the merger is subject to the delivery
of documents and the receipt of third-party consents, officers' certificates,
and other documents.
If these and other conditions are not satisfied or waived, Peoples
Bancorp or Three Rivers may terminate the Plan of Reorganization and Agreement
and Plan of Merger.
NONSOLICITATION
Under the terms of the Plan of Reorganization and Agreement and Plan of
Merger, Three Rivers has agreed not to solicit, encourage, or facilitate
inquiries or proposals for any acquisition proposal. In addition, Three Rivers
has agreed not to enter into any definitive agreement, with respect to, or
initiate or participate in any negotiations or discussions with any person
concerning, any acquisition or purchase of all or any material portion of the
assets of, or of any material equity interest in, Three Rivers or any of its
direct or indirect subsidiaries or any merger or business combination with or
involving Three Rivers or any of its direct or indirect subsidiaries, unless
Three Rivers receives a bona fide offer from a person other than Peoples Bancorp
and the Three Rivers Board of Directors determines, based on written advice of
its counsel, that it has a fiduciary duty to examine the offer. Three Rivers has
agreed to promptly notify Peoples Bancorp of the terms of any competing
transaction.
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EXPENSES
Each party has agreed to pay its own expenses. The parties will share
the expense of printing and mailing this joint proxy statement/prospectus. If,
prior to the effective time of the merger, the Plan of Reorganization and
Agreement and Plan of Merger is terminated by Three Rivers and within 12 months
of the date of termination, Three Rivers agrees to be acquired by, merged, or
otherwise combined with any third party, in consideration for Peoples Bancorp's
expenditure of time and money in connection with the merger and the actions of
Peoples Bancorp connected thereto, Three Rivers will pay Peoples Bancorp the
amount of $250,000.
TREATMENT OF OPTIONS
Each option to purchase Three Rivers common stock issued and
outstanding immediately prior to the completion of the merger and all
obligations of Three Rivers under the Three Rivers Stock Option and Incentive
Plan will, on and after the completion of the merger, be assumed by and be
deemed to be options granted by Peoples Bancorp to purchase that number of
shares of Peoples Bancorp common stock equal to 1.08 times the number of shares
of Three Rivers common stock subject to the option rounded down to the nearest
whole number of Peoples Bancorp common stock. The per share exercise price for
the shares of Peoples Bancorp common stock issuable upon exercise of such Three
Rivers option will be determined by dividing the exercise price immediately
prior to the completion of the merger by 1.08. Peoples Bancorp intends to assume
the Three Rivers Stock Option and Incentive Plan for this purpose.
TERMINATION
The Plan of Reorganization and Agreement and Plan of Merger may be
terminated at any time prior to the completion of the merger:
- by mutual consent of Peoples Bancorp and Three Rivers in
writing;
- by Peoples Bancorp or Three Rivers if a condition to the
terminating party's obligation to close cannot be satisfied
prior March 31, 2000, unless caused by the breach of any
covenant or agreement (x) by Peoples Bancorp or Peoples
Federal, in the case of a termination by Three Rivers, or (y)
by Three Rivers or First Savings, in the case of termination
by Peoples Bancorp;
- by Peoples Bancorp or Three Rivers (provided that none of the
terminating party or any of its affiliates is then in material
breach of any representation, warranty, covenant, or other
agreement contained in the Plan of Reorganization and
Agreement and Plan of Merger) if there has been a material
breach of any of the covenants or agreements or any of the
representations or warranties set forth in the Plan of
Reorganization and Agreement and Plan of Merger on the part of
Peoples Bancorp or Peoples Federal, in the case of a
termination by Three Rivers, or on the part of Three Rivers or
First Savings, in the case of a termination by Peoples
Bancorp, which breach is not cured within thirty (30) days
following written notice given by the terminating party to the
party committing the breach, or, by its nature, cannot be
cured prior March 31, 2000, and which breach would entitle the
terminating party to not consummate the merger;
- by Peoples Bancorp or Three Rivers, if the completion of the
merger has not occurred on or before March 31, 2000 (provided
that the right to terminate the Plan of Reorganization and
Agreement and Plan of Merger is not available to any party
whose failure or whose affiliate's failure to perform any
covenant of obligation under the Plan of Reorganization
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and Agreement and Plan of Merger has been the cause of or
resulted in the failure of the merger to occur on or before
such date);
- by Peoples Bancorp if the Three Rivers Board of Directors
withdraws, modifies or changes in a manner adverse to Peoples
Bancorp its recommendation with respect to the merger, the
Plan of Reorganization and Agreement and Plan of Merger, or
the transactions contemplated thereby, or by Three Rivers if
the Peoples Bancorp Board of Directors withdraws, modifies or
changes in a manner adverse to Three Rivers its recommendation
with respect to the merger, the Plan of Reorganization and
Agreement and Plan of Merger, or the transactions contemplated
thereby.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO COMPLETION OF THE MERGER
The Plan of Reorganization and Agreement and Plan of Merger provides
that, during the period from the date of the Plan of Reorganization and
Agreement and Plan of Merger to the completion of the merger, Three Rivers will
conduct its business only in the normal and customary manner and in accordance
with sound banking practices. The Plan of Reorganization and Agreement and Plan
of Merger also provides that Three Rivers will not, without the prior written
consent of Peoples Bancorp, which consent may not be unreasonably withheld, take
any of the following actions, or cause First Savings to take any of the
following actions:
- amend its certificate of incorporation, charter, or bylaws (or
comparable governing instruments) or merge with or into or
consolidate with any other person, subdivide, combine or in
any way reclassify any shares of its capital stock, or change
in any manner the rights of its outstanding capital stock;
- issue or sell or purchase any of its securities or rights to
purchase any of its securities except pursuant to the exercise
of outstanding options or as otherwise contemplated in the
Plan of Reorganization and Agreement and Plan of Merger;
- waive any right of value to its business other than a waiver,
together with all other such waivers, that would not have a
material adverse effect on Three Rivers;
- make any change in its accounting methods or practices for tax
or accounting purposes or make any change in depreciation or
amortization policies or rates adopted by it for tax or
accounting purposes, except in each case as required by
Generally Accepted Accounting Principles or applicable law;
- materially change, or agree to change, any of its lending
activities, policies or practices, except as required by
applicable law or by any governmental authority;
- make any loan or advance to any of its affiliates, officers,
directors, employees, consultants, agents, or other
representatives (other than travel advances made in the
ordinary course of business consistent with past practice), or
make any other loan or advance otherwise than in the ordinary
course of business consistent with past practice;
- sell, offer to sell, abandon or make any other disposition of
any of its material assets, including selling or closing any
branches; or grant or suffer any encumbrance on any of its
material assets;
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- except in the ordinary course of business consistent with past
practice, incur or assume, or agree to incur or assume, any
liability or obligation (whether or not currently due and
payable) relating to its business or any of its assets;
- create, renew, amend, terminate or cancel, or take any other
action that may result in the creation, renewal, amendment,
termination, or cancellation of, any contract with any of its
affiliates;
- declare, set aside or pay any dividends or declare or make any
other distributions of any kind on or in respect of its
capital stock (other than dividends from First Savings to
Three Rivers or from First Savings' subsidiary to First
Savings), provided that Three Rivers may declare and pay its
regular quarterly cash dividends on Three Rivers common stock
of not more than $0.115 per share per quarterly period,
provided further that the parties agree that after the date of
the Plan of Reorganization and Agreement and Plan of Merger,
each of Peoples Bancorp and Three Rivers will coordinate with
the other the declaration of any dividends in respects of
Peoples Bancorp common stock and Three Rivers common stock and
the record dates and payment dates relating thereto, so that
shareholders of Three Rivers do not receive two dividends, or
fail to receive one dividend, for any single calendar quarter
with respect to their shares;
- create, renew, amend, terminate or cancel, or take any other
action that may result in the creation, renewal, amendment,
termination, or cancellation of, any contract, except in the
ordinary course of business consistent with past practice and
as would not, in the aggregate, have a material adverse effect
on Three Rivers or First Savings; enter into or amend any
contract pursuant to which it agrees to indemnify any party on
behalf of its business or pursuant to which it agrees to
refrain from competing with any party with respect to its
business;
- adopt, amend, renew, terminate or accelerate or vest benefits
under any employee benefit plan or benefit arrangement with
any employees or directors of Three Rivers or First Savings,
except as required by applicable law;
- commit any act or omission which constitutes a breach or
default under any contract or license to which Three Rivers or
First Savings is a party or by which it or any of its
properties or assets is bound except as would not have, in the
aggregate, a material adverse effect on Three Rivers or First
Savings;
- acquire in any manner, including by way of merger,
consolidation, or purchase of an equity interest or assets,
any business or any corporation, partnership, association, or
other business organization or division thereof (other than by
way of foreclosures or acquisitions of control in a bona fide
fiduciary capacity or in satisfaction of debts previously
contracted in good faith, in each case in the ordinary and
usual course of business consistent with past practice);
- increase the salary or wages of any employees of Three Rivers
or First Savings; or pay any incentive, bonus, or similar
payments to employees or directors other than as required by
the terms of any Three Rivers employee benefit plan or benefit
arrangement in effect as of the date hereof and as
contemplated by the Plan of Reorganization and Agreement and
Plan of Merger;
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- purchase any debt securities or derivative securities that are
considered complex securities or purchase any derivatives
contracts;
- make any investment which would cause First Savings to not be
a qualified thrift lender, or not to be a "domestic building
and loan association" under the Internal Revenue Code;
- change its existing investment guidelines, except as required
by applicable law or any governmental authority, or the manner
in which its investment securities portfolio is classified or
reported;
- authorize or make capital expenditures in excess of $100,000,
individually, or $500,000, in the aggregate;
- take any action that or fail to take any action the result of
which would prevent the merger from qualifying as a
"reorganization" under Section 368(a) of the Internal Revenue
Code; or
- agree (by contract or otherwise) to do any of the foregoing.
AMENDMENT AND WAIVER OF THE PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF
MERGER
Subject to applicable law, any provision of the Plan of Reorganization
and Agreement and Plan of Merger may be amended or waived by Peoples Bancorp or
Three Rivers prior to closing if the parties mutually agree to the amendment. In
addition, either Peoples Bancorp or Three Rivers may waive the other party's
performance of covenants or conditions to the Plan of Reorganization and
Agreement and Plan of Merger.
RESALES OF PEOPLES BANCORP COMMON STOCK BY THREE RIVERS SHAREHOLDERS
The shares of Peoples Bancorp common stock to be issued to Three Rivers
shareholders in the merger will be registered under the Securities Act. These
shares may be traded freely and without restriction by those shareholders not
deemed to be "affiliates" of Three Rivers as of the date of the Three Rivers
special meeting. For one year after the special meeting of shareholders of Three
Rivers, if Peoples Bancorp remains current in its reporting obligations under
the Securities Exchange Act of 1934 (or two years if Peoples Bancorp is not
current), affiliates of Three Rivers may only sell their shares of Peoples
Bancorp
- in accordance with the provisions of Rule 145(d) under the
Securities Act of 1933;
- pursuant to an effective registration statement under the
Securities Act; or
- in transactions otherwise exempt from the registration
requirements of the Securities Act.
In addition, Three Rivers shareholders who become "affiliates" of
Peoples Bancorp following the merger will be subject to same resale restrictions
as affiliates of Peoples Bancorp. Generally, persons who are not executive
officers, directors, or greater than ten percent shareholders of Three Rivers at
the time of the special meeting or Peoples Bancorp following the merger will not
be considered affiliates in the absence of other factors indicating a control
relationship. Three Rivers has delivered to Peoples Bancorp an agreement by each
affiliate of Three Rivers that such person will not dispose of any Peoples
Bancorp common stock in violation of the Securities Act.
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REGULATORY APPROVALS FOR THE MERGER
Under the Plan of Reorganization and Agreement and Plan of Merger,
Peoples Bancorp and Three Rivers that each party shall take such actions as may
be reasonably required to carry out the provisions of the Plan of Reorganization
and Agreement and Plan of Merger and the transactions contemplated thereby. In
addition, each party will use its reasonable best efforts to fulfill or obtain
the fulfillment of the conditions precedent to the consummation of the merger,
including the execution and delivery of any documents, certificates, instruments
or other papers that are reasonably required for the consummation of the merger.
During the period from the date of the Plan of Reorganization and Agreement and
Plan of Merger and continuing through the effective time of the merger, except
as required by applicable law or with the prior written consent of the other
party, no party will take any action which, or fail to take any action the
failure of which to be taken, would, or could reasonably be expected to:
- result in any of the representations and warranties set forth in
the Plan of Reorganization and Agreement and Plan of Merger on the
part of the party taking or failing to take the action being or
becoming untrue in any material respect;
- result in any conditions to the merger not being satisfied; or
- adversely affect or materially delay the receipt of any of the
requisite regulatory approvals or the consummation of the merger.
OFFICE OF THRIFT SUPERVISION. The merger of Three Rivers with and into
Peoples Bancorp is subject to prior approval by the Office of Thrift Supervision
under Section 10(e) of the Home Owners' Loan Act. Section 10 requires the Office
of Thrift Supervision, when considering a transaction such as the merger, to
take into consideration the financial and managerial resources and the future
prospects of the companies and associations involved, the insurance risk to the
Savings Association Insurance Fund or the Bank Insurance Fund, as applicable,
and the effect of the transaction on the convenience and needs of the
communities to be served. In considering financial resources and future
prospects, the Office of Thrift Supervision will, among other things, evaluate
the adequacy of the capital levels of the parties to a proposed transaction and
of the resulting institutions. In considering the managerial resources, the
Office of Thrift Supervision will consider the competence, experience, and
integrity of the officers, directors, and principal shareholders of the
companies and associations. In considering financial and managerial factors, the
Office of Thrift Supervision will also assess the degree to which Peoples
Federal and First Savings are taking appropriate steps to ensure that electronic
data processing systems and those of their vendors can safely accommodate the
upcoming change to the new millennium and plans for ensuring Year 2000 readiness
of the resulting organization.
The Home Owners' Loan Act prohibits the Office of Thrift Supervision
from approving a merger if the merger
- would result in a monopoly or be in furtherance of any combination
or conspiracy to monopolize or to attempt to monopolize the
savings and loan business in any part of the United States; or
- the effect in any section of the country would be substantially to
lessen competition or to tend to create a monopoly, or which in
any other manner would be in restraint of trade, unless the Office
of Thrift Supervision finds that the anti-competitive effects of
the merger are clearly outweighed by the probable effect of the
transaction in meeting the convenience and needs of the
communities to be served.
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In addition, under the Community Reinvestment Act of 1977, the Office
of Thrift Supervision must take into account the record of performance of
Peoples Federal and First Savings in meeting the credit needs of the communities
served by such associations, including low- and moderate-income neighborhoods.
The application filed with the Office of Thrift Supervision pursuant to
the Home Owners' Loan Act was filed on December 10, 1999. The merger may not be
completed until the 30th day, or, with the consent of the relevant agencies, the
15th day, following the date of the Office of Thrift Supervision approval,
during which period the United States Department of Justice may comment
adversely on the merger or challenge the merger on antitrust grounds. The
commencement of an antitrust action would stay the effectiveness of any approval
unless a court specifically orders otherwise.
DESCRIPTION OF PEOPLES BANCORP COMMON STOCK
AND THREE RIVERS COMMON STOCK
In the merger, Three Rivers shareholders will exchange their shares of
Three Rivers common stock for shares of Peoples Bancorp common stock. Peoples
Bancorp is organized under the laws of the State of Indiana. Three Rivers is
organized under the laws of the State of Delaware. On consummation of the
merger, Three Rivers shareholders will become Peoples Bancorp shareholders. The
articles of incorporation and bylaws of Peoples Bancorp, in addition to The
Indiana General Corporation Law, will govern their rights as Peoples Bancorp
shareholders.
Set forth below is a summary of the material features of the Peoples
Bancorp common stock and the Three Rivers common stock. Also set forth below is
a summary of the material differences between the rights of a holder of Peoples
Bancorp common stock and a holder of Three Rivers common stock. This summary is
not a complete discussion of the charter documents and other instruments of
Peoples Bancorp and Three Rivers that create the rights of the security holders.
STOCK DESCRIPTION
PEOPLES BANCORP. Peoples Bancorp has authority to issue 7,000,000
shares of Peoples Bancorp common stock, par value $1.00 per share, and 5,000,000
shares of preferred stock, par value $1.00 per share. On the Peoples Bancorp
record date, there were 3,164,706 shares of Peoples Bancorp common stock
outstanding and no shares of preferred stock outstanding. On any matter
submitted to a vote of the shareholders, holders of Peoples Bancorp common stock
are entitled to one vote, in person or by proxy, for each share of Peoples
Bancorp common stock held of record in the shareholder's name on the Peoples
Bancorp books as of the record date. In connection with the election of
directors, the shares may not be voted cumulatively. Each share of Peoples
Bancorp common stock has the same rights, privileges, and preferences as every
other share and will share equally in Peoples Bancorp's net assets upon
liquidation or dissolution. Peoples Bancorp common stock has no preemptive,
conversion or redemption rights, or sinking fund provisions.
The Peoples Bancorp Board of Directors, without shareholder approval,
may authorize one or more classes of serial preferred stock with preferences or
voting rights that may adversely affect the rights of holders of Peoples Bancorp
common stock. Although it is not possible to state the actual effect any
issuance of preferred stock might have upon the rights of holders of the Peoples
Bancorp common stock, the issuance of preferred stock might:
- restrict dividends on Peoples Bancorp common stock if
preferred stock dividends have not been paid;
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- dilute the voting power and equity interest of holders of
Peoples Bancorp common stock to the extent that any preferred
stock series has voting rights or is convertible into Peoples
Bancorp common stock; or
- prevent current holders of Peoples Bancorp common stock from
participating in Peoples Bancorp's assets upon liquidation
until any liquidation preferences granted to the holders of
the preferred stock are satisfied.
In addition, Peoples Bancorp's issuance of preferred stock, may, under
certain circumstances, have the effect of discouraging an attempt to change
control of Peoples Bancorp.
Peoples Bancorp's bylaws provide that Peoples Bancorp shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action suit, or proceeding, whether civil,
criminal, administrative, or investigative because such person is or was a
director, officer, or employee or agent of Peoples Bancorp or any predecessor.
Under the terms of Peoples Bancorp's Bylaws, this indemnification also will be
provided to any person who is or was serving at the request of Peoples Bancorp
or any predecessor as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise. Peoples
Bancorp's Bylaws provide for indemnification to the fullest extent permitted by
law. The rights of indemnification provided in Peoples Bancorp's Bylaws are not
exclusive of any other rights which may be available under Indiana law, any
insurance or other agreement, by vote of stockholders or disinterested
directors, or otherwise.
Shareholders are entitled to dividends when declared by the Peoples
Bancorp Board of Directors, after satisfaction of the prior rights of holders of
outstanding preferred stock, if any, subject to certain restrictions on payment
of dividends imposed by Indiana law and the Office of Thrift Supervision.
The transfer agent and registrar for Peoples Bancorp common stock is
The Fifth Third Bank.
THREE RIVERS. Three Rivers has authority to issue 2,000,000 shares of
common stock, par value $0.01 per share, and 500,000 shares of preferred stock,
par value $0.01 per share. On the Three Rivers record date, there were 702,734
shares of Three Rivers common stock issued and outstanding and no shares of
Three Rivers preferred stock issued and outstanding. On any matter submitted to
a vote of the shareholders, holders of Three Rivers common stock are entitled to
one vote in person or by proxy, for each share of Three Rivers common stock held
of record in the shareholder's name on the Three Rivers books as of the record
date. In connection with the election of directors, the shares may not be voted
cumulatively. Each share of Three Rivers common stock has the same rights,
privileges, and preferences as every other share and will share equally in Three
Rivers net assets upon liquidation or dissolution. The stock has no preemptive,
conversion or redemption rights, or sinking fund provisions.
The Three Rivers Board of Directors, without shareholder approval, may
authorize one or more classes of serial preferred stock with preferences or
voting rights that may adversely affect the rights of holders of Three Rivers
common stock. Although it is not possible to state the actual effect any
issuance of preferred stock might have upon the rights of holders of the Three
Rivers common stock, the issuance of preferred stock might:
- restrict dividends on Three Rivers common stock if preferred
stock dividends have not been paid;
- dilute the voting power and equity interest of holders of
Three Rivers common stock to the extent that any preferred
stock series has voting rights or is convertible into Three
Rivers common stock; or
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<PAGE>
- prevent current holders of Three Rivers common stock from
participating in Three Rivers' assets upon liquidation until
any liquidation preferences granted to the holders of the
preferred stock are satisfied.
In addition, Three Rivers' issuance of preferred stock, may, under
certain circumstances, have the effect of discouraging an attempt to change
control of Three Rivers.
Shareholders are entitled to dividends when declared by the Three
Rivers Board of Directors after satisfaction of the prior rights of holders of
outstanding preferred stock, if any, subject to certain restrictions on payment
of dividends imposed by Delaware law and the Office of Thrift Supervision.
The transfer agent and registrar for Three Rivers common stock is U.S.
Stock Transfer Corporation.
LIMITATIONS ON LIABILITY
PEOPLES BANCORP. The Articles of Incorporation and Bylaws of Peoples
Bancorp do not contain any provisions limiting the liability of directors for
actions taken in the name of Peoples Bancorp. However, Indiana law provides
the standards that directors of Peoples Bancorp should follow in order to
fulfill their duties as directors. Generally, a director is required to
discharge the duties of director in good faith, with the care an ordinarily
prudent person in a like position would exercise under the circumstances, and
in a manner the director reasonably believes to be in the best interests of
Peoples Bancorp. A director will ordinarily not be liable for any action
taken as a director, or any failure to take any action unless the director
has breached or failed to perform the duties of the director's office as
provided under The Indiana Corporation Law and the breach or failure was the
result of willful misconduct or recklessness on the part of the director.
THREE RIVERS. In addition, the Certificate of Incorporation also
provides that a director shall not be personally liable to Three Rivers or
its shareholders for monetary damages for breach of fiduciary duty as a
director. The foregoing limitation of liability is not available in the case
of any breach of a director's
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<PAGE>
duty of loyalty to Three Rivers or its stockholders; acts or omission that are
not in good faith or that involve intentional misconduct or a knowing violation
of the law; any unlawful payment of dividend or unlawful stock purchase or
redemption by Three Rivers; and any transaction from which the director derived
an improper personal benefit.
MATERIAL DIFFERENCES BETWEEN HOLDERS OF PEOPLES BANCORP STOCK AND THREE RIVERS
STOCK
RESTRICTIONS ON OWNERSHIP OF VOTING STOCK.
PEOPLES BANCORP. Other than the limitations governing
acquisitions of control of domestic corporation under the laws of the State of
Indiana or placed on the acquisition of stock of a savings and loan holding by
the Home Owners' Loan Act, the Peoples Bancorp Articles of Incorporation contain
no limitations on the beneficial ownership of Peoples Bancorp common stock.
THREE RIVERS. Three Rivers Certificate of Incorporation
provides that for a period of five years from the effective date of the
conversion of First Savings from the mutual to stock form of organization (I.E.,
August 1995), no person may acquire, directly or indirectly, the beneficial
ownership of more than 10% of any class of equity security of Three Rivers,
unless the offer or acquisition is approved in advance by two-thirds of Three
Rivers' continuing directors. During this five-year period, no shares
beneficially owned in violation of the percentage limit are entitled to vote in
connection with any matter submitted to the stockholders for a vote. The
Certificate of Incorporation provides further restrictions on voting rights of
shares owned in excess of the 10% limit beyond the five-year period. The
limitations on
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<PAGE>
voting rights for shares owned in excess of the limit are imposed automatically.
In order to prevent the imposition of these restrictions, the Board of Directors
is required to take affirmative action approving in advance the particular offer
or acquisition resulting in ownership in excess of the limit. Unless the Board
of Directors takes affirmative action, the provision would limit the voting by
beneficial owners of more than 10% of Three Rivers' common stock for all
purposes.
CALL OF SPECIAL MEETINGS; ACTION OF STOCKHOLDERS WITHOUT A MEETING.
PEOPLES BANCORP. Pursuant to Peoples Bancorp's Articles of
Incorporation and Bylaws, special meetings of shareholders may be called at any
time by the Chairman of the Board or the President, and are required to be to be
called by the Chairman or the President at the request in writing of 80% of the
members of the Board of Directors, or the holders of 20% or more of the voting
shares. The Peoples Bancorp Bylaws provide that any action to be taken or which
may be taken at any annual or special meeting may be taken without a meeting if
a consent in writing, setting forth the actions so taken, is given by the
holders of all outstanding shares entitled to vote.
THREE RIVERS. Three Rivers' Certificate of Incorporation
provides that special meetings of stockholders may only be called by the Board
of Directors or an appropriate committee appointed by the Board of Directors.
Shareholders are not authorized to call a special meeting. Stockholder action
may be taken only at a special or annual meeting of the stockholders and not by
written consent.
BOARD OF DIRECTORS.
PEOPLES BANCORP. The Articles of Incorporation of Peoples
Bancorp provide that the Board of Directors is to be divided into three classes
as nearly equal in number as possible and that the members of each class are
elected for a term of three years, with one class being elected annually. Under
the Bylaws of Peoples Bancorp, vacancies occurring on the Board of Directors for
any reason, including vacancies resulting from an increase in the number of
directors, may be filled by the affirmative vote of a majority of the remaining
directors, although less than a quorum, and any director so chosen shall hold
office for the remainder of the term to which the director has been selected.
Any director may be removed from office with cause by an affirmative vote of a
majority of the outstanding shares entitled to vote in the election of
directors. Any director may be removed without cause but only by the affirmative
vote of the holders of 80% of the outstanding shares entitled to vote in the
election of directors. At least 30 days prior written notice must be sent to the
director whose removal will be considered at the meeting.
THREE RIVERS. The Certificate of Incorporation of Three Rivers
provides that the Board of Directors is to be divided into three classes as
nearly equal in number as possible and that the members of each class are
elected for a term of three years, with one class being elected annually. The
Certificate of Incorporation also provides that directors may be removed only
for cause by the affirmative vote of the holders of at least 80% of the
outstanding shares entitled to vote and that the size of the Board of Directors
may only be changed by a two-thirds vote of the Board of Directors. Any vacancy
occurring on the Three Rivers Board of Directors, including a vacancy created by
an increase in the number of directors, must be filled by a two-thirds vote of
the directors then in office, and any directors so chosen will serve on the
Board of Directors for the remainder of the unexpired term.
BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITIONS.
PEOPLES BANCORP. The Articles of Incorporation of Peoples
Bancorp provide that any proposed "business combination" or acquisition of
"control shares" is governed by the provisions of the Indiana Business
Corporation Law. Indiana law generally prohibits for a period of five years
after an interested shareholder's share acquisition date, business combinations
(defined generally to include
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<PAGE>
certain sales, purchases, exchanges, leases, transfers, dispositions or
acquisitions of assets, mergers, or consolidations) between Peoples Bancorp and
the interested shareholders unless either the proposed business combination or
acquisition of voting power was approved in advance by Peoples Bancorp's Board
of Directors. This five year prohibition applies even if the parties
subsequently decide that they wish to engage in the business combination. As
defined in the Indiana Business Corporation Law, an "interested shareholder"
means any person that is the beneficial owner, directly or indirectly, of 10% or
more of the voting power of the outstanding voting shares of a corporation or is
an affiliate of a person that within the last five years was an interested
shareholder.
Indiana law also contains a "control share acquisition" provision which
effectively denies voting rights to shares of Peoples Bancorp acquired in a
control share acquisition unless the grant of the voting rights is approved by a
majority vote of disinterested directors. A "control share acquisition" is one
by which a purchasing shareholder acquires more that one-fifth, one-third, or
one-half of the voting power of the stock of Peoples Bancorp. If a control share
acquisition is made of a majority or more of a corporation's voting stock, and
those shares are granted full voting rights, shareholders are granted
dissenters' rights.
THREE RIVERS. The Certificate of Incorporation of Three Rivers
provides that at least 80% of the outstanding shares of voting stock of Three
Rivers and at least a majority of the outstanding shares of voting stock, not
including shares held by a related person, is required to approve certain
business combinations (defined generally to include certain mergers,
consolidations, sales of substantially all assets of a corporation, leases,
issuances of securities, exchanges, mortgages, and transfers of assets) with a
related person, unless the proposed transaction has been approved in advance by
two-thirds of the "continuing directors" (defined generally as those members of
the Three Rivers Board of Directors who are unaffiliated with the related person
and who were directors prior to the time when the related person became a
related persons). The term "related persons" is defined to include any person
which owns beneficially or controls, directly or indirectly, 10% or more of the
outstanding shares of voting stock of Three Rivers.
EXPERTS
The audited consolidated financial statements of Peoples Bancorp
contained in Peoples Bancorp's Annual Report to Shareholders for the fiscal year
ended September 30, 1999 are incorporated by reference into and attached to this
joint proxy statement/prospectus and have been audited by Olive LLP, independent
certified public accountants, as indicated in their report contained in Peoples
Bancorp's Annual Report to Shareholders for the fiscal year ended September 30,
1999, which is also incorporated by reference into and attached to this joint
proxy statement/prospectus, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The audited consolidated financial statements of Three Rivers contained
in Three Rivers' Annual Report to Shareholders for the fiscal year ended June
30, 1999 are incorporated by reference into and attached to this joint proxy
statement/prospectus and have been audited by Crowe Chizek and Company LLP,
independent certified public accountants, as indicated in their report contained
in Three Rivers' Annual Report to Shareholders for the fiscal year ended June
30, 1999, which is also incorporated by reference into and attached to this
joint proxy statement/prospectus, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
A representative of Olive LLP is expected to be present at the Peoples
Bancorp annual meeting. The representative will have the opportunity to make a
statement if the representative desires to do so and is expected to be available
to respond to appropriate questions.
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<PAGE>
A representative of Crowe, Chizek and Company LLP is expected to be
present at the Three Rivers special meeting. The representative will have the
opportunity to make a statement if the representative desires to do so and is
expected to be available to respond to appropriate questions.
LEGAL MATTERS
The validity of the shares of Peoples Bancorp common stock to be issued
pursuant to the terms of the Plan of Reorganization and Agreement and Plan of
Merger will be passed upon for Peoples Bancorp by Barnes & Thornburg,
Indianapolis, Indiana. The material federal income tax consequences of the
merger will be passed upon for Peoples Bancorp and Three Rivers by Manatt,
Phelps & Phillips, LLP, Washington, D.C.
PEOPLES BANCORP STOCKHOLDERS' PROPOSALS
All proposals of stockholders of Peoples Bancorp to be presented for
consideration at the next annual meeting and included in the proxy statement
must be received by the Company no later than October 18, 2000.
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Condensed Balance Sheet as
of September 30, 1999 combines the historical consolidated balance sheets of
Peoples Bancorp and Three Rivers as if the merger had been effective on
September 30, 1999. The Unaudited Pro Forma Combined Condensed Statements of
Income for the year ended September 30, 1999 presents the combined results of
operations of Peoples Bancorp and Three Rivers as if the merger had been
effective at the beginning of the period. Dollars are in thousands except for
per share data.
The Unaudited Pro Forma Combined Condensed Financial Information and
accompanying notes reflect the application of the purchase method of accounting
for the merger. Under this method of accounting, the recorded assets and
liabilities of Three Rivers are marked to their fair market values through an
allocation of the purchase price. Any excess of purchase price remaining after
the allocation of the purchase price to assets and liabilities is recorded as
goodwill and amortized over a period of time. The Pro forma combined figures are
simply arithmetical combinations of Peoples Bancorp's and Three Rivers' separate
financial results in order to assist you in analyzing the future prospects of
Peoples Bancorp. The pro forma combined figures illustrate the possible scope of
the change in Peoples Bancorp's historical figures caused by the merger. You
should not assume that Peoples Bancorp and Three Rivers would have achieved the
pro forma combined results if the merger had actually occurred during the
periods presented.
The combined company expects to achieve merger benefits in the form of
operating cost savings. The pro forma earnings, which do not reflect any merger
costs or potential savings that are expected to result from the consolidation of
the operations of Peoples Bancorp and Three Rivers, are not indicative of the
results of future operations. No assurances can be given with respect to the
ultimate level of expense savings. See "A Warning About Forward-Looking
Information" and "Risk Factors - Uncertainties in Integrating Business
Operations and Realizing Enhanced Earnings."
For purposes of preparing these financial statements, we used the
audited consolidated financial statements contained in the Peoples Bancorp
Annual Report to Shareholders for the year ended September 30, 1999 which will
be filed with the Securities and Exchange Commission for the year ended
September 30, 1999 on Form 10-K. In addition, we used the audited consolidated
financial statements which Three
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<PAGE>
Rivers previously filed with the Securities and Exchange Commission for the
years ended June 30, 1999 on Form 10-KSB. In addition, we used the unaudited
consolidated financial statements of Three Rivers previously filed with the
Securities and Exchange Commission for the quarter ended September 30, 1999 on
Form 10-QSB to prepare the financial statements as of and for the year ended
September 30, 1999.
Peoples Bancorp's and Three Rivers' consolidated financial statements
are prepared in conformity with generally accepted accounting principles. In the
opinion of Peoples Bancorp and Three Rivers, the unaudited pro forma condensed
combined financial statements include all adjustments necessary to present
fairly the results of the periods presented.
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<PAGE>
UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
September 30, 1999
<TABLE>
<CAPTION>
Peoples Bancorp
Peoples Three Pro Forma and Three Rivers
Bancorp Rivers Adjustments (a) Combined
--------------- -------------- ---------------- --------------------
<S> <C> <C> <C> <C>
ASSETS:
Cash............................................. $ 4,838,115 $3,386,049 $ -- $ 8,224,164
Short-term interest-bearing deposits............. 834,134 2,168,679 -- 3,002,813
----------- ---------- ------- -----------
Total cash and cash equivalents.............. 5,672,249 5,554,728 -- 11,226,977
Interest-bearing deposits........................ -- 4,254,960 -- 4,254,960
Securities available for sale.................... 16,932,913 2,005,943 -- 18,938,856
Securities held to maturity...................... 867,559 12,757,389 18,123 (f) 13,643,071
Loans:
Loans....................................... 297,875,039 70,025,310 (450,000) (f) 367,450,349
Less: Allowance for loan losses............. 1,005,119 535,090 -- 1,540,209
----------- ---------- ------- -----------
Net loans................................... 296,869,920 69,490,220 (450,000) 365,910,140
Premises and equipment........................... 2,285,889 2,663,275 725,000 (d) 5,674,164
Federal Home Loan Bank of Indianapolis stock, at
cost........................................... 2,473,500 1,162,200 -- 3,635,700
Intangible assets................................ -- -- 2,310,310 (c) 2,310,310
Other assets..................................... 2,460,521 1,610,699 -- 4,071,220
----------- ---------- ------- -----------
Total assets................................. $327,562,551 $99,499,414 $2,603,433 $429,665,398
=========== ========== ========= ===========
LIABILITIES:
NOW and savings deposits......................... $94,238,078 $26,756,270 $ -- $120,994,348
Certificates of deposit.......................... 176,756,016 37,920,661 (319,000) (f) 214,357,677
Short-term borrowings............................ 5,239,739 -- -- 5,239,739
Federal Home Loan Bank advances.................. 5,000,000 22,582,205 (140,000) (f) 27,442,205
Advances by borrowers for taxes and insurance.... -- 396,200 -- 396,200
Other liabilities................................ 872,499 946,393 297,916 (e) 2,116,808
----------- ---------- ------- -----------
Total liabilities............................ 282,106,332 88,601,729 (161,084) 370,546,977
----------- ---------- --------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.................... -- --
Common stock, par value $1....................... 3,183,717 7,027 751,924 (b) 3,942,668
Additional paid-in capital....................... 1,203,696 5,569,461 7,944,681 (b) 14,717,838
Unearned ESOP shares............................. -- (421,538) -- (421,538)
Unearned recognition and retention plan shares... -- (189,353) -- (189,353)
Retained earnings--substantially restricted...... 41,282,725 5,930,002 (5,930,002) (b) 41,282,725
Accumulated other comprehensive income........... (213,919) 2,086 (2,086) (b) (213,919)
-------- --------- -------- ----------
Total stockholders' equity................... 45,456,219 10,897,685 2,764,517 59,118,421
------------ --------- -------- ----------
Total liabilities and stockholders' equity... $327,562,551 $99,499,414 $2,603,433 $429,665,398
=========== ========== ========= ===========
</TABLE>
- ------------------
Footnotes on page 65.
66
<PAGE>
UNAUDITED PRO FORMA
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Twelve Months Ended
-------------------------------
September 30, June 30,
1999 1999 Pro Forma Peoples Bancorp
Peoples Three Purchase Accounting and Three Rivers
Bancorp Rivers Adjustments (a) Combined
--------------- ------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans .................................. $22,028,006 $ 5,577,294 $ 64,286 (i) $27,669,586
Securities ............................. 843,675 896,437 (2,589) (i) 1,737,523
Other interest and dividend income ..... 955,702 740,511 -- 1,696,213
------- ----------- ----------- -----------
Total interest income .............. 23,827,383 7,214,242 61,697 31,103,322
---------- ----------- ----------- -----------
Interest Expense:
Deposits .............................. 11,644,831 2,772,871 45,571 (i) 14,463,273
Borrowed Funds ........................ 416,367 1,152,633 20,000 (i) 1,589,000
----------- --------- ---------- ----------
Total interest expense ............. 12,061,198 3,925,504 65,571 16,052,273
----------- --------- ---------- ----------
Net Interest Income ........................ 11,766,185 3,288,738 (3,875) 15,051,048
Provision for losses on loans ......... 88,969 60,000 -- 148,969
----------- --------- ---------- ----------
Net Interest Income After Provision
for Losses on Loans .................. 11,677,216 3,228,738 (3,875) 14,902,079
----------- --------- ---------- ----------
Other Income:
Trust income ........................... 125,255 -- -- 125,255
Loan servicing ......................... -- 118,721 -- 118,721
Net gains on sale of loans ............. -- 227,794 -- 227,794
Fees and service charges ............... 547,455 266,736 -- 814,191
Other income ........................... 181,009 138,305 -- 319,314
----------- --------- ---------- ----------
Total other income ................. 853,719 751,556 -- 1,605,275
----------- --------- ---------- ----------
Other Expense:
Salaries and employee benefits ......... 2,771,597 1,530,171 -- 4,301,768
Net occupancy and equipment expenses ... 850,372 574,355 24,167 (h) 1,448,894
Data processing expense ................ 461,310 263,611 -- 724,921
Deposit insurance expense .............. 149,564 37,811 -- 187,375
Amortization of intangibles ............ -- -- 154,021 (g) 154,021
Other expenses ......................... 1,226,450 778,726 -- 2,005,176
----------- --------- ---------- ----------
Total other expenses ............... 5,459,293 3,184,674 178,187 8,822,154
----------- --------- ---------- ----------
Income before income tax ................... 7,071,642 795,620 (182,062) 7,685,200
Income tax expense .................... 2,484,876 197,812 (11,107) (j) 2,671,581
----------- --------- ---------- ----------
Net Income ................................. $ 4,586,766 $ 597,808 $ (170,955) $ 5,013,619
=========== ========== ========== ==========
Basic income per common share .............. $1.42 $0.84 $1.26
Diluted income per common share ............ $1.42 $0.83 $1.25
Weighted Average Shares Outstanding:
Basic ................................. 3,226,894 712,469 3,974,306
Diluted ............................... 3,226,894 721,180 4,001,391
</TABLE>
- ---------------
Footnotes on next page.
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<PAGE>
Footnotes from prior two pages.
(a) The merger with Three Rivers will be accounted for as a purchase.
(b) To reflect the issuance of 758,953 shares of Peoples Bancorp common stock
to holders of Three Rivers common stock.
(c) To record the excess cost of acquisition over the estimated market value of
the net assets acquired (goodwill). The purchase price and purchase price
allocation are summarized as follows:
<TABLE>
<S> <C> <C>
Purchase price paid as:
Common stock................................................................... $ 758,953
Paid-in capital................................................................ 12,143,248
Fair value of Three Rivers options acquired.................................... 760,002
------------
Total purchase price paid................................................... 13,662,203
Allocated to:
Historical book value of Three Rivers assets and liabilities...................
$10,897,685
Adjustments to step-up assets and liabilities to fair value:
Securities..................................................................... 18,123
Loans.......................................................................... (450,000)
Premises and equipment......................................................... 725,000
Deposits....................................................................... 319,000
Federal Home Loan Bank advances................................................ 140,000
Deferred taxes................................................................. (297,915)
-----------
Total allocation............................................................ 11,351,893
----------
Excess of purchase price over allocation to identifiable assets and liabilities
(goodwill)....................................................................... $ 2,310,310
===========
</TABLE>
(d) To adjust premises and equipment of Three Rivers to the estimated market
value.
(e) To record the deferred tax liabilities as a result of the purchase
accounting adjustments using Peoples Bancorp's statutory rate of 39.61%.
(f) To adjust interest-earning assets and interest-bearing liabilities of Three
Rivers to approximate market value.
(g) To record amortization of intangible assets using the straight-line method
over 15 years.
(h) To increase depreciation expense from mark up of Three Rivers premises
and equipment to estimated market value.
(i) Record amortization of mark to market of interest-earning assets and
interest-bearing liabilities using the straight line method over seven
years.
(j) To show the impact of taxes at 39.61% rate.
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<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
Peoples Bancorp has agreed to acquire Three Rivers for a fixed exchange
ratio of 1.08 Peoples Bancorp shares of common stock for each Three Rivers share
of common stock. Since these are pro forma statements, we cannot assure that the
amounts reflected in these financial statements would have been representative
of the actual amounts earned had the companies been combined at that time.
Some of the information presented in the historical information on
Three Rivers may have been reclassified to aid in the proper presentation of
these pro forma condensed combined financial statements.
2. Pro Forma Adjustments
Shareholders' equity - We have adjusted the number of shares
outstanding for the issuance of 1.08 shares of Peoples Bancorp common stock for
each 1 share of Three Rivers common stock. In addition, the merger calls for the
stock options of Three Rivers to be converted into the stock options of Peoples
Bancorp at the same ratio of 1.08 Peoples Bancorp common stock option for 1
Three Rivers common stock option. We have adjusted the shares outstanding for
each period presented to reflect this same exchange ratio in the past.
We have based the pro forma combined net income per share on net income
and the weighted average number of outstanding common shares. Net income per
common share dilution includes the dilutive effect of stock options. We have
adjusted the weighted average number of outstanding common shares to reflect the
conversion of each share of Three Rivers common stock into 1.08 shares of
Peoples Bancorp common stock.
3. Merger Related Charges.
While we cannot accurately determine the total merger related charges
at this time, we estimate the following merger related costs:
<TABLE>
<S> <C>
Employee Costs................................... $ 0
Investment Bankers............................... 175,000
Professional Fees................................ 235,000
Data Processing.................................. 0
Other 25,000
-------
Total...................................... $435,000
=======
</TABLE>
Three Rivers will expense costs as incurred, while Peoples Bancorp will
capitalize a portion of its costs, some of which will be prior to the merger,
and some of which will be after the merger.
Our cost estimates are forward-looking. While the costs represent our
current estimate of merger costs we will incur, the ultimate level and timing of
recognition of such costs will be based on the final merger and integration
plan.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Peoples Bancorp and Three Rivers file annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
that the companies file at the Securities and Exchange Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Peoples Bancorp and Three Rivers
public filings are also available to the public from commercial document
retrieval services and at the Internet World Wide Web site maintained by the
Securities and Exchange Commission at "http:// www.sec.gov."
Peoples Bancorp has filed the Registration Statement to register with
the Securities and Exchange Commission the shares of Peoples Bancorp common
stock to be issued to Three Rivers shareholders in the merger. This document is
a part of the Registration Statement and constitutes a prospectus of Peoples
Bancorp and a joint proxy statement of Three Rivers and Peoples Bancorp for
their stockholders meetings.
As allowed by Commission rules, this document does not contain all
the information that shareholders can find in the Registration Statement or
the exhibits to the Registration Statement. The Securities and Exchange
Commission allows Peoples Bancorp and Three Rivers to "incorporate by
reference" information into this document, which means that the company can
disclose important information to you by referring you to another document
filed separately with the Securities and Exchange Commission. The information
incorporated by reference is deemed to be a part of this document, except for
any information which contradicts information contained directly in this
document. This document incorporates by reference the documents set forth
below that Peoples Bancorp and Three Rivers have previously filed with the
Securities and Exchange Commission. These documents contain important
business information about Peoples Bancorp and Three Rivers and their
respective business and financial information that is not included in this
document, or unless otherwise indicated, delivered with this document.
<TABLE>
<CAPTION>
PEOPLES BANCORP
COMMISSION FILINGS (FILE NO. 000-18991) PERIOD
- --------------------------------------- ------
<S> <C>
Annual Report on Form 10-K.................................... Year ended September 30, 1999. This report is
attached as Annex D.
Current Report on Form 8-K ................................... September 24, 1999
All other reports filed under Section 13(a)
or 15(d) of the Exchange Act............................. Since September 30, 1998.
</TABLE>
<TABLE>
<CAPTION>
THREE RIVERS
COMMISSION FILINGS (FILE NO. 001-13826) PERIOD
- --------------------------------------- ------
<S> <C>
Annual Report on Form 10-KSB..................................... Year ended June 30, 1999. This report is
attached as Annex F.
Quarterly Report on Form 10-QSB.................................. Period ended September 30, 1999. This report is
attached as Annex H.
</TABLE>
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Peoples Bancorp has supplied all information contained or incorporated
by reference in this document relating to Peoples Bancorp, and Three Rivers has
supplied all information relating to Three Rivers.
Shareholders of Peoples Bancorp or Three Rivers may obtain documents
incorporated by reference through Peoples Bancorp or Three Rivers or the
Securities and Exchange Commission or the Securities and Exchange Commission's
Internet World Wide Web site described above. Documents incorporated by
reference are available from Peoples Bancorp or Three Rivers without charge,
excluding all exhibits, unless specifically incorporated by reference as an
exhibit to this document. You may obtain documents incorporated by reference in
this document by requesting them in writing or by telephone at the following:
JOHN E. WEIGEL, III
Corporate Secretary
Peoples Bancorp.
212 West 7th Street
Auburn, Indiana 46706
Telephone: (219) 925-2500
G. RICHARD GATTON
President and Chief Executive Officer
Three Rivers Financial Corporation
123 Portage Avenue
Three Rivers, Michigan 49093
Telephone: (616) 279-5117
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM PEOPLES BANCORP OR THREE
RIVERS, PLEASE DO SO AT LEAST FIVE BUSINESS DAYS BEFORE THE DATE OF YOUR
SHAREHOLDERS' MEETING IN ORDER TO RECEIVE TIMELY DELIVERY OF SUCH DOCUMENTS
PRIOR TO YOUR SHAREHOLDERS' MEETING.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the Peoples Bancorp annual
meeting or the Three Rivers special meeting. Peoples Bancorp and Three Rivers
have not authorized anyone to provide you with information that is different
from what is contained in this document. This document is dated December 27,
1999. You should not assume that the information contained in this document is
accurate as of any date other than that date, and neither the mailing of this
document to shareholders nor the issuance of Peoples Bancorp common stock in the
merger creates any implication to the contrary.
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ANNEX A
PLAN OF REORGANIZATION
AND AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PEOPLES BANCORP
AND
THREE RIVERS FINANCIAL CORPORATION
DATED SEPTEMBER 21, 1999
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TABLE OF CONTENTS
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ARTICLE I - CERTAIN DEFINITIONS .......................................................1
Section 1.1 Definitions..............................................................1
ARTICLE II - THE MERGER........................................................................6
Section 2.1 The Merger...............................................................6
Section 2.2 Closing..................................................................6
Section 2.3 Effective Time...........................................................6
Section 2.4. Additional Actions......................................................6
Section 2.5. Articles of Incorporation and Bylaws....................................7
Section 2.6. Boards of Directors and Officers........................................7
Section 2.7. Conversion of Securities................................................7
Section 2.8. Exchange Procedures.....................................................7
Section 2.9. No Fractional Shares....................................................9
Section 2.10. Anti-Dilution Adjustments..............................................9
Section 2.11. Treatment of Stock Options..............................................9
Section 2.12. Reservation of Right to Revise Transaction............................10
ARTICLE III - FIRST SAVINGS...................................................................10
Section 3.1. Liquidation Account....................................................10
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND FIRST SAVINGS..................10
Section 4.1. Organization, Good Standing, Authority, Insurance, Etc.................10
Section 4.2. Capitalization.........................................................11
Section 4.3. Ownership of Subsidiaries..............................................11
Section 4.4. Financial Statements and Reports.......................................11
Section 4.5. Absence of Changes.....................................................12
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Section 4.6. No Broker's or Finder's Fees...........................................12
Section 4.7. Litigation and Other Proceedings.......................................12
Section 4.8. Compliance with Law....................................................12
Section 4.9. Corporate Actions......................................................13
Section 4.10. Authority.............................................................13
Section 4.11. Employment Arrangements...............................................14
Section 4.12. Employee Benefits.....................................................14
Section 4.13. Information Furnished; Registration Statement.........................15
Section 4.14. Property and Assets...................................................15
Section 4.15. Agreements and Instruments............................................16
Section 4.16. Material Contract Defaults............................................17
Section 4.17. Tax Matters...........................................................17
Section 4.18. Environmental Matters.................................................17
Section 4.19. Loan Portfolio; Portfolio Management..................................18
Section 4.20. Real Estate Loans and Investments.....................................18
Section 4.21. Derivatives Contracts.................................................18
Section 4.22. Insurance.............................................................19
Section 4.23. Tax Treatment.........................................................19
ARTICLE V - REPRESENTATIONS AND WARRANTIES OF BANCORP AND THE BANK............................19
Section 5.1. Organization, Good Standing, Authority, Insurance, Etc.................19
Section 5.2. Capitalization.........................................................20
Section 5.3. Ownership of Subsidiaries..............................................20
Section 5.4. Financial Statements and Reports.......................................20
Section 5.5 Absence of Changes......................................................21
Section 5.6. No Broker's or Finder's Fees...........................................21
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Section 5.7. Litigation and Other Proceedings.......................................21
Section 5.8. Compliance With Law....................................................21
Section 5.9. Corporate Actions......................................................22
Section 5.10. Authority.............................................................22
Section 5.11. Information Furnished; Registration Statement.........................22
Section 5.12. Property and Assets...................................................23
Section 5.13. Agreements and Instruments............................................23
Section 5.14. Material Contract Defaults............................................24
Section 5.15. Tax Matters...........................................................24
Section 5.16. Environmental Matters.................................................24
Section 5.17. Loan Portfolio; Portfolio Management..................................25
Section 5.18. Real Estate Loans and Investments.....................................25
Section 5.19. Derivatives Contracts.................................................25
Section 5.20. Insurance.............................................................26
Section 5.21. Tax Treatment.........................................................26
ARTICLE VI - COVENANTS........................................................................26
Section 6.1. Conduct of Business by the Company.....................................26
Section 6.2. Maintenance of Records.................................................28
Section 6.3. Salary and Benefits....................................................28
Section 6.4. Efforts of Parties to Close............................................29
Section 6.5. Confidentiality and Announcements......................................30
Section 6.6. Access; Certain Communications.........................................30
Section 6.7. Cooperation; Preparation of Documents..................................31
Section 6.8. Notification of Certain Matters........................................32
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Section 6.9. Expenses...............................................................33
Section 6.10. Third Party Proposals.................................................33
Section 6.11. Stock Listing.........................................................33
Section 6.12. Integration; Conforming Entries.......................................33
Section 6.13. Tax-Free Treatment....................................................34
Section 6.14. Agreements of Affiliates..............................................34
Section 6.15. Stockholder Approval..................................................34
Section 6.16. Indemnification.......................................................35
Section 6.17. D&O Insurance.........................................................35
Section 6.18. Environmental Reports.................................................35
ARTICLE VII - CONDITIONS TO CONSUMMATION OF THE MERGER........................................36
Section 7.1. Mutual Conditions......................................................36
Section 7.2. Conditions to Bancorp's Obligations....................................37
Section 7.3. Conditions to the Company's Obligations................................38
ARTICLE VII - TERMINATION.....................................................................38
Section 8.1. Termination............................................................38
Section 8.2. Survival After Termination.............................................39
Section 8.3. Termination Fee........................................................39
ARTICLE IX - MISCELLANEOUS....................................................................40
Section 9.1. Amendments; Waiver.....................................................40
Section 9.2. Entire Agreement.......................................................40
Section 9.3. Non-Survival of Representations, Warranties and Agreements.............40
Section 9.4. Interpretation.........................................................40
Section 9.5. Severability...........................................................40
Section 9.6. Notices................................................................40
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Section 9.7. Binding Effect; Persons Benefiting; No Assignment......................41
Section 9.8. Counterparts...........................................................41
Section 9.9. Governing Law..........................................................42
Section 9.10. Specific Performance..................................................42
Section 9.11. Waiver of Jury Trial..................................................42
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PLAN OF REORGANIZATION
AND AGREEMENT AND PLAN OF MERGER
THIS PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF MERGER, dated as
of September 21, 1999 (the "AGREEMENT"), is by and among Peoples Bancorp, an
Indiana corporation ("BANCORP") and Three Rivers Financial Corporation, a
Delaware corporation (the "COMPANY").
WHEREAS, Bancorp, a unitary savings and loan holding company, with its
principal offices in Auburn, Indiana, owns all of the issued and outstanding
capital stock of Peoples Federal Savings Bank of DeKalb County, a federally
chartered savings bank and wholly-owned subsidiary of Bancorp (the "BANK"), with
its principal offices in Auburn, Indiana;
WHEREAS, the Company, a unitary savings and loan holding company, with
its principal offices in Three Rivers, Michigan, owns all of the issued and
outstanding capital stock of First Savings Bank, A Federal Savings Bank, a
federally chartered savings bank and wholly-owned subsidiary of ("FIRST
SAVINGS"), with its principal offices in Three Rivers, Michigan;
WHEREAS, Bancorp and the Company desire to combine their
respective holding companies through a tax-free exchange so that the respective
shareholders of both Bancorp and the Company will have an equity ownership in
the combined holding company;
WHEREAS, to accomplish the foregoing, the Board of Directors of the
Company (the "COMPANY BOARD") and the Board of Directors of Bancorp (the
"BANCORP BOARD") have approved the merger (the " Merger") of the Company with
and into Bancorp, pursuant to the terms and subject to the conditions of this
Agreement;
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Code (as defined below) and this Agreement shall constitute a plan of
reorganization pursuant to Section 368 of the Code;
WHEREAS, the parties desire that First Savings shall become a separate
wholly-owned subsidiary of Bancorp, and not be merged with and into the Bank;
WHEREAS, the parties desire to provide for certain undertakings,
conditions, representations, warranties, and covenants in connection with the
transactions contemplated by this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and
subject to the conditions and other terms herein set forth, and intending to be
legally bound hereby, the parties hereto hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
SECTION 1.1. DEFINITIONS. For all purposes of this Agreement, the
following terms shall have the respective meanings set forth in this Section 1.1
(such definitions to be equally applicable to both the singular and plural forms
of the terms herein defined):
"ACQUISITION PROPOSAL" shall have the meaning set forth in Section
6.10.
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"AFFILIATE" shall mean any individual, partnership, corporation,
entity, or other Person that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with,
the Person specified.
"AGREEMENT" shall have the meaning set forth on the first page hereof.
"APPLICABLE LAW" shall mean any domestic or foreign federal, state, or
local statute, law, ordinance, rule, administrative interpretation, regulation,
order, writ, injunction, directive, judgment, decree, policy, guideline, or
other requirement applicable to the Company, Bancorp, or any of their respective
Affiliates, properties, assets, officers, directors, employees, or agents, as
the case may be.
"APPROVAL DATE" shall have the meaning set forth in Section 2.3.
"ASSET CLASSIFICATION" shall have the meaning set forth in Section
4.19(b).
"BANCORP" has the meaning set forth on the first page hereof and
includes any direct or indirect successor or assign.
"BANCORP BOARD" has the meaning set forth on the first page hereof.
"BANCORP COMMON STOCK" shall mean the common stock, par value $1.00 per
share, of Bancorp.
"BANCORP MATERIAL ADVERSE EFFECT" shall mean, with respect to Bancorp
or any of its Affiliates, a material adverse effect on (i) the business,
financial condition or results of operations of Bancorp and the Bancorp
Subsidiaries taken as a whole or (ii) the ability of Bancorp or the Bank to
complete the transactions contemplated hereby; provided, however, that a Bancorp
Material Adverse Effect shall not be defined to include (w) any change
attributable to or resulting from any change in Applicable Law or GAAP or
regulatory accounting principles, in each case which affects thrift institutions
generally, or (x) the effects of any change attributable to or resulting from
changes in economic conditions applicable to depository institutions generally
or in general levels of interest rates affecting thrift institutions generally,
or (y) expenses related to consummation of the Merger which are otherwise
permitted under this Agreement (or set forth in the Bancorp Disclosure
Schedule), including, but not limited to, preparation, legal, investment banking
and auditing fees.
"BANCORP PLANS" shall have the meaning set forth in Section 6.3.
"BANCORP SUBSIDIARY" and "BANCORP SUBSIDIARIES" shall have the
respective meanings set forth in Section 5.1 and shall include First Savings
after the Effective Time.
"BANK" has the meaning set forth on the first page hereof and includes
any direct or indirect successor or assign.
"BENEFIT ARRANGEMENTS" shall have the meaning set forth in Section
4.12(a)
"BUSINESS DAY" shall mean any day that the NYSE is normally open for
trading and that is not a Saturday, a Sunday or a day on which banks in the
States of Indiana and Michigan are generally closed for regular banking
business.
"CERTIFICATES" shall have the meaning set forth in Section 2.8.
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"CLOSING" shall have the meaning set forth in Section 2.2.
"CLOSING DATE" shall have the meaning set forth in Section 2.2.
"CODE" shall mean the Internal Revenue Code of 1986, as amended,
together with the Treasury regulations thereunder.
"COMPANY" has the meaning set forth on the first page hereof and
includes any direct or indirect successor or assign.
"COMPANY BOARD" has the meaning set forth on the first page hereof.
"COMPANY COMMON STOCK" shall mean the common stock, par value $0.01 per
share, of Company.
"COMPANY EMPLOYEE BENEFIT PLAN" has the meaning set forth in Section
4.12(a).
"COMPANY MATERIAL ADVERSE EFFECT" shall mean, with respect to the
Company or any of its Affiliates, a material adverse effect on (i) the business,
financial condition or results of operations of the Company and the Company
Subsidiaries taken as a whole or (ii) the ability of the Company or First
Savings to complete the transactions contemplated hereby; provided, however,
that a Company Material Adverse Effect shall not be defined to include (w) any
change attributable to or resulting from any change in Applicable Law or GAAP or
regulatory accounting principles, in each case which affects thrift institutions
generally, or (x) the effects of any change attributable to or resulting from
changes in economic conditions applicable to depository institutions generally
or in general levels of interest rates affecting thrift institutions generally,
or (y) expenses related to consummation of the Merger which are otherwise
permitted under this Agreement (or set forth in the Company Disclosure
Schedule), including, but not limited to, preparation, legal, investment banking
and auditing fees.
"COMPANY OPTION" shall have the meaning set forth in Section 2.11.
"COMPANY PREFERRED STOCK" shall have the meaning set forth in Section
4.2.
"COMPANY PROPERTY" shall have the meaning set forth in Section 6.18.
"COMPANY SUBSIDIARY" and "COMPANY SUBSIDIARIES" shall have the
respective meanings set forth in Section 4.1.
"CONTRACT" has the meaning set forth in Section 4.10.
"CURRENT PROPERTY" shall have the meaning set forth in Section 6.18.
"DERIVATIVES CONTRACT" shall mean the meaning set forth in Section
4.21.
"DGCL" shall have the meaning set forth in Section 2.1.
"EFFECTIVE TIME" shall have the meaning set forth in Section 2.3.
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"ENCUMBRANCE" shall mean any lien, pledge, security interest, claim,
charge, easement, limitation, commitment, encroachment, restriction, or
encumbrance of any kind or nature whatsoever.
"ENVIRONMENTAL FIRM" shall have the meaning set forth in Section 6.18.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, and the rules and regulations thereunder.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder.
"EXCHANGE AGENT" shall have the meaning set forth in Section 2.8.
"EXCHANGE OPTION" shall have the meaning set forth in Section 2.11.
"EXCHANGE RATIO" shall mean, subject to Section 2.10, 1.08 shares of
Bancorp Common Stock for each one share of Company Common Stock.
"FACILITY PROPERTY" shall have the meaning set forth in Section 6.18.
"FDIC" shall mean the Federal Deposit Insurance Corporation and any
successor thereto.
"GAAP" shall mean generally accepted accounting principles as used in
the United States of America as in effect at the time any applicable financial
statements were prepared or any act requiring the application of GAAP was
performed.
"GOVERNMENTAL APPROVAL" shall have the meaning set forth in Section
4.10.
"GOVERNMENTAL AUTHORITY" shall mean any government, any state or other
political subdivision thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
including any government agency, department, board, commission, or
instrumentality of the United States, any state of the United States or any
political subdivision thereof, and any court or tribunal of competent
jurisdiction, and any governmental or nongovernmental self-regulatory
organization, agency, or authority (including the NASDAQ NMS and the National
Association of Securities Dealers, Inc.).
"HOLA" shall mean the Home Owners' Loan Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"IBCL" shall have the meaning set forth in Section 2.1.
"INJUNCTION" shall have the meaning set forth in Section 7.1(a).
"IRS" shall mean the Internal Revenue Service and any successor
thereto.
"INSURANCE POLICIES" shall have the meaning set forth in Section 4.22.
"MERGER" has the meaning set forth on the first page hereof.
"MERGER CONSIDERATION" shall have the meaning set forth in Section
2.12.
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"NASDAQ NMS" means the Nasdaq National Market and any successor
thereto.
"NYSE" means the New York Stock Exchange, Inc. and any successor
thereto.
"OTS" shall mean the Office of Thrift Supervision and any successor
thereto.
"PERSON" shall mean any individual, corporation, company, partnership
(limited or general), joint venture, association, trust or other entity or
similar contractual arrangement or relationship.
"PREVIOUSLY DISCLOSED" by a party shall mean information set forth in a
schedule (with respect to Bancorp, the "BANCORP DISCLOSURE SCHEDULE"; and with
respect to the Company, the "COMPANY DISCLOSURE SCHEDULE"), correspondingly
enumerated to the representations, warranties, or covenants to which such
information relates, that is delivered by such party to the other party
contemporaneously with the execution of this Agreement and specifically
designated as information "PREVIOUSLY DISCLOSED" pursuant to this Agreement.
"PROSPECTUS" shall have the meaning set forth in Section 4.13.
"PROXY STATEMENT" shall have the meaning set forth in Section 4.13.
"RECORDS" shall mean, with respect to any Person, all records and
original documents (and copies thereof) in the Person's possession, or in the
possession of an Affiliate of such Person, as of the Closing Date (a) which
pertain to or are utilized by such Person or Affiliate to administer, reflect,
monitor, evidence or record information respecting the business or conduct of
the Company or the Company Subsidiaries or Bancorp or the Bancorp Subsidiaries,
or (b) necessary or appropriate for the Company or the Company Subsidiaries or
Bancorp and the Bancorp Subsidiaries to comply with any Applicable Law, and
shall include in the case of (a) and (b) above, all such records maintained on
electronic or magnetic media, or in the electronic data base system of or used
by such Person or Affiliate.
"REGISTRATION STATEMENT" shall have the meaning set forth in Section
4.13.
"REGULATORY DOCUMENTS" shall mean, with respect to a Person, all forms,
reports, registration statements, schedules, and other documents filed, or
required to be filed by such Person with any Governmental Authority or pursuant
to any Applicable Law.
"REPRESENTATIVES" shall have the meaning set forth in Section 6.10.
"RIGHT" shall have the meaning set forth in Section 6.1(ii).
"SAIF" shall have the meaning set forth in Section 4.1 and any
successor thereto.
"SEC" shall mean the Securities and Exchange Commission and any
successor thereto.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the SEC thereunder.
"SURVIVING CORPORATION" shall have the meaning set forth in Section
2.1.
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"TAX RETURN" shall mean any return, report, information statement,
schedule or other document (including any related or supporting information and
including any Form 1099 or other document or report required to be provided to
third parties) with respect to Taxes, including any document required to be
retained or provided to any Governmental Authority pursuant to 31 U.S.C.
Sections 5311-5328 and regulations promulgated thereunder.
"TAXES" shall mean all federal, provincial, territorial, state,
municipal, local, foreign or other taxes, imposts, rates, levies, assessments
and other charges (and all interest and penalties thereon), including, without
limitation, all income, excise, franchise, gains, real property, value added,
severance, ad valorem, personal property, sales, use, license, employment,
payroll, social security, unemployment, disability, estimated or withholding
taxes, and all customs and import duties, and all interest, penalties, and
losses thereon or associated therewith or associated with any Tax Return.
"TRANSFERRED EMPLOYEES" shall have the meaning set forth in Section
6.3.
ARTICLE II
THE MERGER
SECTION 2.1. THE MERGER. Subject to the terms and conditions of this
Agreement and to the HOLA, the Company shall be merged with and into Bancorp in
accordance with the Indiana Business Corporation Law (the "IBCL") and the
Delaware General Corporation Law (the "DGCL"), and thereafter the separate
corporate existence of the Company shall cease. Bancorp shall be the surviving
corporation of the Merger (sometimes referred to herein as the "SURVIVING
CORPORATION") and shall continue to be governed by the laws of the State of
Indiana. The Merger shall have the effects set forth in the applicable
provisions of the IBCL and the DGCL.
SECTION 2.2. CLOSING. The closing (the "CLOSING") of the Merger shall
take place at the offices of Barnes & Thornburg, 11 South Meridian Street,
Indianapolis, Indiana 46204, counsel to Bancorp (including by mail, fax, or
otherwise as reasonably agreed to by the parties hereto) or such other time and
place as the parties shall agree, prior to the Effective Time on the date that
the Effective Time occurs (the "CLOSING DATE").
SECTION 2.3. EFFECTIVE TIME. The Merger shall become effective on the
date and at the time (the "EFFECTIVE TIME") on which appropriate documents in
respect of the Merger are filed with the Secretaries of State of the States of
Indiana and Delaware in such form as required by, and in accordance with, the
relevant provisions of the DGCL and IBCL, respectively. Subject to the terms and
conditions of this Agreement, the Effective Time shall occur on such date as
Bancorp shall notify the Company in writing (such notice to be at least five
full trading days in advance of the Effective Time) but (i) not earlier than the
satisfaction or waiver of all conditions set forth in Article VII (such date
being referred to herein as the "APPROVAL DATE") and (ii) subject to clause (i),
not later than the first Business Day of the first full calendar month
commencing at least five full trading days after the Approval Date, or at such
other time as Bancorp and the Company shall agree.
SECTION 2.4. ADDITIONAL ACTIONS. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any further
deeds, assignments, or assurances or any other acts are necessary or desirable
to (i) vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation its right, title, or interest in, to, or under any of the rights,
properties, or assets of Bancorp or the Company. or (ii) otherwise carry out the
purposes of this Agreement, the Company and each of its officers and
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directors shall be deemed to have granted to the Surviving Corporation an
irrevocable power of attorney to execute and deliver all such deeds,
assignments, or assurances and to do all acts necessary or desirable to vest,
perfect or confirm title and possession to such rights, properties, or assets in
the Surviving Corporation and otherwise to carry out the purposes of this
Agreement, and the officers and directors of the Surviving Corporation are
authorized in the name of the Company or otherwise to take any and all such
action.
SECTION 2.5. ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation and Bylaws of Bancorp in effect immediately prior to the Effective
Time shall be the Articles of Incorporation and Bylaws of the Surviving
Corporation following the Merger until otherwise amended or repealed.
SECTION 2.6. BOARDS OF DIRECTORS AND OFFICERS. At the Effective Time,
the directors and officers of Bancorp immediately prior to the Effective Time
shall continue to be directors and officers, respectively, of the Surviving
Corporation following the Merger; such directors and officers shall hold office
in accordance with the Surviving Corporation's Bylaws and applicable law.
Promptly following the Effective Time, (i) Richard Gatton, President, CEO, and
Chairman of the Company, and one other representative of the Company, shall be
invited to serve as additional members of the Bancorp Board and, upon acceptance
thereof and appointment thereon, shall be entitled to receive director fees and
other benefits on the same basis as other directors of Bancorp, and (ii) two
representatives of Bancorp shall be appointed to the Board of Directors of First
Savings. Each director serving on the Board of Directors of First Savings as of
the date hereof and as of the Effective Time shall remain a director of First
Savings for a period of not less than sixty (60) months following the Effective
Time. Directors of First Savings shall be entitled to be compensated at the same
rate following the Effective Time as the Board of Directors is currently being
compensated, subject to increases in accordance with the policies of Bancorp
related to the compensation of directors of the Bank.
SECTION 2.7. CONVERSION OF SECURITIES. At the Effective Time, by virtue
of the Merger and without any action on the part of Bancorp, the Company, or the
holder of any of the following securities:
(a) Each share of Bancorp Common Stock that is issued and
outstanding immediately prior to the Effective Time shall remain outstanding and
shall be unchanged after the Merger; and
(b) Subject to Sections 2.9, and 2.10 hereof:
(i) each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time shall cease to be
outstanding and shall be converted into and become the right to receive a number
of shares of Bancorp Common Stock equal to the Exchange Ratio, provided,
however, that any shares of Company Common Stock held by the Company, Bancorp,
or any of their respective Subsidiaries, in each case other than in a fiduciary
capacity or as a result of debts previously contracted, shall be canceled and
shall not be exchanged for shares of Bancorp Common Stock; and
(ii) each share of Company Common Stock issued and
outstanding pursuant to the Company's recognition and retention plan immediately
prior to the Effective Time shall cease to be outstanding and shall be converted
into and become the right to receive a number of shares of Bancorp Common Stock
equal to the Exchange Ratio and shall continue to be subject to the same
conditions and limitations as such Company Common Stock was subject immediately
prior to the Effective Time.
SECTION 2.8. EXCHANGE PROCEDURES. (a) At or prior to the Effective
Time, Bancorp shall deposit, or shall cause to be deposited, with the Exchange
Agent, for the benefit of the holders of certificates of Company Common Stock
for exchange in accordance with this Article II, certificates representing the
shares
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of Bancorp Common Stock and an estimated amount of cash to be paid in lieu of
fractional shares to be paid pursuant to this Article II in exchange for
outstanding shares of Company Common Stock.
(b) Holders of record of certificates which immediately prior
to the Effective Time represented outstanding shares of Company Common Stock
(the "CERTIFICATES") shall be instructed to tender such Certificates to Bancorp,
or to an exchange agent designated by Bancorp (the "EXCHANGE AGENT"), pursuant
to a letter of transmittal that Bancorp shall deliver or cause to be delivered
to such holders as promptly as practicable following the Effective Time. Such
letter of transmittal shall specify that risk of loss and title to Certificates
shall pass only upon delivery of such Certificates to Bancorp or the Exchange
Agent.
(c) Subject to Section 2.9, after the Effective Time, each
holder of a Certificate(s) that surrenders such Certificate(s) to Bancorp, or to
the Exchange Agent, will, upon acceptance thereof by Bancorp or the Exchange
Agent, be entitled to (x) a certificate or certificates representing the number
of whole shares of Bancorp Common Stock into which the shares represented by the
Certificate(s) so surrendered (aggregating all Certificates surrendered by such
holder) shall have been converted pursuant to this Agreement and (y) a check
representing the amount of any cash in lieu of fractional shares, if any, and
dividends and distributions, if any, which such holder has the right to receive
hereunder with respect to the Certificate(s) so surrendered, in each case after
giving effect to any required withholding tax.
(d) Bancorp or, at the election of Bancorp, the Exchange
Agent, shall accept Certificates upon compliance with such reasonable terms and
conditions as Bancorp or the Exchange Agent may impose to effect an orderly
exchange thereof in accordance with customary exchange practices. Certificates
shall be appropriately endorsed or accompanied by such instruments of transfer
as Bancorp or the Exchange Agent may reasonably require.
(e) All shares of Bancorp Common Stock issued upon surrender
of Certificates in accordance with the terms hereof (including any cash paid
pursuant to this Article II) shall be deemed to have been in full satisfaction
of all rights pertaining to such shares of Company Common Stock represented
thereby. After the Effective Time, holders of Certificates shall cease to have
rights with respect to the shares previously represented by such Certificates,
and their sole rights shall be to exchange such Certificates for the
consideration provided for in this Agreement.
(f) After the Effective Time, there shall be no further
transfer on the records of the Company of Certificates, and if such Certificates
are presented to the Company for transfer, they shall be canceled against
delivery of the consideration provided therefor in this Agreement. Bancorp shall
not be obligated to deliver the consideration to which any former holder of
Company Common Stock is entitled as a result of the Merger until such holder
surrenders the Certificates as provided herein. Certificates surrendered for
exchange by any person constituting an "affiliate" of the Company for purposes
of Rule 145 of the Securities Act, shall not be exchanged for certificates
representing Bancorp Common Stock until Bancorp has received a written agreement
from such person in the form attached hereto as EXHIBIT A. Neither the Exchange
Agent nor any party to this Agreement nor any Affiliate thereof shall be liable
to any holder of stock represented by any Certificate for any consideration paid
to a public official pursuant to applicable abandoned property, escheat or
similar laws. Bancorp and the Exchange Agent shall be entitled to rely upon the
stock transfer books of the Company to establish the identity of those persons
entitled to receive consideration specified in this Agreement, which books shall
be conclusive with respect thereto. In the event of a dispute with respect to
ownership of stock represented by any Certificate, Bancorp and the Exchange
Agent shall be entitled to deposit any consideration represented thereby in
escrow with an independent third party and thereafter be relieved with respect
to any claims thereto.
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(g) Notwithstanding any other provisions of this Agreement, no
dividends or other distributions declared or made after the Effective Time with
respect to Bancorp Common Stock having a record date after the Effective Time
shall be paid to the holder of any unsurrendered Certificate, and no cash
payment in lieu of fractional shares shall be paid to any such holder, until the
holder shall surrender such Certificate as provided in this Section 2.8. Subject
to the effect of Applicable Laws, following surrender of any such Certificate,
there shall be paid to the holder of the certificates representing whole shares
of Bancorp Common Stock issued in exchange therefor, without interest, (i) at
the time of such surrender, the amount of dividends or other distributions with
a record date on or after the Effective Time theretofore payable with respect to
such whole shares of Bancorp Common Stock and not paid, less the amount of any
withholding taxes which may be required thereon, and (ii) at the appropriate
payment date subsequent to surrender, the amount of dividends or other
distributions with a record date on or after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Bancorp Common Stock, less the amount of any withholding
taxes which may be required thereon.
SECTION 2.9. NO FRACTIONAL SHARES. Notwithstanding any other provision
of this Agreement, neither certificates nor scrip for fractional shares of
Bancorp Common Stock shall be issued in the Merger. Each holder who otherwise
would have been entitled to a fraction of a share of Bancorp Common Stock shall
receive in lieu thereof cash (without interest) in an amount determined by
multiplying the fractional share interest to which such holder would otherwise
be entitled by the average of the closing prices per share of Bancorp Common
Stock for the five full trading days immediately preceding the Closing Date as
reported on the NASDAQ NMS (as reported in THE WALL STREET JOURNAL or, if not
reported therein, in another mutually agreed upon authoritative source). No such
holder shall be entitled to dividends, voting rights, or any other rights in
respect of any fractional share.
SECTION 2.10. ANTI-DILUTION ADJUSTMENTS. In the event that prior to the
Effective Time Bancorp shall (or shall establish a record date prior to the
Effective Time for the following) declare a stock dividend or other distribution
payable in Bancorp Common Stock or securities convertible into Bancorp Common
Stock or a distribution otherwise Previously Disclosed, or effect a stock split,
reclassification, combination, or other change with respect to Bancorp Common
Stock, the Exchange Ratio or the Merger Consideration, as the case may be, shall
be appropriately adjusted to reflect such dividend, distribution, stock split,
reclassification, combination, or other change, such that the shareholders of
the Company shall be entitled to same as if the Effective Time had occurred
prior thereto.
SECTION 2.11. TREATMENT OF STOCK OPTIONS. (a) Prior to the Effective
Time, Bancorp and the Company shall take all such actions as may be necessary to
cause each unexpired and unexercised option under stock option plans of the
Company in effect on the date hereof which has been granted to current or former
directors, officers, or employees of the Company by the Company (each, a
"COMPANY OPTION") to be automatically converted at the Effective Time into an
option (an "EXCHANGE OPTION") to purchase that number of shares of Bancorp
Common Stock equal to the number of shares of Company Common Stock issuable
immediately prior to the Effective Time upon exercise of the Company Option
(without regard to actual restrictions on exercisability) multiplied by the
Exchange Ratio (fractional shares as a result thereof to be subject to the terms
of the respective Company Options and the terms of the plans governing same),
with an exercise price equal to the exercise price which existed under the
corresponding Company Option divided by the Exchange Ratio, and with other terms
and conditions that are the same as the terms and conditions of such Company
Option immediately before the Effective Time, provided that with respect to any
Company Option that is an "incentive stock option" within the meaning of Section
422 of the Code, the foregoing conversion shall be carried out in a manner
satisfying the requirements of Section 424(a) of the Code. In connection with
the issuance of Exchange Options, Bancorp shall (i) reserve for issuance the
number of
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shares of Bancorp Common Stock that will become subject to Exchange Options
pursuant to this Section 2.11 and (ii) from and after the Effective Time, upon
exercise of Exchange Options, make available for issuance all shares of Bancorp
Common Stock covered thereby, subject to the terms and conditions applicable
thereto.
(b) The Company agrees to issue treasury shares of the
Company, to the extent available, upon the exercise of Company Options prior to
the Effective Time.
(c) Bancorp agrees to file with the SEC within one month after
the Closing Date a registration statement on Form S-8 or other appropriate form
under the Securities Act to register shares of Bancorp Common Stock issuable
upon exercise of the Exchange Options and use its reasonable efforts to cause
such registration statement to remain effective until the exercise or expiration
of all of such Exchange Options. Such registration statement may be in the form
of either an initial filing or a post-effective amendment to the registration
statement on Form S-4 filed in connection with this Agreement and the
transactions contemplated hereby.
SECTION 2.12. RESERVATION OF RIGHT TO REVISE TRANSACTION. Bancorp may
at any time change the method of effecting the acquisition of the Company or the
Company Subsidiaries by Bancorp, and the Company shall cooperate in such
efforts, if and to the extent Bancorp deems such change to be desirable and
subject to the Company's approval (which approval shall not be unreasonably
withheld); provided, however, that no such change shall (A) alter or change the
amount or kind of consideration to be issued to holders of Company Common Stock
as provided for in this Agreement (the "MERGER CONSIDERATION"), (B) adversely
affect the tax treatment to the Company's shareholders as a result of receiving
the Merger Consideration, or (C) materially delay the consummation of the
transactions contemplated by this Agreement.
ARTICLE III
FIRST SAVINGS
SECTION 3.1. LIQUIDATION ACCOUNT. The liquidation account established
by First Savings pursuant to the plan of conversion adopted in connection with
its conversion from mutual to stock form shall, to the extent required by
Applicable Law, continue to be maintained by First Savings after the Effective
Time for the benefit of those persons and entities who were savings account
holders of First Savings on the eligibility and supplemental eligibility record
dates for such conversion and who continue from time to time to have rights
therein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND FIRST SAVINGS
The Company and First Savings jointly and severally represent and
warrant to Bancorp and the Bank, except as otherwise Previously Disclosed, as
follows:
SECTION 4.1. ORGANIZATION, GOOD STANDING, AUTHORITY, INSURANCE, ETC.
(a) The Company is a corporation organized, existing, and in good standing under
the laws of the State of Delaware, and is registered as a savings and loan
holding company with the OTS under the HOLA. First Savings is a federal savings
association. Each "subsidiary" of the Company within the meaning of Section
10(a)(1)(G) of HOLA (individually a "COMPANY SUBSIDIARY" and collectively the
"COMPANY SUBSIDIARIES"), has been Previously Disclosed. Each of the Company
Subsidiaries is organized, existing and in good standing under the laws of the
respective jurisdiction under which it is organized, as set forth in the Company
Disclosure Schedule. Each of the Company and the Company Subsidiaries has all
requisite corporate power and
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corporate authority and is qualified and licensed to own, lease and operate its
properties and conduct its business as it is now being conducted, except for
such failure or failures to be so qualified or licensed as would not, in the
aggregate, have a Company Material Adverse Effect. The Company has made
available to Bancorp a true, complete and correct copy of the articles of
incorporation, charter, or other organizing documents and of the bylaws of the
Company and each Company Subsidiary as in effect on the date of this Agreement.
Each of the Company and the Company Subsidiaries is qualified to do business as
a foreign corporation and is in good standing in each jurisdiction in which
qualification is necessary under Applicable Law, except to the extent that any
failures to so qualify would not, in the aggregate, have a Company Material
Adverse Effect. First Savings is a member in good standing of the Federal Home
Loan Bank of Indianapolis, and all eligible accounts issued by First Savings are
insured by the Savings Association Insurance Fund ("SAIF") as administered by
the FDIC to the maximum extent permitted under Applicable Law, and all premiums
and assessments required in connection therewith have been paid by First
Savings. First Savings is a "domestic building and loan association" as defined
in Section 7701(a)(19) of the Code, and is a "qualified thrift lender" as
defined in Section 10(m) of the HOLA.
(b) The minute books of the Company and the Company
Subsidiaries contain records of all meetings and other corporate actions held or
taken of their respective shareholders and Boards of Directors (including the
committees of such Boards) since January 1, 1996, which records are complete and
accurate in all material respects and have been made available to Bancorp.
SECTION 4.2. CAPITALIZATION. The authorized capital stock of the
Company consists of 2,000,000 shares of Company Common Stock, of which 702,734
shares were issued and outstanding as of the date of this Agreement, and 500,000
shares of preferred stock, par value of $0.01 per share ("COMPANY PREFERRED
STOCK"), of which no shares were outstanding as of the date of this Agreement.
No other class or series of capital stock of the Company is or has been
authorized. As of the date of this Agreement, there were no shares of Company
Common Stock and no shares of Company Preferred Stock held in the Company's
treasury and, except as Previously Disclosed, there were no shares of Company
Common Stock reserved for issuance. All issued and outstanding shares of Company
Common Stock are duly authorized, validly issued, fully paid, nonassessable, and
free of preemptive rights. As of the date of this Agreement, except as
Previously Disclosed, there are no outstanding Rights to purchase or acquire any
capital stock of the Company and no oral or written agreement, contract,
arrangement, understanding, plan, or instrument of any kind to which the Company
or any of its Affiliates is subject with respect to the issuance, voting or sale
of issued or unissued shares of the capital stock of the Company.
SECTION 4.3. OWNERSHIP OF SUBSIDIARIES. All the outstanding shares of
the capital stock or other ownership interests in all of the Company
Subsidiaries are validly issued, fully paid, nonassessable and owned
beneficially and of record by the Company or a Company Subsidiary free and clear
of any Encumbrance. There are no outstanding Rights to purchase or acquire any
capital stock of any Company Subsidiary and no oral or written agreement,
contract, arrangement, understanding, plan, or instrument of any kind to which
any of the Company or any of its Affiliates is subject with respect to the
issuance, voting or sale of issued or unissued shares of the capital stock of
any of the Company Subsidiaries. Neither the Company nor any Company Subsidiary
owns any of the capital stock or other equity securities (including any Rights
with respect to such securities) of or profit participations in any Person or
"company" (as defined in Section 10(a)(1)(C) of the HOLA) other than the Federal
Home Loan Bank of Indianapolis and the Company Subsidiaries.
SECTION 4.4. FINANCIAL STATEMENTS AND REPORTS. For the past three
years, the Company and the Company Subsidiaries have timely filed all Regulatory
Documents required to be filed by them, except to the extent that all failures
to so file, in the aggregate, would not have a Company Material Adverse Effect;
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and all such documents, as finally amended, complied in all material respects
with applicable requirements of Applicable Law and, as of their respective date
or the date as amended, did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Except to the extent stated therein, all financial
statements and schedules included in the documents referred to in the preceding
sentences (i) are in accordance with the Company's books and records and those
of any of the Company Subsidiaries, which books and records are complete and
accurate in all material respects and have been maintained in all material
respects in accordance with Applicable Law, and (ii) present fairly the
consolidated financial position and the consolidated results of operations and
cash flows of the Company as of the dates and for the periods indicated in
accordance with GAAP consistently applied during the periods involved (except
for the omission of notes to unaudited statements, year-end adjustments to
interim results normal in nature and amount, and changes in GAAP and except
where regulatory reporting requirements provide otherwise). The audited
consolidated financial statements of the Company as of June 30, 1999 and for the
three years then ended last filed by the Company as part of a publicly available
Regulatory Document disclose all liabilities (whether accrued, absolute,
contingent, unliquidated, or otherwise, whether due or to become due and
regardless of when asserted), as of their respective dates, of the Company and
the Company Subsidiaries required to be reflected in such financial statements
according to GAAP, other than liabilities which are not, in the aggregate,
material to the Company and the Company Subsidiaries, taken as a whole, and
contain in the opinion of management, adequate reserves for losses on loans and
properties acquired in settlement of loans, Taxes, and all other material
accrued liabilities and for all reasonably anticipated material losses in
accordance with GAAP, if any, as of such date. Except for (i) those liabilities
that are fully reflected or reserved against on the Company's audited
consolidated balance sheet last filed by the Company as part of a publicly
available Regulatory Document and (ii) liabilities incurred in the ordinary
course of business since the date of such audited consolidated balance sheet and
which would not have, individually or in the aggregate, a Company Material
Adverse Effect, the Company has no liabilities or obligations of any nature,
whether absolute, accrued, contingent, or otherwise and whether due or to become
due, which are or would be required by GAAP to be shown on its consolidated
balance sheet.
SECTION 4.5. ABSENCE OF CHANGES. (a) Except as disclosed in publicly
available Regulatory Documents filed by the Company prior to the date of this
Agreement, since June 30, 1999, there has been no event, occurrence,
development, fact, or set of circumstances of any nature existing or, to the
knowledge of the Company, threatened which, individually or in the aggregate,
has had or could reasonably be expected to have a Company Material Adverse
Effect.
(b) Except as Previously Disclosed, since June 30, 1999, each
of the Company and the Company Subsidiaries has owned and operated its
respective assets, properties, and businesses in the ordinary course of business
and consistent with past practice and has not taken any action or suffered any
event that if taken or suffered after the date hereof would violate Section 6.1
of this Agreement.
SECTION 4.6. NO BROKER'S OR FINDER'S FEES. No agent, broker, investment
banker, Person, or firm acting on behalf or under authority of the Company or
any of the Company Subsidiaries is or will be entitled to any broker's or
finder's fee or any other commission or similar fee directly or indirectly in
connection with the Merger or any other transaction contemplated hereby, except
the Company has engaged Trident Securities, a Division of McDonald Investments,
Inc., an investment banking firm, to provide financial advisory services.
SECTION 4.7. LITIGATION AND OTHER PROCEEDINGS. (a) Except for matters
which would not have, in the aggregate, a Company Material Adverse Effect,
neither the Company nor any Company Subsidiary is a defendant in, nor is any of
its property subject to, any pending or, to the knowledge of the Company,
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threatened claim, action, suit, investigation, or proceeding. There is no
judicial order, judgment, or decree to which any of the Company, the Company
Subsidiaries, or their respective properties is subject which has had or could
reasonably be expected to have a Company Material Adverse Effect.
(b) All pending claims, actions, suits, investigations, and
proceedings in which the Company or any Company Subsidiary is a defendant and
all judicial orders, judgments, or decrees to which the Company or any Company
Subsidiary is subject have been Previously Disclosed.
SECTION 4.8. COMPLIANCE WITH LAW. The Company and the Company
Subsidiaries have been in compliance in all respects with all Applicable Laws,
except where such noncompliance would not have, in the aggregate, a Company
Material Adverse Effect, and neither the Company nor any Company Subsidiary has
received notice from any Governmental Authority of any material violation of,
and does not know of any material violations of, any Applicable Law.
SECTION 4.9. CORPORATE ACTIONS. The Board of Directors of the Company
by at least a two-thirds vote of the Continuing Directors (as such term is
defined in Article XV of the Company's Certificate of Incorporation) has
authorized its appropriate officers to execute and deliver this Agreement and to
take all action necessary to consummate the Merger and the other transactions
contemplated hereby. Except for obtaining the requisite approval of the
Company's shareholders as contemplated hereby, all corporate authorization by
the Board of Directors and shareholders of the Company required for the
consummation of the Merger and the transactions contemplated hereby has been
obtained.
SECTION 4.10. AUTHORITY. Except as Previously Disclosed, the execution,
delivery, and performance by the Company of its obligations under this Agreement
and the consummation thereby of the transactions contemplated hereby do not, and
will not, violate or conflict with any of the provisions of, or constitute a
breach or default (or an event which, with notice or lapse of time, or both,
would constitute a breach or default) under, terminate, give any Person the
right to terminate, modify or accelerate payment or performance under or result
in the creation of any Encumbrance upon any of the respective properties or
assets of the Company or any Company Subsidiary under (i) the articles of
incorporation, charter or bylaws of the Company or any Company Subsidiary, (ii)
subject to the Governmental Approvals and the approval of the Company's
shareholders described below, any Applicable Law to which the Company or any of
the Company Subsidiaries is subject or (iii) except, in each case, where such
violation, conflict, breach, default, termination (or right to terminate),
modification, acceleration or Encumbrance would not, individually or in the
aggregate, have a Company Material Adverse Effect, any agreement, lease,
contract, note, mortgage, indenture, arrangement or other obligation or
instrument, whether oral or written ("CONTRACT"), to which the Company or any of
the Company Subsidiaries is a party or is subject or by which any of their
properties or assets is bound or affected. The parties acknowledge that the
consummation of the Merger is subject to various regulatory approvals. The
Company has all requisite corporate power and corporate authority to enter into
this Agreement and to perform its obligations hereunder. Other than the filings,
notices, approvals, and consents with or of the Governmental Authorities as
Previously Disclosed (the "GOVERNMENTAL APPROVALS") and the requisite approval
of the Company's shareholders as contemplated hereby, no filings, notices,
approvals, or consents are required on behalf of the Company or any Company
Subsidiary in connection with the consummation of the transactions contemplated
by this Agreement. The Company has no knowledge of any reason why the
Governmental Approvals cannot be obtained or granted on a timely basis. This
Agreement constitutes the valid and binding obligation of the Company and is
enforceable in accordance with its terms, except as enforceability may be
limited by Applicable Laws relating to bankruptcy, insolvency or creditors
rights generally, the rights of creditors of insured depository institutions,
and general principles of equity.
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SECTION 4.11. EMPLOYMENT ARRANGEMENTS. Except as Previously Disclosed,
there are no employment, incentive compensation, severance, or other agreements,
plans, or arrangements with any current or former directors, officers, or
employees of the Company or any Company Subsidiary which may not be terminated
without penalty or liability (including any augmentation or acceleration of
benefits) on thirty (30) days or less notice to such Person. Except as
Previously Disclosed, neither the execution of this Agreement nor the
consummation of the transactions contemplated hereby will (either alone or upon
the occurrence of additional events or acts) result in, cause the accelerated
vesting or delivery of, or increase the amount or value of, any payment or
benefit to any employee, officer, or director of the Company or any Company
Subsidiary. Except as Previously Disclosed, no amount paid or payable to
directors, officers, or employees of the Company or the Company Subsidiaries in
connection with the transactions contemplated hereby (either solely as a result
of such transactions or as a result of such transactions in conjunction with any
other event) will cause the imposition of excise taxes under Section 4999 of the
Code or the disallowance of a deduction pursuant to Sections 162, 280G, or any
other section of the Code.
SECTION 4.12. EMPLOYEE BENEFITS. (a) Neither the Company nor any of the
Company Subsidiaries maintains, contributes to, or sponsors any funded deferred
compensation plans (including profit sharing, pension, savings, or stock bonus
plans), unfunded deferred compensation arrangements, or employee benefit plans
as defined in Section 3(3) of ERISA, other than any plans ("COMPANY EMPLOYEE
BENEFIT PLANS") Previously Disclosed (true and correct copies of which have been
delivered to Bancorp). Except as Previously Disclosed, neither the Company nor
any of the Company Subsidiaries (i) provides health, medical, death, or survivor
benefits to any former employee or beneficiary thereof, or (ii) maintains any
form of current (exclusive of base salary and base wages) or deferred
compensation, bonus, stock option, stock appreciation right, benefit, severance
pay, retirement, incentive, group, or individual health insurance, welfare, or
similar plan or arrangement for the benefit of any single or class of directors,
officers, or employees, whether active or retired (collectively "BENEFIT
ARRANGEMENTS").
(b) All Company Employee Benefit Plans and Benefit
Arrangements which are in effect were in effect for substantially all of
calendar year 1998 and, except as Previously Disclosed, there has been no
material amendment thereof (other than amendments required to comply with
Applicable Law) and, except as disclosed in publicly available Regulatory
Documents filed by the Company prior to the date of this Agreement, no material
increase in the cost thereof, or benefits payable thereunder on or after January
1, 1999.
(c) To the knowledge of the Company, with respect to all
Company Employee Benefit Plans and Benefit Arrangements, the Company and each
Company Subsidiary are in substantial compliance with the requirements
prescribed by any and all Applicable Laws currently in effect, including but not
limited to ERISA and the Code, applicable to such Company Employee Benefit Plans
or Benefit Arrangements. None of the Company Employee Benefit Plans which are
defined benefit pension plans have incurred any "accumulated funding deficiency"
(whether or not waived) as that term is defined in Section 412 of the Code and
the fair market value of the assets of each such plan equals or exceeds the
accrued liabilities of such plan. To the knowledge of the Company, there are not
now nor have there been any non-exempt "prohibited transactions," as such term
is defined in Section 4975 of the Code or Section 406 of ERISA, involving the
Company Employee Benefit Plans which could subject Company or any of the Company
Subsidiaries to the penalty or Tax imposed under Section 502(i) of ERISA or
Section 4975 of the Code.
(d) No Company Employee Benefit Plan which is subject to Title
IV of ERISA has been completely or partially terminated; no proceedings to
completely or partially terminate any Company Employee Benefit Plan have been
instituted within the meaning of Subtitle C of said Title IV of ERISA; and
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no reportable event, within the meaning of Section 4043(c) of said Subtitle C
for which the 30-day notice requirement of ERISA has not been waived, has
occurred with respect to any Company Employee Benefit Plan.
(e) No Company Employee Benefit Plan or Benefit Arrangement is
a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA or a
plan that has two or more contributing sponsors at least two of whom are not
under common control, within the meaning of Section 4063 of ERISA.
(f) Neither the Company nor any Company Subsidiary has engaged
in any transaction described in Section 4069 of ERISA within the last five
years. There does not now exist, nor do any circumstances exist that could
result in, any liability of the Company or any Company Subsidiary (or any
entity, trade, or business that is or was at any time required to be aggregated
with the Company or any Company Subsidiary under Section 414(b), (c), (m), or
(o) of the Code) under Title IV of ERISA, Section 302 of ERISA, Sections 412 and
4971 of the Code, the continuation coverage requirements of Section 601 et seq.
of ERISA and Section 4980B of the Code, other than such liabilities that arise
solely out of, or relate solely to, the Company Employee Benefit Plans or
Benefit Arrangements, that would be a liability of Bancorp, a Bancorp
Subsidiary, the Company, or a Company Subsidiary following consummation of the
Merger.
(g) Neither the Company nor any Company Subsidiary has failed
to make any contribution or pay any amount due and owing as required by the
terms of any Company Employee Benefit Plan or Benefit Arrangement. None of the
Company or any of the Company Subsidiaries has incurred or reasonably expects to
incur any liability to the Pension Benefit Guaranty Corporation except for
required premium payments which, to the extent due and payable, have been paid.
To the knowledge of the Company, the Company Employee Benefit Plans intended to
be qualified under Section 401(a) of the Code are so qualified, and the Company
is not aware of any fact which would adversely affect the qualified status of
such plans.
SECTION 4.13. INFORMATION FURNISHED; REGISTRATION STATEMENT. (a) To the
knowledge of the Company, no statement contained in any schedule, certificate or
other document furnished (whether prior to or subsequent to the date of this
Agreement) or to be furnished in writing by or on behalf of the Company or any
of its Affiliates to Bancorp pursuant to this Agreement contains or will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(b) None of the information provided by the Company or any
Company Subsidiary for inclusion in the registration statement on Form S-4 to be
filed with the SEC by Bancorp under the Securities Act relating to shares of
Bancorp Common Stock to be issued in the Merger, including the prospectus (the
"Prospectus") relating to such issuance and the joint proxy statement and forms
of proxy relating to the vote of Bancorp shareholders and Bancorp shareholders
with respect to the Merger (as amended, supplemented or modified, the "PROXY
STATEMENT") contained therein (such registration statement as amended,
supplemented or modified, the "REGISTRATION STATEMENT"), at the time the
Registration Statement becomes effective or, in the case of the Proxy Statement,
at the date of mailing, will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. Each of the Registration Statement and Proxy
Statement, except for such portions thereof that relate only to Bancorp or a
Bancorp Subsidiary, will comply as to form in all material respects with the
provisions of the Securities Act and Exchange Act, as applicable.
SECTION 4.14. PROPERTY AND ASSETS. The Company and the Company
Subsidiaries have good and marketable title to all of their real property
reflected in the consolidated financial statements last filed by the
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Company as part of a publicly available Regulatory Document or acquired
subsequent thereto, free and clear of all Encumbrances, except for (a) such
items reflected in such financial statements or in the notes thereto, (b) liens
for current taxes not yet delinquent, (c) customary title exceptions that have
no material adverse effect upon the current use of such property, (d) property
sold or transferred in the ordinary course of business consistent with past
practice since the date of such financial statements and (e) as otherwise
Previously Disclosed. The Company and the Company Subsidiaries enjoy peaceful
and undisturbed possession under all material leases for the use of real
property under which they are the lessee; all of such leases are valid and
binding and in full force and effect and neither the Company nor any Company
Subsidiary is in default in any respect under any such lease, except where such
failure to be valid and binding and in full force and effect, or where such
default, would not have, in the aggregate, a Company Material Adverse Effect.
There has been no physical loss, damage or destruction, whether or not covered
by insurance, affecting the real properties of the Company and the Company
Subsidiaries since June 30, 1999, except such loss, damage or destruction which
would not have, in the aggregate, a Company Material Adverse Effect. All
property and assets material to their businesses and currently used by the
Company and the Company Subsidiaries are, in all material respects, in good
operating condition and repair, normal wear and tear excepted.
SECTION 4.15. AGREEMENTS AND INSTRUMENTS. Except as Previously
Disclosed, neither the Company nor any Company Subsidiary is a party to:
(a) any material Contract;
(b) any Contract relating to the borrowing of money by the
Company or any Company Subsidiary or the guarantee by the Company or any Company
Subsidiary of any such obligation (other than Federal Home Loan Bank advances
with a maturity of one year or less from the date hereof);
(c) any Contract to make loans or for the provision, purchase,
or sale of goods, services or property between the Company or any Company
Subsidiary and any director or officer of the Company or any Company Subsidiary,
or any member of the immediate family or Affiliate of any of the foregoing
(other than loans or deposits made on an arms-length basis in the ordinary
course of business);
(d) any Contract with or concerning any labor or employee
organization;
(e) any Contract between the Company or any Company Subsidiary
and any Affiliate thereof (other than Contracts solely between the Company and a
Company Subsidiary or solely between Company Subsidiaries);
(f) any agreements, directives, orders, or similar
arrangements between or involving the Company or any Company Subsidiary and any
Governmental Authority;
(g) any Contract with respect to the employment, retention, or
severance of any directors, officers, employees, or consultants;
(h) any Contract which materially restricts the conduct of any
line of business by the Company or any current or future Affiliates thereof; or
(i) any Contract pursuant to which the Company or any Company
Subsidiary is or may become obligated to invest in or contribute capital to any
Company Subsidiary.
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SECTION 4.16. MATERIAL CONTRACT DEFAULTS. Neither the Company nor any
Company Subsidiary nor, to the knowledge of the Company, the other party thereto
is in default in any respect under any Contract to which any of the Company or
the Company Subsidiaries is a party or by which its respective assets, business,
or operations may be bound or affected or under which it or its respective
assets, business, or operations receives benefits, other than any such default
or defaults which would not have, in the aggregate, a Company Material Adverse
Effect, and there has not occurred any event that, with the lapse of time or the
giving of notice or both, would constitute such a default. To the knowledge of
the Company, all material Contracts to which the Company or any of the Company
Subsidiaries is a party are valid, binding, and in full force and effect.
SECTION 4.17. TAX MATTERS. (a) The Company, each of the Company
Subsidiaries, and any affiliated group (within the meaning of Section 1504(a) of
the Code) of which the Company or any of the Company Subsidiaries is a member
have filed all Tax Returns required to be filed by them and have made timely
payments of all Taxes due and payable, whether disputed or not; such Tax Returns
are true, correct, and complete in all material respects; the current status of
audits of such Tax Returns by the IRS and other applicable agencies has been
Previously Disclosed; and there is no agreement by the Company or any Company
Subsidiary for the waiver or extension of time for the assessment or payment of
any Taxes payable. Neither the IRS nor any other taxing authority is now
asserting or, to the knowledge of the Company, threatening to assert any
deficiency or claim for additional Taxes, nor to the knowledge of the Company is
there any basis for any such assertion or claim. The Company and each of the
Company Subsidiaries have complied in all material respects with applicable IRS
backup withholding requirements and have filed all appropriate information
reporting returns for all Tax years for which the statute of limitations has not
closed.
(b) Adequate provision for any Taxes due or to become due for
the Company or any of the Company Subsidiaries for any period or periods through
and including June 30, 1999, has been made and is reflected on the June 30, 1999
consolidated financial statements last filed by the Company as part of a
publicly available Regulatory Document and has been or will be made with respect
to periods ending after June 30, 1999.
SECTION 4.18. ENVIRONMENTAL MATTERS. To the knowledge of the Company,
neither the Company nor any Company Subsidiary owns any properties affected by
toxic waste, radon gas, or other hazardous conditions or constructed in part
with the use of asbestos. Neither the Company nor any Company Subsidiary has
knowledge of, nor has the Company or any Company Subsidiary received written
notice from any Governmental Authority of, any conditions, activities,
practices, or incidents which are reasonably likely to interfere with or prevent
compliance or continued compliance by the Company or any Company Subsidiary with
hazardous substance laws or any regulation, order, decree, judgment, or
injunction, issued, entered, promulgated or approved thereunder, or which may
give rise to any legal liability on the part of the Company or any Company
Subsidiary, or otherwise form the basis of any claim, action, suit, proceeding,
hearing or investigation against or of the Company or any Company Subsidiary,
based on or related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling, or the emission,
discharge, release, or threatened release into the environment, of any
pollutant, contaminant, or chemical, or industrial, toxic, or hazardous
substance or waste. There is no civil, criminal, or administrative claim,
action, suit, proceeding, hearing, or investigation pending or, to the knowledge
of the Company, threatened against the Company or any Company Subsidiary
relating in any way to such hazardous substance laws or any regulation, order,
decree, judgment or injunction issued, entered, promulgated or approved
thereunder. To the knowledge of the Company, none of the Company or the Company
Subsidiaries has made or participated in any loan to any Person who is subject
to any civil, criminal, or administrative claim, action, suit, proceeding,
hearing, or investigation relating in any way to such
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hazardous substance laws or any regulation, order, decree, judgment, or
injunction issued, entered, promulgated or approved thereunder and relating to
the property secured by such loan.
SECTION 4.19. LOAN PORTFOLIO; PORTFOLIO MANAGEMENT. (a) All evidences
of indebtedness reflected as assets in the consolidated financial statements
last filed by the Company as part of a publicly available Regulatory Document or
acquired since such date, are (except with respect to those assets which are no
longer assets of the Company or any Company Subsidiary) binding obligations of
the respective obligors named therein except as enforcement may be limited by
bankruptcy, insolvency, or other similar laws affecting the enforcement of
creditors rights generally, and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding may be brought, and the payment of no material
amount thereof (either individually or in the aggregate with other evidences of
indebtedness) is subject to any defenses which have been threatened or asserted
against the Company or any Company Subsidiary. All such indebtedness which is
secured by an interest in real property is secured by a valid and perfected
mortgage lien having the priority specified in the loan documents. All loans
originated or purchased by the Company or any Company Subsidiaries were at the
time entered into and at all times since have been in compliance in all material
respects with all Applicable Laws. The Company and the Company Subsidiaries
administer their loan and investment portfolios in accordance with all
Applicable Laws and the terms of applicable instruments. The records of the
Company and the Company Subsidiaries regarding all loans outstanding on their
books are accurate in all material respects and the risk classification system
has been established in accordance with the requirements of the OTS.
(b) The Company and First Savings have Previously Disclosed a
list, accurate and complete in all material respects, of the aggregate amounts
of loans, extensions of credit, and other assets of the Company and the Company
Subsidiaries that have been adversely designated, criticized, or classified as
of June 30, 1999, separated by category of classification or criticism (the
"ASSET CLASSIFICATION"); and no amounts of loans, extensions of credit, or other
assets that have been adversely designated, classified or criticized as of the
date hereof by any representative of any Government Authority as "Special
Mention," "Substandard," "Doubtful," "Loss," or words of similar import are
excluded from the amounts disclosed in the Asset Classification, other than
amounts of loans, extensions of credit, or other assets that were charged off or
recovered by the Company or any of the Company Subsidiaries before the date
hereof.
SECTION 4.20. REAL ESTATE LOANS AND INVESTMENTS. Except for properties
acquired in settlement of loans, there are no facts, circumstances, or
contingencies known to the Company which exist which would require a material
reduction under GAAP in the present carrying value of any of the real estate
investments, joint ventures, construction loans, other investments, or other
loans of the Company or any Company Subsidiary (either individually or in the
aggregate with other loans and investments).
SECTION 4.21. DERIVATIVES CONTRACTS. (a) Neither the Company nor any of
the Company Subsidiaries is a party to or has agreed to enter into an
exchange-traded or over-the-counter swap, forward, future, option, cap, floor or
collar financial contract or any other Contract not included on the consolidated
balance sheet last filed by the Company as part of a publicly available
Regulatory Document which is a derivatives contract or owns securities that are
identified in Thrift Bulletin No. 13a as "complex securities," (including
various combinations thereof) (each, a "DERIVATIVES CONTRACT"), except for those
Derivatives Contracts Previously Disclosed, including a list, as applicable, of
any of the Company's or First Savings' assets pledged as security for a
Derivatives Contract.
(b) All Derivative Contracts to which the Company or any
Company Subsidiary is a party or by which any of their properties or assets may
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be bound were entered into in the ordinary course of business and in accordance
with prudent banking practice, based on industry-wide standards at the time, and
with counterparties believed by the Company to be financially responsible at the
time.
SECTION 4.22. INSURANCE. The Company and the Company Subsidiaries have
in effect insurance coverage with reputable insurers which, in respect of
amounts, types, and risks insured, is reasonably adequate for the business in
which the Company and the Company Subsidiaries are engaged. A schedule of all
insurance policies in effect as to the Company and the Company Subsidiaries (the
"INSURANCE POLICIES") has been Previously Disclosed (other than policies
pertaining to secured loans made in the ordinary course of business). All
Insurance Policies are in full force and effect, all premiums with respect
thereto covering all periods up to and including the date of this Agreement have
been paid, such premiums covering all periods from the date hereof up to and
including the Effective Date shall have been paid on or before the Effective
Date, to the extent then due and payable (other than retrospective premiums
which may be payable with respect to worker's compensation insurance policies,
adequate reserves for which are reflected in the Company's financial statements
last filed by the Company as part of a publicly available Regulatory Document).
The Insurance Policies are valid, outstanding, and enforceable in accordance
with their respective terms and will not in any way be affected by, or
terminated or lapsed solely by reason of, the transactions contemplated by this
Agreement. To the knowledge of the Company, neither the Company nor any Company
Subsidiary has been refused any insurance with respect to any material
properties, assets or operations, nor has any coverage been limited or
terminated by any insurance carrier to which it has applied for any such
insurance or with which it has carried insurance during the last three (3)
years.
SECTION 4.23. TAX TREATMENT. Neither the Company nor any of its
Affiliates has taken or agreed to take any action that or has failed to take any
action the result of which would (but without giving effect to any actions taken
or agreed to be taken by Bancorp or any of its Affiliates) prevent the Merger
from qualifying as a "reorganization" under Section 368(a) of the Code.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BANCORP AND THE BANK
Bancorp and the Bank jointly and severally represent and warrant to the
Company and First Savings, except as otherwise Previously Disclosed, as follows:
SECTION 5.1. ORGANIZATION, GOOD STANDING, AUTHORITY, INSURANCE, ETC.
(a) Bancorp is a corporation organized, existing, and in good standing under the
laws of the State of Indiana, and is registered as a savings and loan holding
company with the OTS under the HOLA. The Bank is a federal savings association.
Each "subsidiary" of Bancorp within the meaning of Section 10(a)(1)(G) of HOLA
(individually a "BANCORP SUBSIDIARY" and collectively the "BANCORP
SUBSIDIARIES") has been Previously Disclosed. Each of the Bancorp Subsidiaries
is organized, existing, and in good standing under the laws of the respective
jurisdiction under which it is organized as set forth in the Bancorp Disclosure
Schedule. Each of Bancorp and the Bancorp Subsidiaries has all requisite
corporate power and corporate authority and is qualified and licensed to own,
lease, and operate its properties and conduct its business as it is now being
conducted, except for such failure or failures to be so qualified or licensed as
would not, in the aggregate, have a Bancorp Material Adverse Effect. Bancorp has
made available to the Company a true, complete and correct copy of the articles
of incorporation, charter or other organizing documents and of the bylaws of
Bancorp and each Bancorp Subsidiary as in effect on the date of this Agreement.
Each of Bancorp and the Bancorp Subsidiaries is qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which
qualification is necessary under Applicable Law, except to the extent that any
failures to so qualify would not, in the aggregate, have a Bancorp Material
Adverse Effect. The Bank is a member in good standing of the Federal Home Loan
Bank of Indianapolis, and all eligible accounts issued by the
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Bank are insured by SAIF as administered by the FDIC to the maximum extent
permitted under Applicable Law, and all premiums and assessments required in
connection therewith have been paid by the Bank. The Bank is a "domestic
building and loan association" as defined in Section 7701(a)(19) of the Code,
and is a "qualified thrift lender" as defined in Section 10(m) of the HOLA.
(b) The minute books of Bancorp and the Bancorp Subsidiaries
contain records of all meetings and other corporate actions held or taken of
their respective shareholders and Boards of Directors (including the committees
of such Boards) since January 1, 1996, which records are complete and accurate
in all material respects and have been made available to the Company.
SECTION 5.2. CAPITALIZATION. The authorized capital stock of Bancorp
consists of 7,000,000 shares of Bancorp Common Stock, of which 3,183,717 shares
were issued and outstanding as of the date of this Agreement, and 5,000,000
shares of serial preferred stock, par value of $1.00 per share, of which no
shares were outstanding as of the date of this Agreement. As of the date of this
Agreement, except as Previously Disclosed, there were no shares of Bancorp
Common Stock reserved for issuance. All issued and outstanding shares of Bancorp
Common Stock are duly authorized, validly issued, fully paid, nonassessable and
free of preemptive rights. As of the date of this Agreement, except as
Previously Disclosed and as contemplated by this Agreement, there are no
outstanding Rights to purchase or acquire any capital stock of Bancorp and no
oral or written agreement, contract, arrangement, understanding, plan or
instrument of any kind to which Bancorp or any of its Affiliates is subject with
respect to the issuance, voting or sale of issued or unissued shares of the
capital stock of Bancorp. The shares of Bancorp Common Stock to be issued
pursuant to the Merger will be duly authorized and validly issued and, at the
Closing, all such shares will be fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership
thereof.
SECTION 5.3. OWNERSHIP OF SUBSIDIARIES. All the outstanding shares of
the capital stock or other ownership interests in all of the Bancorp
Subsidiaries are validly issued, fully paid, nonassessable and owned
beneficially and of record by Bancorp or a Bancorp Subsidiary free and clear of
any Encumbrance. There are no outstanding Rights to purchase or acquire any
capital stock of any Bancorp Subsidiary and no oral or written agreement,
contract, arrangement, understanding, plan or instrument of any kind to which
Bancorp or any of its Affiliates is subject with respect to the issuance, voting
or sale of issued or unissued shares of the capital stock of any of the Bancorp
Subsidiaries. Neither Bancorp nor any Bancorp Subsidiary owns any of the capital
stock or other equity securities (including any Rights with respect to such
securities) of or profit participations in any Person or "company" (as defined
in Section 10(a)(1)(C) of the HOLA) other than the Federal Home Loan Bank of
Indianapolis and the Bancorp Subsidiaries.
SECTION 5.4. FINANCIAL STATEMENTS AND REPORTS. For the past three
years, Bancorp and the Bancorp Subsidiaries have timely filed all Regulatory
Documents required to be filed by them, except to the extent that all failures
to so file, in the aggregate, would not have a Bancorp Material Adverse Effect;
and all such documents, as finally amended, complied in all material respects
with applicable requirements of Applicable Law and, as of their respective date
or the date as amended, did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Except to the extent stated therein, all financial
statements and schedules included in the documents referred to in the preceding
sentences (i) are in accordance with Bancorp's books and records and those of
any of the Bancorp Subsidiaries, which books and records are complete and
accurate in all material respects and have been maintained in all material
respects in accordance with Applicable Law, and (ii) present fairly the
consolidated financial position and the consolidated results of operations and
cash flows of Bancorp as of the dates and for the periods indicated in
accordance with GAAP consistently applied during the periods
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involved (except for the omission of notes to unaudited statements, year-end
adjustments to interim results normal in nature and amount and changes in GAAP
and except where regulatory reporting requirements provide otherwise). The
audited consolidated financial statements of Bancorp as of September 30, 1998
and for the three years then ended last filed by Bancorp as part of a publicly
available Regulatory Document disclose all liabilities (whether accrued,
absolute, contingent, unliquidated or otherwise, whether due or to become due
and regardless of when asserted), as of their respective dates, of Bancorp and
the Bancorp Subsidiaries required to be reflected in such financial statements
according to GAAP, other than liabilities which are not, in the aggregate,
material to Bancorp and the Bancorp Subsidiaries, taken as a whole, and contain
in the opinion of management, adequate reserves for losses on loans and
properties acquired in settlement of loans, Taxes and all other material accrued
liabilities and for all reasonably anticipated material losses in accordance
with GAAP, if any, as of such date. Except for (i) those liabilities that are
fully reflected or reserved against on Bancorp's audited consolidated balance
sheet last filed by Bancorp as part of a publicly available Regulatory Document
and (ii) liabilities incurred in the ordinary course of business since the date
of such audited consolidated balance sheet and which would not have,
individually or in the aggregate, a Bancorp Material Adverse Effect, Bancorp has
no liabilities or obligations of any nature, whether absolute, accrued,
contingent or otherwise and whether due or to become due, which are or would be
required by GAAP to be shown on its consolidated balance sheet.
SECTION 5.5. ABSENCE OF CHANGES. (a) Except as disclosed in publicly
available Regulatory Documents filed by Bancorp prior to the date of this
Agreement, since September 30, 1998, there has been no event, occurrence,
development, fact, or set of circumstances of any nature existing or, to the
knowledge of Bancorp, threatened which, individually or in the aggregate, has
had or could reasonably be expected to have a Bancorp Material Adverse Effect.
(b) Except as Previously Disclosed, since September 30, 1998,
each of Bancorp and the Bancorp Subsidiaries has owned and operated its
respective assets, properties, and businesses in the ordinary course of business
and consistent with past practice.
SECTION 5.6. NO BROKER'S OR FINDER'S FEES. No agent, broker, investment
banker, Person, or firm acting on behalf or under authority of Bancorp or any of
the Bancorp Subsidiaries is or will be entitled to any broker's or finder's fee
or any other commission or similar fee directly or indirectly in connection with
the Merger, except Bancorp has engaged JMP Financial, Inc., an investment
banking firm, to provide financial advisory services.
SECTION 5.7. LITIGATION AND OTHER PROCEEDINGS. (a) Except for matters
which would not have, in the aggregate, a Bancorp Material Adverse Effect,
neither Bancorp nor any Bancorp Subsidiary is a defendant in, nor is any of its
property subject to, any pending, or, to the knowledge of Bancorp, threatened
claim, action, suit, investigation, or proceeding. There is no judicial order,
judgment, or decree to which any of Bancorp, the Bancorp Subsidiaries or their
respective properties is subject which has had or could reasonably be expected
to have a Bancorp Material Adverse Effect.
(b) All pending claims, actions, suits, investigations, and
proceedings in which Bancorp or any Bancorp Subsidiary is a defendant and all
judicial orders, judgments, or decrees to which the Bancorp or any Bancorp
Subsidiary is subject have been Previously Disclosed.
SECTION 5.8. COMPLIANCE WITH LAW. Bancorp and the Bancorp Subsidiaries
have been and are in compliance in all respects with all Applicable Laws, except
where such noncompliance would not have, in the aggregate, a Bancorp Material
Adverse Effect, and neither Bancorp nor any Bancorp Subsidiary has
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received notice from any Governmental Authority of any material violation of,
and does not know of any material violations of, any Applicable Law.
SECTION 5.9. CORPORATE ACTIONS. The Board of Directors of Bancorp has
authorized its officers to execute and deliver this Agreement and to take all
action necessary to consummate the Merger and the other transactions
contemplated hereby. Except for obtaining the requisite approval of the Bancorp
shareholders as contemplated hereby, all corporate authorization by the Board of
Directors of Bancorp required for the consummation of the Merger and the
transactions contemplated hereby has been obtained.
SECTION 5.10. AUTHORITY. Except as Previously Disclosed, the execution,
delivery and performance by Bancorp of its obligations under this Agreement and
the consummation thereby of the transactions contemplated hereby do not, and
will not, violate or conflict with any of the provisions of, or constitute a
breach or default (or an event which, with notice or lapse of time, or both,
would constitute a breach or default) under, terminate, give any Person the
right to terminate, modify or accelerate payment or performance under or result
in the creation of any Encumbrance upon any of the properties or assets of
Bancorp under (i) the articles of incorporation, charter, or by-laws of Bancorp,
the Bank, or any other Bancorp Subsidiary, (ii) subject to the Governmental
Approvals and the approval of Bancorp shareholders described below, any
Applicable Law to which Bancorp or any of the Bancorp Subsidiaries is subject,
or (iii) except, in each case, where such violation, conflict, breach, default,
termination (or right to terminate), modification, acceleration, or Encumbrance
would not, individually or in the aggregate, have a Bancorp Material Adverse
Effect, any Contract to which Bancorp or any of the Bancorp Subsidiaries is a
party or is subject or by which any of their properties or assets is bound or
affected. The parties acknowledge that the consummation of the Merger is subject
to various regulatory approvals. Bancorp has all requisite corporate power and
corporate authority to enter into this Agreement and to perform its obligations
hereunder. Other than the Governmental Approvals and the requisite approval of
Bancorp shareholders as contemplated hereby, no filings, notices, approvals, or
consents are required on behalf of Bancorp or any Bancorp Subsidiary in
connection with the consummation of the transactions contemplated by this
Agreement. Bancorp has no knowledge of any reason why the Governmental Approvals
cannot be obtained or granted on a timely basis. This Agreement constitutes the
valid and binding obligation of Bancorp and is enforceable in accordance with
its terms, except as enforceability may be limited by Applicable Law relating to
bankruptcy, insolvency or creditors' rights generally, the rights of creditors
of insured depository institutions, and general principles of equity.
SECTION 5.11. INFORMATION FURNISHED; REGISTRATION STATEMENT. (a) To the
knowledge of Bancorp, no statement contained in any schedule, certificate, or
other document furnished (whether prior to or subsequent to the date of this
Agreement) or to be furnished in writing by or on behalf of Bancorp or any of
its Affiliates to the Company pursuant to this Agreement contains or will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(b) None of the information provided by Bancorp or any Bancorp
Subsidiary for inclusion in the Registration Statement, at the time the
Registration Statement becomes effective or, in the case of the Proxy Statement,
at the date of mailing, will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. Each of the Registration Statement and Proxy
Statement, except for such portions thereof that relate only to the Company or a
Company Subsidiary, will comply as to form in all material respects with the
provisions of the Securities Act and Exchange Act, as applicable.
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SECTION 5.12. PROPERTY AND ASSETS. Bancorp and the Bancorp Subsidiaries
have good and marketable title to all of their real property reflected in the
consolidated financial statements last filed by Bancorp as part of a publicly
available Regulatory Document or acquired subsequent thereto, free and clear of
all Encumbrances, except for (a) such items reflected in such financial
statements or in the notes thereto, (b) liens for current taxes not yet
delinquent, (c) customary title exceptions that have no material adverse effect
upon the current use of such property, (d) property sold or transferred in the
ordinary course of business consistent with past practice since the date of such
financial statements and (e) as otherwise Previously Disclosed. Bancorp and the
Bancorp Subsidiaries enjoy peaceful and undisturbed possession under all
material leases for the use of real property under which they are the lessee;
all of such leases are valid and binding and in full force and effect and
neither Bancorp nor any Bancorp Subsidiary is in default in any respect under
any such lease, except where such failure to be valid and binding and in full
force and effect, or where such default, would not have, in the aggregate, a
Bancorp Material Adverse Effect. No consent of the lessor of any material real
property or material personal property lease is required for consummation of the
Merger. There has been no physical loss, damage or destruction, whether or not
covered by insurance, affecting the real properties of Bancorp and the Bancorp
Subsidiaries since September 30, 1998, except such loss, damage or destruction
which would not have, in the aggregate, a Bancorp Material Adverse Effect. All
property and assets material to their businesses and currently used by Bancorp
and the Bancorp Subsidiaries are, in all material respects, in good operating
condition and repair, normal wear and tear excepted.
SECTION 5.13. AGREEMENTS AND INSTRUMENTS. Except as Previously
Disclosed, neither Bancorp nor any Bancorp Subsidiary is a party to:
(a) any material Contract;
(b) any Contract relating to the borrowing of money by Bancorp
or any Bancorp Subsidiary or the guarantee by Bancorp or any Bancorp Subsidiary
of any such obligation (other than Federal Home Loan Bank advances with a
maturity of one year or less from the date hereof);
(c) any Contract to make loans or for the provision, purchase,
or sale of goods, services, or property between Bancorp or any Bancorp
Subsidiary and any director or officer of Bancorp or any Bancorp Subsidiary, or
any member of the immediate family or Affiliate of any of the foregoing (other
than loans or deposits made on an arms-length basis in the ordinary course of
business);
(d) any Contract with or concerning any labor or employee
organization;
(e) any Contract between Bancorp or any Bancorp Subsidiary and
any Affiliate thereof (other than Contracts solely between Bancorp and a Bancorp
Subsidiary or solely between Bancorp Subsidiaries);
(f) any agreements, directives, orders, or similar
arrangements between or involving Bancorp or any Bancorp Subsidiary and any
Governmental Authority;
(g) any Contract with respect to the employment, retention, or
severance of any directors, officers, employees, or consultants;
(h) any Contract which materially restricts the conduct of any
line of business by Bancorp or any current or future Affiliates thereof; or
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(i) any Contract pursuant to which Bancorp or any Bancorp
Subsidiary is or may become obligated to invest in or contribute capital to any
Bancorp Subsidiary.
SECTION 5.14. MATERIAL CONTRACT DEFAULTS. Neither Bancorp nor any
Bancorp Subsidiary nor, to the knowledge of Bancorp, the other party thereto is
in default in any respect under any Contract to which any of Bancorp or the
Bancorp Subsidiaries is a party or by which its respective assets, business, or
operations may be bound or affected or under which it or its respective assets,
business, or operations receives benefits, other than any such default or
defaults which would not have, in the aggregate, a Bancorp Material Adverse
Effect, and there has not occurred any event that, with the lapse of time or the
giving of notice or both, would constitute such a default. To the knowledge of
Bancorp, all material Contracts to which Bancorp or any of the Bancorp
Subsidiaries is a party are valid, binding, and in full force and effect.
SECTION 5.15. TAX MATTERS. (a) Bancorp, each of the Bancorp
Subsidiaries and any affiliated group (within the meaning of Section 1504(a) of
the Code) of which Bancorp or any of the Bancorp Subsidiaries is a member have
filed all Tax Returns required to be filed by them and have made timely payments
of all Taxes due and payable, whether disputed or not; and such Tax Returns are
true, correct, and complete in all material respects. Neither the IRS nor any
other taxing authority is now asserting or, to the knowledge of Bancorp,
threatening to assert any deficiency or claim for additional Taxes, nor to the
knowledge of Bancorp is there any basis for any such assertion or claim. Bancorp
and each of the Bancorp Subsidiaries have complied in all material respects with
applicable IRS backup withholding requirements and have filed all appropriate
information reporting returns for all Tax years for which the statute of
limitations has not closed. Bancorp and each Bancorp Subsidiary have complied
with all applicable state law sales and use Tax collection and reporting
requirements.
(b) Adequate provision for any Taxes due or to become due for
Bancorp or any of the Bancorp Subsidiaries for any period or periods through and
including September 30, 1998, has been made and is reflected on the September
30, 1998 audited consolidated financial statements last filed by Bancorp as part
of a publicly available Regulatory Document and has been or will be made with
respect to periods ending after September 30, 1998.
SECTION 5.16. ENVIRONMENTAL MATTERS. To the knowledge of Bancorp,
neither Bancorp nor any Bancorp Subsidiary owns or leases any properties
affected by toxic waste, radon gas, or other hazardous conditions or constructed
in part with the use of asbestos. Neither Bancorp nor any Bancorp Subsidiary has
knowledge of, nor has Bancorp or any Bancorp Subsidiary received written notice
from any Governmental Authority of, any conditions, activities, practices, or
incidents which are reasonably likely to interfere with or prevent compliance or
continued compliance by Bancorp or any Bancorp Subsidiary with hazardous
substance laws or any regulation, order, decree, judgment, or injunction,
issued, entered, promulgated or approved thereunder, or which may give rise to
any legal liability on the part of Bancorp or any Bancorp Subsidiary, or
otherwise form the basis of any claim, action, suit, proceeding, hearing, or
investigation against or of Bancorp or any Bancorp Subsidiary, based on or
related to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling, or the emission, discharge, release or
threatened release into the environment, of any pollutant, contaminant, or
chemical, or industrial, toxic, or hazardous substance or waste. There is no
civil, criminal, or administrative claim, action, suit, proceeding, hearing, or
investigation pending or, to the knowledge of Bancorp, threatened against
Bancorp or any Bancorp Subsidiary relating in any way to such hazardous
substance laws or any regulation, order, decree, judgment, or injunction issued,
entered, promulgated or approved thereunder. To the knowledge of Bancorp, none
of Bancorp or the Bancorp Subsidiaries has made or participated in any loan to
any Person who is subject to any civil, criminal, or administrative claim,
action, suit, proceeding, hearing, or investigation relating in any way to such
hazardous substance laws or any regulation, order, decree,
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judgment, or injunction issued, entered, promulgated or approved thereunder and
relating to the property secured by such loan.
SECTION 5.17. LOAN PORTFOLIO; PORTFOLIO MANAGEMENT. (a) All evidences
of indebtedness reflected as assets in the consolidated financial statements
last filed by Bancorp as part of a publicly available Regulatory Document or
acquired since such date, are (except with respect to those assets which are no
longer assets of Bancorp or any Bancorp Subsidiary) binding obligations of the
respective obligors named therein except as enforcement may be limited by
bankruptcy, insolvency, or other similar laws affecting the enforcement of
creditors rights generally, and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding may be brought, and the payment of no material
amount thereof (either individually or in the aggregate with other evidences of
indebtedness) is subject to any defenses which have been threatened or asserted
against Bancorp or any Bancorp Subsidiary. All such indebtedness which is
secured by an interest in real property is secured by a valid and perfected
mortgage lien having the priority specified in the loan documents. All loans
originated or purchased by Bancorp or any Bancorp Subsidiaries were at the time
entered into and at all times since have been in compliance in all material
respects with all Applicable Laws. Bancorp and the Bancorp Subsidiaries
administer their loan and investment portfolios in accordance with all
Applicable Laws and the terms of applicable instruments. The records of Bancorp
and the Bancorp Subsidiaries regarding all loans outstanding on their books are
accurate in all material respects and the risk classification system has been
established in accordance with the requirements of the OTS.
(b) Bancorp and the Bank have Previously Disclosed a list,
accurate and complete in all material respects, of the aggregate amounts of
loans, extensions of credit, and other assets of Bancorp and the Bancorp
Subsidiaries that have been adversely designated, criticized, or classified as
of September 30, 1998, separated by Asset Classification; and no amounts of
loans, extensions of credit, or other assets that have been adversely
designated, classified or criticized as of the date hereof by any representative
of any Government Authority as "Special Mention," "Substandard," "Doubtful,"
"Loss," or words of similar import are excluded from the amounts disclosed in
the Asset Classification, other than amounts of loans, extensions of credit, or
other assets that were charged off or recovered by Bancorp or any of the Bancorp
Subsidiaries before the date hereof.
SECTION 5.18. REAL ESTATE LOANS AND INVESTMENTS. Except for properties
acquired in settlement of loans, there are no facts, circumstances, or
contingencies known to Bancorp which exist which would require a material
reduction under GAAP in the present carrying value of any of the real estate
investments, joint ventures, construction loans, other investments, or other
loans of Bancorp or any Bancorp Subsidiary (either individually or in the
aggregate with other loans and investments).
SECTION 5.19. DERIVATIVES CONTRACTS. (a) Neither Bancorp nor any of the
Bancorp Subsidiaries is a party to or has agreed to enter into an
exchange-traded or over-the-counter Derivatives Contract or any other Contract
not included on the consolidated balance sheet last filed by Bancorp as part of
a publicly available Regulatory Document which is a Derivatives Contract, except
for those Derivatives Contracts Previously Disclosed, including a list, as
applicable, of any of Bancorp's or the Bank's assets pledged as security for a
Derivatives Contract.
(b) All Derivative Contracts to which Bancorp or any Bancorp
Subsidiary is a party or by which any of their properties or assets may be bound
were entered into in the ordinary course of business and in accordance with
prudent banking practice, based on industry-wide standards at the time, and with
counterparties believed by Bancorp to be financially responsible at the time.
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SECTION 5.20. INSURANCE. Bancorp and the Bancorp Subsidiaries have in
effect insurance coverage with reputable insurers which, in respect of amounts,
types, and risks insured, is reasonably adequate for the business in which
Bancorp and the Bancorp Subsidiaries are engaged. All Insurance Policies are in
full force and effect, The Insurance Policies are valid, outstanding, and
enforceable in accordance with their respective terms and will not in any way be
affected by, or terminated or lapsed solely by reason of, the transactions
contemplated by this Agreement. To the knowledge of Bancorp, neither Bancorp nor
any Bancorp Subsidiary has been refused any insurance with respect to any
material properties, assets or operations, nor has any coverage been limited or
terminated by any insurance carrier to which it has applied for any such
insurance or with which it has carried insurance during the last three (3)
years.
SECTION 5.21. TAX TREATMENT. Neither Bancorp nor any of its Affiliates
has taken or agreed to take any action that or has failed to take any action the
result of which would (but without giving effect to any actions taken or agreed
to be taken by the Company or any of its Affiliates) prevent the Merger from
qualifying as a "reorganization" under Section 368(a) of the Code.
ARTICLE VI
COVENANTS
SECTION 6.1. CONDUCT OF BUSINESS BY THE COMPANY. During the period from
the date of this Agreement and continuing through the Closing Date, except as
Previously Disclosed and except as expressly contemplated and permitted by this
Agreement or with the prior written consent of Bancorp (which consent shall not
be unreasonably withheld), the Company shall cause each of the Company and the
Company Subsidiaries to (a) carry on its business in the ordinary course
consistent with past practice; (b) use its reasonable best efforts to preserve
its present business organization and relationships; (c) use its reasonable best
efforts to keep available the present services of the Company's and the Company
Subsidiaries' employees; and (d) use its reasonable best efforts to preserve its
rights, franchises, goodwill, and relations with customers and others with whom
it conducts business. Without limiting the generality of the foregoing, except
as expressly contemplated and permitted by this Agreement, consented to in
writing by Bancorp or Previously Disclosed, the Company shall not, and the
Company shall not permit any of the Company Subsidiaries to, directly or
indirectly:
(i) amend its articles/certificate of incorporation,
charter, or bylaws (or comparable governing instruments) or merge with or into
or consolidate with any other Person, subdivide, combine or in any way
reclassify any shares of its capital stock, or change in any manner the rights
of its outstanding capital stock;
(ii) issue or sell or purchase any shares of its
capital stock, or issue or sell or purchase any option, warrant, convertible or
exchangeable security, right, subscription, call, unsatisfied pre-emptive right
or other agreement or right of any kind to purchase or otherwise acquire
(including, without limitation, by exchange or conversion) (each a "RIGHT") any
shares of its capital stock (except that the Company may issue shares of Company
Common Stock upon (i) exercise of Company Options outstanding on the date of
this Agreement or (ii) as Previously Disclosed);
(iv) waive any right of value to its business other
than a waiver, together with all other such waivers, that would not have a
Company Material Adverse Effect;
(v) make any change in its accounting methods or
practices for Tax or accounting purposes or make any change in depreciation or
amortization policies or rates adopted by it for Tax or accounting purposes,
except in each case as required by GAAP or Applicable Law;
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(vi) materially change, or agree to change, any of
its lending activities, policies or practices, except as required by Applicable
Law or by any Governmental Authority;
(vii) make any loan or advance to any of its
Affiliates, officers, directors, employees, consultants, agents, or other
representatives (other than travel advances made in the ordinary course of
business consistent with past practice), or make any other loan or advance
otherwise than in the ordinary course of business consistent with past practice;
(viii) sell, offer to sell, abandon or make any other
disposition of any of its material assets, including selling or closing any
branches; or grant or suffer any Encumbrance on any of its material assets;
(ix) except in the ordinary course of business
consistent with past practice, incur or assume, or agree to incur or assume, any
liability or obligation (whether or not currently due and payable) relating to
its business or any of its assets;
(x) create, renew, amend, terminate or cancel, or
take any other action that may result in the creation, renewal, amendment,
termination, or cancellation of, any Contract with any of its Affiliates;
(xi) declare, set aside or pay any dividends or
declare or make any other distributions of any kind on or in respect of its
capital stock (other than dividends from a Company Subsidiary to the Company or
another Company Subsidiary), or make any direct or indirect redemption,
retirement, purchase, or other acquisition of any shares of its capital stock or
Rights, provided that the Company may declare and pay its regular quarterly cash
dividends on the Company Common Stock of not more than $0.115 per share per
quarterly period, provided further that the parties agree that after the date of
this Agreement, each of Bancorp and the Company shall coordinate with the other
the declaration of any dividends in respects of Bancorp Common Stock and Company
Common Stock and the record dates and payment dates relating thereto, it being
the intention of the parties hereto that holders of Company Common Stock shall
not receive two dividends, or fail to receive one dividend, for any single
calendar quarter with respect to their shares of Company Common Stock and any
shares of Bancorp Common Stock any such holder receives in exchange therefore in
the Merger;
(xii) create, renew, amend, terminate or cancel, or
take any other action that may result in the creation, renewal, amendment,
termination, or cancellation of, any Contract, except in the ordinary course of
business consistent with past practice and as would not, in the aggregate, have
a Company Material Adverse Effect; enter into or amend any Contract pursuant to
which it agrees to indemnify any party on behalf of its business or pursuant to
which it agrees to refrain from competing with any party with respect to its
business;
(xiii) except as Previously Disclosed, adopt, amend,
renew, terminate or accelerate or vest benefits under any Company Employee
Benefit Plan or Benefit Arrangement or any other employee program, plan,
agreement, arrangement, or policy between the Company or a Company Subsidiary
and one or more of employees or directors of the Company or a Company
Subsidiary, except as required by Applicable Law;
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(xiv) commit any act or omission which constitutes a
breach or default under any Contract or license to which it is a party or by
which it or any of its properties or assets is bound except as would not have,
in the aggregate, a Company Material Adverse Effect;
(xv) acquire in any manner, including by way of
merger, consolidation, or purchase of an equity interest or assets, any business
or any corporation, partnership, association, or other business organization or
division thereof (other than by way of foreclosures or acquisitions of control
in a bona fide fiduciary capacity or in satisfaction of debts previously
contracted in good faith, in each case in the ordinary and usual course of
business consistent with past practice);
(xvi) increase the salary or wages of any employees
of the Company or of any Company Subsidiary; or pay any incentive, bonus, or
similar payments to employees or directors other than as required by the terms
of any Company Employee Benefit Plan or Benefit Arrangement in effect as of the
date hereof and Previously Disclosed;
(xvii) purchase any debt securities or derivative
securities that are defined as "complex securities" under OTS Thrift Bulletin
No. 13a dated December 1, 1998 as revised or purchase any Derivatives Contracts;
(xviii) make any investment which would cause First
Savings to not be a qualified thrift lender under Section 10(m) of the HOLA, or
not to be a "domestic building and loan association" as defined in Section
7701(a)(19) of the Code;
(xix) change its existing investment guidelines
Previously Disclosed, except as required by Applicable Law or any Governmental
Authority, or the manner in which its investment securities portfolio is
classified or reported;
(xx) authorize or make capital expenditures in excess
of $100,000, individually, or $500,000, in the aggregate;
(xxi) take any action that or fail to take any action
the result of which would (but without giving effect to any actions taken or
agreed to be taken by the Company or any of its Affiliates) prevent the Merger
from qualifying as a "reorganization" under Section 368(a) of the Code; or
(xxii) agree (by Contract or otherwise) to do any of
the foregoing.
SECTION 6.2. MAINTENANCE OF RECORDS. Through the Closing Date, the
Company and the Company Subsidiaries will maintain their Records in the same
manner and with the same care that such Records have been maintained prior to
the execution of this Agreement.
SECTION 6.3. SALARY AND BENEFITS. (a) Bancorp shall, or shall cause the
appropriate Bancorp Subsidiary to, permit employees of the Company or any
Company Subsidiary who are employees with the Company or any Company Subsidiary
as of immediately prior to the Effective Time and become employees of Bancorp or
a Bancorp Subsidiary as of the Effective Time ("TRANSFERRED EMPLOYEES") to
participate in the employee benefit plans, programs, and arrangements of Bancorp
or the Bancorp Subsidiaries, as applicable (the "BANCORP PLANS"), on the same
terms as such plans and benefits are offered to similarly situated employees of
Bancorp or the Bancorp Subsidiaries, as applicable. Bancorp shall recognize, or
shall cause the appropriate Bancorp Subsidiary to recognize, each Transferred
Employee's service with the Company or any Company Subsidiary for purposes of
determining eligibility to participate in and vest under the Bancorp
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Plans, but not for purposes of benefit accruals under any such plans and no such
Transferred Employees or dependents shall be subject to any uninsured waiting
periods or preexisting condition exclusions under any plan of Bancorp or the
Bank. Furthermore, benefit levels under the welfare plans sponsored by Bancorp
or the Bank shall be determined based upon prior service with the Company or any
Company Subsidiaries.
(b) Bancorp shall, or shall cause the appropriate Bancorp
Subsidiary to, use its best efforts to employ employees of the Company or any
Company Subsidiary who are employees with the Company or any Company Subsidiary
as of immediately prior to the Effective Time on the same terms and conditions
as are offered to similarly situated employees of Bancorp or the Bancorp
Subsidiaries, as applicable; provided, however, that for a period of 12 months
after the Effective Time, salaries of Transferred Employees shall not be reduced
below the level of such salaries for such employees immediately prior to the
Effective Time.
(c) Bancorp shall enter into a six-year employment contract
with Richard Gatton which shall contain such provisions as are customarily
included in such agreements with key management personnel. The employment
contract also shall include the provisions included in EXHIBIT B attached
hereto.
(d) Bancorp shall enter into a three-year employment contract
with Jeffrey Gatton which shall contain such provisions as are customarily
included in such agreements with key management personnel. The employment
contract also shall include the provisions included in EXHIBIT B attached
hereto.
(e) Notwithstanding the foregoing, Bancorp shall, or shall
cause the appropriate Bancorp Subsidiary to, (A) provide severance benefits
equal to one week of pay for each year of service with the Company or a Company
Subsidiary (including any service as an employee of Bancorp or a Bancorp
Subsidiary) to Persons who (i) were employees of the Company or any Company
Subsidiary immediately prior to the Effective Time, (ii) are terminated without
cause as of or within 12 months after the Effective Time by Bancorp or a Bancorp
Subsidiary (but not upon termination by the employee or termination for cause by
Bancorp or a Bancorp Subsidiary), and (iii) are not otherwise entitled to any
severance benefits under any Contract as a result or in respect of such
termination, in the amounts as Previously Disclosed, which amounts, less
applicable withholding taxes, shall be paid upon the effectiveness of such
termination and (B) recognize and carry forward as of the Effective Time all
sick leave and vacation accrued by each Transferred Employee during the 12 month
period ending on (and including) the Closing Date under the respective policies
of Bancorp or the appropriate Bancorp Subsidiary (but (x) without giving effect
to any accrued benefits carried forward from any time prior to such 12-month
period under such Bancorp and Bancorp Subsidiary policies and (y) in no event
greater than such benefits as would accrue under such policies during one full
calendar year without giving effect to accrued benefits carried forward from
prior calendar years under such policies).
(f) Further, Bancorp shall, or shall cause the appropriate
Bancorp Subsidiary to, perform after the Effective Time all of the obligations
of the Company or the appropriate Company Subsidiary under the terms of the
severance agreements existing as of the date hereof which are between the
Company or a Company Subsidiary, on the one hand, and management employees
(other than G. Richard Gatton) of the Company or a Company Subsidiary, on the
other hand, which have been Previously Disclosed and which by their terms
survive the Effective Time, provided, however, that the Company shall use its
best efforts to modify those agreements or replace them with agreements so that
no benefits are payable solely as a result of the Merger.
SECTION 6.4. EFFORTS OF PARTIES TO CLOSE. During the period from the
date of this Agreement through the Closing Date, each party to this Agreement
shall take such actions as may be reasonably
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required to carry out the provisions hereof and the transactions contemplated
hereby and each party hereto shall use its reasonable best efforts to fulfill or
obtain the fulfillment of the conditions precedent to the consummation of the
Merger, including the execution and delivery of any documents, certificates,
instruments or other papers that are reasonably required for the consummation of
the transactions contemplated hereby. During the period from the date of this
Agreement and continuing through the Closing, except as required by Applicable
Law or with the prior written consent of the other parties to this Agreement, no
party to this Agreement shall take any action which, or fail to take any action
the failure of which to be taken, would, or could reasonably be expected to, (a)
result in any of the representations and warranties set forth in this Agreement
on the part of the party taking or failing to take such action being or becoming
untrue in any material respect; (b) result in any conditions to the Closing set
forth in Article VII not being satisfied; or (c) adversely affect or materially
delay the receipt of any of the requisite regulatory approvals or the
consummation of the Merger.
SECTION 6.5. CONFIDENTIALITY AND ANNOUNCEMENTS. (a) Other than as
required by Applicable Law upon prior notice to the other parties (where
reasonably practicable), the Filing of a Form 8-K with respect to this Agreement
reasonably acceptable to both parties, or with the prior consent of the other
parties, none of Bancorp, the Company, the Bank, or First Savings shall, and
each of the foregoing shall cause each of its Affiliates and Representatives not
to, disclose to any Person the fact of execution and delivery hereof, any of the
contents hereof or any information with respect to the Merger or the other
transactions contemplated hereby, except that nothing herein shall prohibit any
party from providing any information to its regulatory authorities as required
by Applicable Law.
(b) Subject to Section 6.7(a) and (b), the parties to this
Agreement shall agree with each other as to the form and substance of any press
release related to this Agreement or the transactions contemplated hereby and
shall consult each other as to the form and substance of other public
disclosures related hereto and thereto.
SECTION 6.6. ACCESS; CERTAIN COMMUNICATIONS. Between the date of this
Agreement and the Closing Date, subject to any Applicable Laws relating to the
exchange of information:
(a) The Company and the Company Subsidiaries shall afford to
Bancorp and its authorized agents and representatives reasonable access, upon
reasonable notice to an executive officer of the Company and during normal
business hours, to all Contracts, documents, and information of or relating to
the assets, liabilities, business, operations, personnel, and other aspects of
the business of the Company and the Company Subsidiaries. The Company and the
Company Subsidiaries shall cause their personnel, attorneys, and accountants to
provide assistance to Bancorp in Bancorp's investigation of matters relating to
the Merger, including allowing Bancorp and its authorized agents and
representatives access to their operating sites and facilities and cooperating
therewith in an effort to coordinate and facilitate the integration of Bancorp's
and the Company's computer systems in anticipation of consummation of the
Merger; provided, however, that Bancorp's investigation shall be conducted in a
manner which does not unreasonably interfere with the normal operations,
customers, and employee relations of the Company and the Company Subsidiaries;
provided further, however, that, in providing the foregoing access, the Company
shall not be required to jeopardize its attorney-client privilege (the Company
hereby agreeing to use all reasonable efforts to make appropriate alternative
disclosure arrangements in such circumstances).
(b) Bancorp shall afford to the Company and its authorized
agents and representatives reasonable access, upon reasonable notice to an
executive officer of Bancorp and during normal business hours, to all Contracts,
documents, and information of or relating to the assets, liabilities, business,
operations, personnel, and other aspects of the business of Bancorp and the
Bancorp Subsidiaries. Bancorp
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shall cause its personnel, attorneys and accountants to provide assistance to
the Company in the Company's investigation of matters relating to the Merger,
including allowing the Company and its authorized agents and representatives
access to its operating sites and facilities; provided, however, that the
Company's investigation shall be conducted in a manner which does not
unreasonably interfere with Bancorp's normal operations, customers, and employee
relations; provided further, however, that, in providing the foregoing access,
Bancorp shall not be required to jeopardize its attorney-client privilege
(Bancorp hereby agreeing to use all reasonable efforts to make appropriate
alternative disclosure arrangements in such circumstances).
(c) The investigations of the parties pursuant to this Section
6.6 shall not affect any of the representations or warranties contained herein.
SECTION 6.7. COOPERATION; PREPARATION OF DOCUMENTS. (a) The parties to
this Agreement shall cooperate with each other and use their reasonable best
efforts promptly to prepare and file all necessary documentation, to effect all
applications, notices, petitions, and filings, and to obtain as promptly as
practicable all permits, consents, approvals, waivers, and authorizations of all
third parties and Governmental Authorities which are necessary or advisable to
consummate the transactions contemplated by this Agreement. If any required
consent of or waiver by any third party (excluding any Governmental Authority)
is not obtained prior to the Closing, or if the assignment of any Contract would
be ineffective or would adversely affect any material rights or benefits
thereunder so that Bancorp would not in fact receive all such rights and
benefits, the parties hereto, each without cost, expense or liability to the
other, shall cooperate in good faith to seek, if possible, an alternative
arrangement to achieve the economic results intended. The parties to this
Agreement will have the right to review in advance, and will consult with each
other on, in each case subject to Applicable Laws relating to the exchange of
information, all the information relating to Bancorp, the Bancorp Subsidiaries,
the Company, or the Company Subsidiaries, as the case may be, which appear in
any filing made with, or written materials submitted to, any third party or any
Governmental Authority in connection with the transactions contemplated by this
Agreement; provided, however, that nothing contained herein shall be deemed to
provide any party to this Agreement with a right to review any information
provided to any Governmental Authority on a confidential basis in connection
with the transactions contemplated hereby. The parties to this Agreement agree
that they will consult with each other with respect to the obtaining of all
permits, consents, approvals, and authorizations of all third parties and
Governmental Authorities necessary or advisable to consummate the transactions
contemplated by this Agreement and each party will keep the others apprised of
the status of matters relating to completion of the transactions contemplated
herein. The party responsible for a filing as set forth above shall promptly
deliver to the other parties hereto evidence of the filing of all applications,
filings, registrations, and notifications relating thereto (except for any
confidential portions thereof), and any supplement, amendment, or item of
additional information in connection therewith (except for any confidential
portions thereof). The party responsible for a filing shall also promptly
deliver to the other parties hereto a copy of each material notice, order,
opinion, and other item of correspondence received by such filing party from any
Governmental Authority in respect of any such application (except for any
confidential portions thereof). In exercising the foregoing rights and
obligations, Bancorp, the Bancorp Subsidiaries, the Company, and the Company
Subsidiaries shall each act reasonably and as promptly as practicable.
(b) Bancorp and the Company shall jointly prepare and file
with the SEC as soon as is reasonably practicable the Registration Statement (or
the equivalent in the form of preliminary proxy material). The parties hereto
shall use their reasonable best efforts (i) to cause the Registration Statement
to become effective, (ii) to maintain the effectiveness thereof through the
Effective Time, and (iii) to the extent any such party becomes aware of any
information contained or omitted from the Registration Statement which makes any
material statement contained therein false or misleading, to file the
information necessary
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to make such statements in the Registration Statement not false or misleading.
Bancorp also shall take such other reasonable actions (other than qualifying to
do business in any jurisdiction in which it is not so qualified) required to be
taken under any applicable state securities laws in connection with the issuance
of Bancorp Common Stock under the Registration Statement as contemplated hereby.
Bancorp and the Company shall use their respective reasonable best efforts to
mail at the earliest practicable date to Bancorp shareholders and the Company
shareholders, respectively, a Proxy Statement, which shall include all
information required under Applicable Law to be furnished to Bancorp
shareholders and Company shareholders, respectively, in connection with the
Merger and the transactions contemplated hereby and shall include the
recommendation of the Bancorp Board and of the Company Board in favor of the
Merger, this Agreement, and the transactions contemplated hereby; provided,
however, that the parties shall not be required to make such recommendation if
it reasonably determines in good faith not to so recommend based upon the advice
of counsel, which counsel or is otherwise reasonably acceptable to the other
party, to the effect that to so recommend would constitute a violation of the
Board's fiduciary duties under Applicable Law.
(c) Each party to this Agreement shall, upon request, promptly
furnish each other with all information concerning themselves, Affiliates,
directors, officers, and stockholders and such other matters as may be
reasonably necessary or advisable in connection with any statement (including
the Registration Statement), filing, notice, or application made by or on behalf
of Bancorp, the Bank, the Company, or First Savings to any Governmental
Authority in connection with the transactions contemplated by this Agreement.
(d) The parties to this Agreement shall promptly advise each
other upon receiving any communication from any Governmental Authority whose
consent or approval is required for consummation of the transactions
contemplated by this Agreement which causes such party to believe that there is
a reasonable likelihood that any requisite regulatory approval will not be
obtained or that the receipt of any such approval will be materially delayed.
SECTION 6.8. NOTIFICATION OF CERTAIN MATTERS. (a) Each party to this
Agreement shall give prompt notice to the other parties of the occurrence, or
any known failure to occur, of any event or existence of any condition that has
caused or could reasonably be expected to cause any of its representations or
warranties contained in this Agreement to be untrue or inaccurate in any
material respect at any time after the date of this Agreement, up to and
including the Closing Date, and (ii) any failure on its part to comply with or
satisfy, in any material respect, any covenant, condition, or agreement to be
complied with or satisfied by it under this Agreement.
(b) During the period from the date of this Agreement to the
Closing Date, each party will promptly notify the other party of any material
change in the conduct of its business or in the operation of its properties and
of any governmental complaints, investigations, or hearings (or communications
indicating that the same may be contemplated), or the institution or the threat
of significant litigation involving the party, and will keep each other fully
informed of such events.
(c) Bancorp shall provide the Company with true, correct, and
complete copies of Bancorp's audited consolidated financial statements as of
September 30, 1999 and for the three years then ended promptly following
completion thereof, but in any event on or before the date such financial
statements are first filed with the SEC or any other Governmental Authority in
any Regulatory Document.
(d) The Company shall provide Bancorp with true, correct, and
complete copies of the Company's audited consolidated financial statements as of
June 30, 1999 and for the three years then ended
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promptly following completion thereof, but in any event on or before the date
such financial statements are first filed with the SEC or any other Governmental
Authority in any Regulatory Document.
SECTION 6.9. EXPENSES. Except as otherwise expressly provided herein,
the parties hereto shall each bear their respective direct and indirect expenses
incurred in connection with the negotiation and preparation of this Agreement
and the consummation of the transactions contemplated hereby (including all fees
and expenses payable to or on behalf of financial advisors, attorneys,
accountants, and consultants).
SECTION 6.10. THIRD PARTY PROPOSALS. None of the Company, any of the
Company Subsidiaries, any of the Affiliates of the foregoing or any officers,
directors, employees, representatives, or advisors of the foregoing
("REPRESENTATIVES") shall directly or indirectly solicit, encourage, or
facilitate inquiries or proposals, or enter into any definitive agreement, with
respect to, or initiate or participate in any negotiations or discussions with
any Person concerning, any acquisition or purchase of all or any material
portion of the assets of, or of any material equity interest in, the Company or
any of the Company Subsidiaries or any merger or business combination with or
involving the Company or any of the Company Subsidiaries other than as
contemplated by this Agreement (each, an "ACQUISITION PROPOSAL") or furnish any
information regarding the Company or the Company Subsidiaries to any such
Person; provided, however, that the Board of Directors of the Company may, and
may authorize and permit its Representatives to, furnish or cause to be
furnished nonpublic information, subject to a binding confidentiality agreement
with the Company to such Person and may participate in such discussions and
negotiations directly or through its Representatives with such Person, if (i)
such Board of Directors has reasonably determined in good faith based upon the
written advice of counsel, which counsel is reasonably acceptable to Bancorp, to
the effect that the failure to provide such nonpublic information or participate
in such negotiations and discussions would constitute a violation of the Board's
fiduciary duties under Applicable Law and (ii) copies of all information so
furnished to such Person and the terms of such Person's Acquisition Proposal
(and any supplements or amendments thereto) are furnished promptly to Bancorp.
The Company, the Company Subsidiaries, and any of their respective Affiliates
and Representatives shall notify Bancorp immediately if any Acquisition Proposal
(including the terms thereof) is received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated with
any of the Company, the Company Subsidiaries, or any of the Affiliates or
Representatives of the foregoing. None of the Company, the Company Subsidiaries,
or any of their respective Affiliates and Representatives shall amend, modify,
waive or terminate, or otherwise release any Person from, any standstill,
confidentiality, or similar agreement or arrangement currently in effect with
respect to the Company or any of the Company Subsidiaries. Nothing contained in
this Agreement shall require the Company or the Company Board to take any action
or fail to take any action in violation of Applicable Laws.
SECTION 6.11. STOCK LISTING. Bancorp shall use its reasonable best
efforts to cause to be listed on the NASDAQ NMS, subject to official notice of
issuance, the shares of Bancorp Common Stock to be issued as Merger
Consideration.
SECTION 6.12. INTEGRATION; CONFORMING ENTRIES. (a) The Company and
First Savings, prior to the Closing, shall (i) consult and cooperate with
Bancorp regarding the implementation as of the Effective Time of those policies,
procedures, and systems (including computer stems) established by Bancorp for
its governance and operations and for that of the Bancorp Subsidiaries and not
otherwise referenced in Sections 6.12(b) and 6.12(c), including, without
limitation, policies, procedures, and systems pertaining to the accounting,
asset/liability management, audit, credit, human resources, treasury, and legal
functions, and (ii) at the request of Bancorp, conform the Company's and the
Company Subsidiaries' existing policies, procedures and systems to Bancorp's
policies, procedures, and systems or, in the absence of any existing Company or
Company Subsidiary policy, procedure, or system regarding any function,
introduce Bancorp's
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policies, procedures, and systems in respect thereof, in each case effective as
of the Effective Time, unless to do so would cause the Company or any of the
Company's Subsidiaries to be in violation of any Applicable Law.
(b) Notwithstanding that the Company believes that the Company
and the Company Subsidiaries have established all reserves and taken all
provisions for possible loan losses required by GAAP and Applicable Laws, the
Company recognizes that Bancorp may have adopted different loan, accrual, and
reserve policies (including loan classifications and levels of reserves for
possible loan losses). From and after the date of this Agreement to the Closing,
Bancorp and the Company shall consult and cooperate with each other with respect
to conforming as of the Effective Time the loan, accrual, and reserve policies
of Company and the Company Subsidiaries to those policies of Bancorp, as
specified in each case in writing to the Company and the Company Subsidiaries.
(c) Subject to Applicable Laws, the Company shall (i)
establish and take such reserves and accruals at such time as Bancorp shall
reasonably request to conform the Company's loan, accrual, and reserve policies
to Bancorp's policies, and (ii) establish and take such accruals, reserves, and
charges in order to implement such policies in respect of excess facilities and
equipment capacity, severance costs, litigation matters, write-off or write-down
of various assets, and other appropriate accounting adjustments, and to
recognize for financial accounting purposes such expenses of the Merger and
restructuring charges related to or to be incurred in connection therewith, in
each case at such times as are reasonably requested by Bancorp; provided,
however, that on the date such reserves, accruals, and charges are to be taken,
Bancorp shall certify to the Company that the conditions set forth in Sections
7.1, 7.2, and 7.3 have been satisfied or waived (except to the extent that any
waiting period associated therewith may then have commenced but not expired);
and provided further, however, that the Company shall not be required to take
any such action that is not consistent with GAAP and regulatory accounting
principles.
SECTION 6.13. TAX-FREE TREATMENT. Each of the parties hereto shall use
its reasonable best efforts to cause the Merger to constitute a "reorganization"
under Section 368(a) of the Code.
SECTION 6.14. AGREEMENTS OF AFFILIATES. The Company shall cause each
Person who may be at the Effective Time or was on the date hereof an "affiliate"
of the Company for purposes of Rule 145 under the Securities Act to execute and
deliver to the Company, no less than 45 days prior to the date of the meeting of
Company shareholders to approve the Merger, the written undertakings in the form
attached hereto as EXHIBIT A. On or prior to such delivery date, the Company
shall provide Bancorp with a letter specifying, to its knowledge, all of the
Persons who may be deemed to be "affiliates" of the Company under the preceding
sentence.
SECTION 6.15. STOCKHOLDER APPROVAL. (a) Each of Bancorp and the Company
shall call a meeting of its shareholders to be held as soon as practicable for
the purpose of voting upon and approving the Merger, this Agreement and the
transactions contemplated hereby.
(b) The Company Board shall submit for approval of Company
shareholders the matters to be voted upon in order to authorize the Merger and
hereby does and will recommend the Merger, this Agreement and the transactions
contemplated hereby to Company shareholders and will use its best efforts to
obtain any vote of Company shareholders that is necessary for the approval of
the Merger and the approval and adoption of this Agreement and consummation of
the transactions contemplated hereby, provided that Company shall have received
an opinion of Trident Securities, a Division of McDonald Investments, Inc., or
such other nationally recognized investment banking firm as is reasonably
acceptable to Bancorp and the Company, dated within five days of mailing of the
Proxy Statement to Company
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shareholders that the Exchange Ratio is fair to Company shareholders from a
financial point of view (Bancorp hereby agreeing that the terms of this proviso
are subject to the Company's using all reasonable efforts to obtain such opinion
from Trident Securities, a Division of McDonald Investments, Inc. and, if not
forthcoming therefrom within a reasonable period of time following a request
made therefor, to obtain such opinion from at least one such other reasonably
acceptable investment banking firm); provided further, however, that the Company
Board shall not be required to make such recommendation if it reasonably
determines in good faith not to so recommend based upon the written advice of
counsel, which counsel either is reasonably acceptable to Bancorp, to the effect
that to so recommend would constitute a violation of the Board's fiduciary
duties under Applicable Law.
(c) The Bancorp Board shall submit for approval of Bancorp
shareholders the matters to be voted upon in order to authorize the Merger and
hereby does and will recommend the Merger, this Agreement and the transactions
contemplated hereby to Bancorp shareholders and will use its best efforts to
obtain any vote of Bancorp shareholders that is necessary for the approval of
the Merger and the approval and adoption of this Agreement and consummation of
the transactions contemplated hereby provided that Bancorp shall have received
an opinion of JMP Financial, Inc., or such other nationally recognized
investment banking firm as is reasonably acceptable to Bancorp and the Company,
dated within five days of mailing of the Proxy Statement to Bancorp shareholders
that the Exchange Ratio is fair to Bancorp shareholders from a financial point
of view (the Company hereby agreeing that the terms of this proviso are subject
to the Bancorp's using all reasonable efforts to obtain such opinion from JMP
Financial, Inc. and, if not forthcoming therefrom within a reasonable period of
time following a request made therefor, to obtain such opinion from at least one
such other reasonably acceptable investment banking firm); provided further,
however, that the Bancorp Board shall not be required to make such
recommendation if it reasonably determines in good faith not to so recommend
based upon the written advice of counsel, which counsel either is reasonably
acceptable to the Company, to the effect that to so recommend would constitute a
violation of the Board's fiduciary duties under Applicable Law.
SECTION 6.16. INDEMNIFICATION. From and after the Effective Time,
Bancorp shall indemnify, defend and hold harmless, and advance expenses for, the
present and former officers and directors of the Company against all losses,
expenses, claims, damages or liabilities arising from any acts or omissions by
such person in his or her capacity as such occurring prior to the Effective
Time, including any of the foregoing arising out of the transactions
contemplated by this Agreement, to the fullest extent permitted or required
under the Articles of Incorporation and Bylaws of Bancorp, in each case, as in
effect on the date hereof. This Section shall be construed as an agreement as to
which the directors and officers of the Company and the Company Subsidiaries
referred to herein are intended to be third party beneficiaries and shall be
enforceable by such persons and their heirs and representatives.
SECTION 6.17. D&O INSURANCE. From and after the Effective Time, Bancorp
shall maintain in effect, for not less than three years, policies of directors
and officers liability insurance providing coverage with respect to matters
occurring prior to the Effective Time, which policies shall cover those present
and former officers and directors of the Company and the Company Subsidiaries
that are covered by and shall provide coverage that is no less beneficial, in
the aggregate, than those covered and that coverage provided by the current
policies of the Company; provided, however, that Bancorp shall not be required
to pay aggregate premiums for such insurance in excess of $50,000, but in such
case shall purchase as much coverage as possible for such amount.
SECTION 6.18. ENVIRONMENTAL REPORTS. Bancorp, at its expense, may order
within thirty (30) days of the Agreement a reputable environmental firm selected
by Bancorp (the "ENVIRONMENTAL FIRM") to perform a phase one environmental
investigation and/or asbestos survey on (i) each parcel of Company real
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estate ("Company Property") owned or leased by, (ii) each office and premise
used as a facility ("FACILITY PROPERTY") by, and (iii) each property that serves
as security for any Company real estate loan having an original principal
balance greater than $500,000 made by, the Company or any Company Subsidiary
(collectively, clauses (i), (ii) and (iii), the "CURRENT PROPERTY"); provided,
however, that Bancorp shall use reasonable efforts to cause the Environmental
Firm to complete any such investigation or survey as soon as reasonably
practicable, but not later than sixty (60) days after the date hereof. In
addition, Bancorp, at its expense, may cause the Environmental Firm to perform a
phase one environmental examination and/or asbestos survey on any Company
Property or Facility Property acquired, leased or used by the Company or any of
the Company Subsidiaries after the date hereof (together with the Current
Property, the "COMPANY PROPERTY"); provided, however, that Bancorp shall use
reasonable efforts to cause the Environmental Firm to complete any such
investigation or survey as soon as reasonably practicable, but not later than
fifteen (15) days after being notified by the Company of the acquisition, lease,
or commencement of use of such Company Property or Facility Property. If a phase
one report provided by the Environmental Firm recommends that a phase two
environmental survey be performed with respect to any parcel of the Company
Property, then Bancorp, at its expense, may cause the Environmental Firm to
perform a phase two environmental investigation of such Company Property;
provided, however, that Bancorp shall use reasonable efforts to cause the
Environmental Firm to complete any such phase two investigation as soon as
reasonably practicable, but not later than forty-five (45) days after the date
that such phase one report is received by Bancorp. Should the cost of taking all
remedial or other corrective actions and measures (i) required by Applicable Law
or (ii) recommended by the Environmental Firm in such phase one or phase two
report or reports in light of potentially serious life, health, or safety
concerns, in the aggregate, exceed the sum of $250,000, as reasonably estimated
by the Environmental Firm, or if the cost of such actions or measures cannot be
so reasonably estimated by the Environmental Firm to be such amounts or less
with any reasonable degree of certainty, Bancorp shall have the right pursuant
to Section 8.1(a)(vi) hereof, for a period of fifteen (15) Business Days
following receipt of such estimate or indication that the cost of such actions
and measures cannot be so reasonably estimated, to terminate this Agreement.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 7.1. MUTUAL CONDITIONS. The obligations of each party to this
Agreement to consummate the Merger shall be subject to the following conditions:
(a) No statute, rule, regulation, order, injunction, decree,
or other Applicable Law shall have been enacted, entered, issued, promulgated or
enforced by any Governmental Authority which prohibits, restricts or makes
illegal consummation of the Merger pursuant hereto (an "INJUNCTION") and which
remains in effect; and no proceeding initiated by any Governmental Authority
seeking an Injunction shall be pending;
(b) All consents, waivers, authorizations, and approvals
required from all Governmental Authorities to consummate Merger shall have been
obtained and shall remain in full force and effect and all waiting periods under
Applicable Law in respect thereof shall have expired or terminated;
(c) The Merger, this Agreement, and the transactions
contemplated hereby shall have been approved by the Bancorp shareholders and the
Company shareholders, in each case, in the manner required by Applicable Law;
(d) The SEC shall have declared the Registration Statement
effective; and on the Closing Date and at the Effective Time, no stop order
suspending the effectiveness of the Registration
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Statement shall have been issued and no proceedings for that purpose shall have
been initiated or then threatened by the SEC;
(e) The shares of Bancorp Common Stock, if any, to be issued
as Merger Consideration in the Merger shall have been approved for listing on
the NASDAQ NMS, subject to official notice of issuance;
(g) Bancorp and the Company shall have received an opinion of
Manatt, Phelps & Phillips, LLP, or of such other reasonably qualified Person as
Bancorp and the Company shall reasonably determine, in form and substance
reasonably acceptable to Bancorp and the Company, dated the Closing Date,
substantially to the effect that, on the basis of facts, representations and
assumptions set forth in such opinion which are consistent with the state of
facts existing at the Effective Time, (i) the Merger should constitute a
"reorganization" within the meaning of Section 368(a) of the Code and (ii) no
gain or loss should be recognized by Company shareholders who receive solely
Bancorp Common Stock in exchange for shares of Company Common Stock pursuant to
the Merger (except with respect to cash received in lieu of a fractional share
interest in Bancorp Common Stock). In rendering such opinion, counsel may
require and rely upon representations contained in certificates of officers of
the Company, Bancorp, and others.
SECTION 7.2. CONDITIONS TO BANCORP'S OBLIGATIONS. The obligations of
Bancorp to consummate the Merger shall be subject to the following conditions:
(a) The representations and warranties of the Company set
forth in this Agreement shall be true and correct in all material respects as of
the date of this Agreement and (except to the extent such representation and
warranty speaks as of an earlier date) as of the Closing Date as though made on
and as of the Closing Date;
(b) Each of the Company and the Company Subsidiaries shall
have performed and complied in all material respects with each agreement,
covenant, obligation, and condition required by this Agreement to be performed
or complied with by it at or prior to the Closing Date;
(c) The Company shall have delivered to Bancorp a certificate,
dated as of the Closing Date, signed on behalf of the Company by its Chief
Executive Officer and Chief Financial Officer, confirming the satisfaction of
the conditions contained in paragraphs (a) and (b) of this Section 7.2;
(d) Bancorp, at its expense, shall have received from Crowe,
Chizek and Company LLP letters dated the date of mailing the Prospectus and the
date of the Closing to the effect that: (i) with respect to the Company they are
independent accountants within the meaning of the Securities Act and the
Exchange Act, (ii) it is their opinion that the audited consolidated financial
statements of the Company included in or incorporated by reference into the
Prospectus comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and Exchange Act, (iii) on the
basis of such procedures as are set forth therein but without performing an
examination in accordance with generally accepted auditing standards nothing has
come to their attention which would cause them to believe that (A) any unaudited
interim financial statements appearing in the Prospectus do not comply as to
form in all material respects with the applicable accounting requirements of the
Securities Act and Exchange Act; (B) said financial statements are not stated on
a basis substantially consistent with that of the audited financial statements;
(C) (1) at the date of the latest available consolidated financial statements of
the Company and at a specific date not more than five (5) Business Days prior to
the date of each such letter there has been, except as specified in such letter,
any increase in the outstanding capital stock, or indebtedness for borrowed
money of the Company (other than deposits and Federal Home Loan Bank advances
with a maturity of one
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year or less) or any decrease in the shareholders' equity thereof as compared
with amounts shown in the latest statement of financial condition included in
the Prospectus, or (2) for the period from the date of the latest audited
financial statements of the Company included in or incorporated by reference
into the Prospectus to a specific date not more than five (5) Business Days
prior to the date of each such letter, there were, except as specified in such
letter, any decreases, as compared with the corresponding period in the
preceding year, in consolidated net income for the Company excluding expenses
associated with the Merger or any increase, as compared with the corresponding
period in the preceding year, in the provision for loan losses for the Company,
(iv) they have performed certain specific procedures as a result of which they
determined that certain information of an accounting, financial or statistical
nature included in the Prospectus and requested by Bancorp and agreed upon by
such accountants, which is expressed in dollars (or percentages obtained from
such dollar amounts) and obtained from accounting records which are subject to
the internal controls of the Company's accounting system or which has been
derived directly from such accounting records by analysis or computation is in
agreement with such records or computations made therefrom (excluding any
questions of legal interpretation), and (v) on the basis of such procedures as
are set forth in such letter, nothing came to their attention with respect to
the Company which would cause them to believe that the pro forma financial
statements had not been properly compiled on the pro forma basis described
therein; and
(e) Each Person who may be at the Effective Time or was on the
date of this Agreement an "affiliate" of the Company for purposes of Rule 145
under the Securities Act shall have executed and delivered to the Company, at
least 45 days prior to the date of the meeting of the Company shareholders to
approve the Merger, the written undertakings in the form attached hereto as
EXHIBIT A.
SECTION 7.3. CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations
of the Company to consummate the Merger shall be subject to the following
conditions:
(a) The representations and warranties of Bancorp set forth in
this Agreement shall be true and correct in all material respects as of the date
of this Agreement and (except to the extent such representation and warranty
speaks as of an earlier date) as of the Closing Date as though made on and as of
the Closing Date;
(b) Each of Bancorp and the Bancorp Subsidiaries shall have
performed and complied in all material respects with each agreement, covenant,
obligation, and condition required by this Agreement to be performed or complied
with by it at or prior to the Closing Date; and
(c) Bancorp shall have delivered to Bancorp and the Company a
certificate, dated as of the Closing Date, signed on behalf of Bancorp by its
Chief Executive Officer and Chief Financial Officer, confirming the satisfaction
of the conditions contained in paragraphs (a) and (b) of this Section 7.3.
ARTICLE VIII
TERMINATION
SECTION 8.1. TERMINATION. (a) This Agreement may be terminated at any
time prior to the Effective Time, whether before or after approval and adoption
of this Agreement by the Bancorp shareholders or the Company shareholders, as
follows:
(i) by written consent of the parties hereto;
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(ii) by Bancorp or the Company if a condition to the
terminating party's obligation to close set forth in Article VII cannot be
satisfied prior to the date set forth in Section 8.1(a)(iv) below unless caused
by the breach of any covenant or agreement under this Agreement (x) by Bancorp
or the Bank, in the case of a termination by the Company, or (y) by the Company
or First Savings, in the case of termination by Bancorp;
(iii) by Bancorp or the Company (provided that none
of the terminating party or any of its Affiliates is not then in material breach
of any representation, warranty, covenant, or other agreement contained herein)
if there shall have been a material breach of any of the covenants or agreements
or any of the representations or warranties set forth in this Agreement on the
part of Bancorp or the Bank, in the case of a termination by the Company, or on
the part of the Company or First Savings, in the case of a termination by
Bancorp, which breach is not cured within thirty (30) days following written
notice given by the terminating party to the party committing such breach, or,
by its nature, cannot be cured prior to the date set forth in Section 8.1(a)(iv)
below, and which breach would entitle the terminating party to not consummate
the Merger pursuant to Article VII;
(iv) by Bancorp or the Company, if the Closing has
not occurred on or before March 31, 2000 (provided that the right to terminate
this Agreement under this Section 8.1(a)(iv) shall not be available to any party
whose failure or whose Affiliate's failure to perform any covenant of obligation
under this Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date);
(v) by Bancorp if the Company Board shall withdraw,
modify or change in a manner adverse to Bancorp its recommendation with respect
to the Merger, this Agreement, or the transactions contemplated hereby, or by
the Company if the Bancorp Board shall withdraw, modify or change in a manner
adverse to the Company its recommendation with respect to the Merger, this
Agreement, or the transactions contemplated hereby;
(vi) by Bancorp pursuant to and in accordance with
the provision of the last sentence of Section 6.18.
(b) The termination of this Agreement shall be effectuated by
the delivery by the party terminating this Agreement to the other party of a
written notice of such termination. If this Agreement terminates pursuant to
this Section 8.1, it shall become null and void and have no further force or
effect, except as provided in Section 8.2.
SECTION 8.2. SURVIVAL AFTER TERMINATION. If this Agreement is
terminated in accordance with Section 8.1 hereof and the transactions
contemplated hereby are not consummated, this Agreement shall become void and of
no further force and effect, without any liability on the part of any party
hereto, except for the provisions of Sections 6.5 and 6.9. Notwithstanding the
foregoing, nothing in this Section 8.2 shall relieve any party to this Agreement
of liability for a willful breach of any provision of this Agreement.
SECTION 8.3. TERMINATION FEE. If, prior to the Effective Time, this
Agreement is terminated by the Company and within 12 months of the date of
termination, the Company agrees to be acquired by, merged, or otherwise combined
with any third party, in consideration for Bancorp's expenditure of time and
money in connection with the drafting of this Agreement and the actions of
Bancorp connected hereto, the Company shall pay Bancorp the amount of $250,000.
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ARTICLE IX
MISCELLANEOUS
SECTION 9.1. AMENDMENTS; WAIVER. This Agreement may be amended by the
parties hereto, by action taken by or on behalf of their respective Boards of
Directors, at any time before or after approval of this Agreement by the Bancorp
shareholders or Company shareholders; provided, however, that after any such
approval by the Bancorp shareholders or Company shareholders, no such amendment
shall be made which under Applicable Law would require further approval or
authorization by the Bancorp shareholders or Company shareholders, without
obtaining such further approval or authorization. Notwithstanding the foregoing,
this Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto. Any agreement on the part of any party to
waive (i) any inaccuracies in the representations and warranties contained
herein made by any other party or in any document, certificate or writing
delivered pursuant hereto by any other party, or (ii) compliance with any of the
agreements, covenants, or conditions contained herein, shall be valid only if
set forth in an instrument in writing signed on behalf of such party. No such
waiver shall constitute a waiver of, or estoppel with respect to, any subsequent
or other inaccuracy, breach, or failure to strictly comply with the provisions
of this Agreement. The failure of any party at any time or times to enforce or
require performance of any provision hereof shall in no way operate as a waiver
or affect the right of such party at a later time to enforce the same.
SECTION 9.2. ENTIRE AGREEMENT. This Agreement (including Disclosure
Schedules, Annexes, Exhibits, certificates, lists and documents referred to
herein, and any documents executed by the parties simultaneously herewith or
pursuant hereto,) constitute the entire agreement of the parties hereto and
supersede all prior agreements and understandings, written and oral, among the
parties with respect to the subject matter hereof.
SECTION 9.3. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. No investigation by the parties hereto made heretofore or hereafter
shall affect the representations and warranties of the parties which are
contained herein and each such representation and warranty shall survive such
investigation. The representations, warranties, covenants, and agreements of the
parties contained herein shall not survive the Effective Time, except for those
covenants and agreements which by their terms contemplate performance after the
Effective Time.
SECTION 9.4. INTERPRETATION. When a reference is made in this Agreement
to Sections, Annexes, Exhibits, or Disclosure Schedules, such reference shall be
to a Section of or Annex or Exhibit or Disclosure Schedule to this Agreement
unless otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation." The phrases "the date of this
Agreement," "the date hereof" and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to the date set forth in the first
paragraph of this Agreement.
SECTION 9.5. SEVERABILITY. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable in any
jurisdiction, the provision shall be interpreted to be only so broad as is
enforceable in that jurisdiction.
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SECTION 9.6. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given (a) upon delivery in person, (b)
upon transmission by telecopy (with written confirmation), (c) upon receipt if
mailed by registered or certified mail (return receipt requested), or (d) on the
business date after being delivered to a reputable overnight delivery service,
in each case, to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
If to Bancorp or the Bank:
Peoples Bancorp
212 West 7th Street
Auburn, Indiana 46706
Attention: Mr. Maurice F. Winkler, III, President and
Chief Operating Officer
Telecopy:
With a copy to:
Barnes & Thornburg
11 South Meridian Street
Indianapolis, Indiana 46204
Attention: Claudia Swhier, Esq.
Telecopy: 317-231-7433
If to the Company or First Savings:
Three Rivers Financial Corporation
123 Portage Avenue
Three Rivers, Michigan 49093
Attention: Mr. G. Richard Gatton, President and
Chief Executive Officer
Telecopy:
With copies to:
Manatt, Phelps & Phillips, LLP 1501 M Street, N.W.
Suite 700
Washington, D.C. 20005
Attention: Edward L. Lublin, Esq.
Telecopy: 202-463-4394
SECTION 9.7. BINDING EFFECT; PERSONS BENEFITING; NO ASSIGNMENT. Subject
to the last sentence of this Section 9.7, this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns. Except for the provisions of Sections 6.16 and
6.17, nothing in this Agreement is intended or shall be construed to confer upon
any Person other than the parties hereto and their respective successors and
permitted assigns any right, remedy, or claim under or by reason of their
Agreement or any part hereof or to create any third party beneficiaries. This
Agreement may not be assigned by any of the parties hereto without the prior
written consent of each of the other parties hereto.
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SECTION 9.8. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same agreement, it being understood
that all of the parties need not sign the same counterpart.
SECTION 9.9. GOVERNING LAW. This agreement, the legal relations between
the parties and the adjudication and the enforcement thereof, shall be governed
by and interpreted and construed in accordance with the substantive laws of the
State of Indiana, without regard to applicable choice of law provisions thereof.
SECTION 9.10. SPECIFIC PERFORMANCE. The parties hereto each acknowledge
that, in view of the uniqueness of its business and the transactions
contemplated by this Agreement, each party would not have an adequate remedy at
law for money damages in the event that the covenants to be performed hereunder
have not been performed in accordance with their terms, and therefore agree that
the other parties shall be entitled to specific enforcement of the terms hereof
in addition to any other equitable remedy to which such parties may be entitled.
SECTION 9.11. WAIVER OF JURY TRIAL. THE PARTIES TO THIS AGREEMENT AGREE
TO WAIVE ANY RIGHT TO A JURY TRIAL AS TO ALL DISPUTES HEREUNDER.
IN WITNESS WHEREOF the parties have hereunto caused this Agreement to
be duly executed as of the date first above written.
PEOPLES BANCORP
By: /s/ Roger J. Wertenberger
-----------------------------------
Name: Roger J. Wertenberger
Title: Chairman
THREE RIVERS FINANCIAL CORPORATION
By: /s/ G. Richard Gatton
-----------------------------------
Name: G. Richard Gatton
Title: President and Chief
Executive Officer
<PAGE>
ANNEX B
JMP FINANCIAL, INC.
- -------------------
753 GRAND MARAIS
GROSSE POINTE PARK, MI 48230
TEL/FAX (313) 824-1711
October 16, 1999
Board of Directors
Peoples Bancorp
212 West 7th Street
Auburn, Indiana 46706
Gentlemen:
We have examined the Plan of Reorganization and Agreement and Plan of
Merger (the "Agreement") by and among Peoples Bancorp ("PFDC"), an Indiana
corporation, and Three Rivers Financial Corporation ("THR"), a Delaware
corporation, dated September 21, 1999, by which PFDC will acquire all the
outstanding shares of THR in exchange for shares of PFDC (the "Exchange").
The terms of the transaction contemplated by the Agreement provide that
each share of THR common stock issued and outstanding as of the closing date of
this Merger (the "Effective Date") shall be exchanged, pursuant to the Exchange
Ratio specified in the Agreement, into shares of PFDC. You have requested our
opinion as to the fairness, from a financial point of view, of the Exchange to
the shareholders of PFDC (the "Shareholders").
JMP Financial, Inc. ("JMP"), as a regular part of its investment
banking business, is engaged in the valuation of the securities of commercial
and savings banks as well as the holding companies of commercial and savings
banks in connection with mergers, acquisitions, and divestitures, and for other
purposes.
In connection with this engagement and rendering this opinion, we
reviewed materials deemed necessary and appropriate by us under the
circumstances, including;
- Audited consolidated financial statements of THR and PFDC for the
three years ended June 30, 1999 and September 30, 1998,
respectively;
- Unaudited financial statements of PFDC for the nine months ended
June 30, 1999 and internal financial reports of PFDC and THR as of
August 31, 1999;
- Other publicly available information concerning THR and PFDC;
- Publicly available information with respect to certain other bank
holding companies, which we deemed, appropriate, including
competitors of THR and PFDC;
- Publicly available information with respect to the nature and
terms of certain other thrift merger and acquisition transactions
which we consider relevant;
- The Agreement;
- Reviewed and discussed with representatives of management of THR
its large or over 60 day delinquent loans;
<PAGE>
Page Two
Peoples Bancorp
October 16, 1999
- Reviewed and discussed with representatives of management of THR
and PFDC, certain information of a business and financial nature
regarding THR and PFDC, including financial forecast and related
assumptions, provided by THR or PFDC or otherwise publicly
available; and
- Reviewed certain historical market prices and trading volumes of
THR and PFDC common stock.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of all of the financial statements and other
information reviewed by us for the purposes of the opinion expressed herein. We
have not made an independent evaluation or appraisal of the assets and
liabilities of THR or PFDC or any of its subsidiaries and we have not been
furnished with any such evaluation or appraisal. We have also assumed that there
has been no material change in THR's or PFDC's assets, financial condition,
results of operations, business, or prospects since the date of the last
financial statements made available to us for THR and PFDC, respectively. This
opinion is necessarily based on economic, market and other conditions in effect
on, and the information made available to us as of, the date hereof. It should
be understood that subsequent developments may affect the opinion and that JMP
does not have any obligation to update, revise or reaffirm it.
The opinion expressed herein is being rendered to the Board of
Directors of PFDC solely for its use in evaluation of the proposed transaction,
assuming the transaction is consummated upon the terms set forth in the
Agreement. The opinion is not intended to confer rights or remedies upon any
stockholder of THR or PFDC or any person other than PFDC's Board of Directors.
Based upon the terms and conditions of the Exchange and the current
market value and further upon such other considerations as we deem relevant, JMP
is, subject to the foregoing, of the opinion on the date hereof, that the
consideration to be paid to the shareholders of THR in the Exchange is fair from
a financial point of view to the Shareholders of PFDC, if the transaction
contemplated by the Agreement is in fact consummated pursuant to the terms
thereof.
Sincerely,
/s/John Palffy
John Palffy
President
JMP Financial, Inc.
<PAGE>
ANNEX C
TRIDENT SECURITIES
A DIVISION OF MCDONALD INVESTMENTS INC.
4601 SIX FORKS ROAD, SUITE 400
RALEIGH, NORTH CAROLINA 27609
TELEPHONE (919) 781-8900
FACSIMILE (919) 787-1670
September 21, 1999
Board of Directors
Three Rivers Financial Corporation
123 Portage Avenue
Three Rivers, MI 49093
Attention: Mr. Richard Gatton
Chief Executive Officer
Members of the Board:
You have requested our opinion with respect to the fairness, from a
financial point of view, as of the date hereof, to the holders of the common
stock, par value $0.01 per share ("Three Rivers Common"), of Three Rivers
Financial Corporation, ("Three Rivers"), of the Exchange Ratio, as set forth in
the Plan Of Reorganization And Agreement And Plan Of Merger (the "Agreement"),
between Three Rivers and Peoples Bancorp ("Peoples").
The Agreement provides for the merger (the "Merger") of Three Rivers with and
into Peoples Bancorp, pursuant to which, among other things, at the Effective
Time (as defined in the Agreement), each outstanding share of Three Rivers
Common, other than shares held in the treasury of Three Rivers, will be
converted into the right to receive 1.08 shares of the common stock, par value
$1.00 per share ("Peoples Common") of Peoples Bancorp, as set forth in the
Agreement. The terms and conditions of the Merger are more fully set forth in
the Agreement.
Trident Securities, a Division of McDonald Investments Inc., as part of
its investment banking business, is customarily engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes.
<PAGE>
Board of Directors
September 21, 1999
Page 2
We have acted as Three Rivers' financial advisor in connection with,
and have participated in certain negotiations leading to, the Agreement. In
connection with rendering our opinion set forth herein, we have among other
things:
(i) Reviewed the Agreement and exhibits;
(ii) Reviewed certain publicly available financial statements of Three
Rivers and Peoples;
(iii) Reviewed certain other public and non-public information,
primarily financial in nature, relating to the respective
businesses, earnings, assets and prospects of Three Rivers and
Peoples provided to us or publicly available;
(iv) Participated in meetings and telephone conferences with members
of senior management of Three Rivers and Peoples concerning the
financial condition, business, assets, financial forecasts and
prospects of the respective companies, as well as other matters
we believed relevant to our inquiry;
(v) Reviewed certain stock market information for Three Rivers Common
and Peoples Common, and compared it with similar information for
certain companies, the securities of which are publicly traded;
(vi) Compared the results of operations and financial condition of
Three Rivers and Peoples with that of certain companies, which we
deemed to be relevant for purposes of this opinion;
(vii) Reviewed the financial terms, to the extent publicly available,
of certain acquisition transactions, which we deemed to be
relevant for purposes of this opinion; and
(ix) Performed such other reviews and analyses as we have deemed
appropriate.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have relied upon the accuracy and
completeness of the representations, warranties and covenants of Three Rivers
and Peoples contained in the Agreement. We have not been engaged to undertake,
and have not assumed any responsibility for, nor have we conducted, an
independent investigation or verification of such matters. We have not been
engaged to and we have not conducted a physical inspection of any of the assets,
properties or facilities of either Three Rivers or Peoples, nor have we made or
obtained or been furnished with any independent valuation or appraisal of any of
such assets, properties or facilities or any of the liabilities of
<PAGE>
Board of Directors
September 21, 1999
Page 3
either Three Rivers or Peoples. With respect to financial forecasts used in our
analysis, we have assumed that such forecasts have been reasonably prepared or
reviewed by management of Three Rivers and Peoples, as the case may be, on a
basis reflecting the best currently available estimates and judgments of the
management of Three Rivers and Peoples, as to the future performance of Three
Rivers, Peoples, and Three Rivers and Peoples combined, as the case may be. We
have not been engaged to, and we have not, assumed any responsibility for, nor
have we conducted any independent investigation or verification of such matters,
and we express no view as to such financial forecasts or the assumptions on
which they are based. We have also assumed that all of the conditions to the
consummation of the Merger, as set forth in the Agreement, including the
tax-free treatment of the Merger to the holders of Three Rivers Common, would be
satisfied and that the Merger would be consummated on a timely basis in the
manner contemplated by the Agreement.
We will receive a fee for our services as financial advisor to Three
Rivers, a substantial portion of which is contingent upon closing of the Merger.
We will also receive a fee for our services in rendering this opinion.
In the ordinary course of business, we may actively trade securities of
Peoples and Three Rivers for our own account and for the accounts of customers
and accordingly, we may at any time hold a long or short position in such
securities.
This opinion is based on economic and market conditions and other
circumstances existing on, and information made available as of, the date
hereof. In addition, our opinion is, in any event, limited to the fairness, as
of the date hereof, from a financial point of view, of the Exchange Ratio, to
the holders of Three Rivers Common, and does not address the underlying business
decision by Three Rivers' Board of Directors to effect the Merger, does not
compare or discuss the relative merits of any competing proposal or any other
terms of the Merger, and does not constitute a recommendation to any Three
Rivers shareholder as to how such shareholder should vote with respect to the
Merger. This opinion does not represent an opinion as to what the value of Three
Rivers Common or Peoples Common may be at the Effective Time of the Merger or as
to the prospects of Three Rivers' business or Peoples' business.
This opinion is directed to the Board of Directors of Three Rivers and
may not be reproduced, summarized, described or referred to or given to any
other person without our prior written consent. Notwithstanding the foregoing,
this opinion may be included in the proxy statement to be mailed to the holders
of Three Rivers Common in connection with the Merger, provided that this opinion
will be reproduced in such proxy statement in full, and any description of or
reference to us or our actions, or any summary of the opinion in such proxy
statement, will be in a form reasonably acceptable to us and our counsel.
<PAGE>
Board of Directors
September 21, 1999
Page 4
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the Exchange Ratio is fair to the holders of Three Rivers
Common from a financial point of view.
Very truly yours,
/s/ Trident Securities
TRIDENT SECURITIES
A DIVISION OF McDONALD INVESTMENTS INC.
<PAGE>
Annex D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
For Annual and Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to ________
Commission File Number 0-18991
PEOPLES BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1811284
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
212 West 7th Street, Auburn, Indiana 46706
- ------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 925-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [X ]
Aggregate market value of voting stock held by non-affiliates of the
registrant, as of December 28, 1999: $43,769,891.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of December 28, 1999:
3,105,962 shares of Common Stock, par value $1.00 per share
Documents Incorporated by Reference:
Portions of the definitive Proxy Statement/Prospectus (Part III) and the
Annual Report to Stockholders for the year ended September 30, 1999 (Parts II
and IV).
<PAGE>
PART I
Item 1. Business
General
Peoples Bancorp (the "Company") is an Indiana corporation organized in
October 1990 to become the thrift holding company for Peoples Federal Savings
Bank of DeKalb County (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 its seven full-service offices located in Avilla, Columbia City,
Garrett, Kendallville, LaGrange, and Waterloo, 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, 1999, the Company had repurchased 233,925
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. During 1999, the Bank added agricultural and commercial lending officers
to its staff. Since these loans typically yield higher returns than traditional
mortgage lending and are for shorter terms, it is expected that these loans will
assist the Bank in managing its interest rate risk, and increase overall
profitability. The Bank provides these services through a branch network
comprised of eight 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.
<PAGE>
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 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. The Bank competes for real estate loans with
commercial banks, mortgage banking companies, insurance companies, and other
institutional lenders. The most direct competition for savings comes 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
as well as money market mutual funds. The principal methods generally used by
the Bank to attract deposit accounts include: competitive interest rates,
advertising, providing a variety of financial services, convenient office
locations, flexible hours for the public, and promotions for opening or adding
to deposit accounts.
Net Interest Income
Net interest income increases during periods when the spread is widened
between the Bank's weighted average rate at which new loans are originated and
the weighted average cost of interest-bearing liabilities. The Bank's ability to
originate loans is affected by market factors such as interest rates,
competition, consumer preferences, the supply of and demand for housing, and the
availability of funds.
The Bank has supplemented its interest income through purchases of
investments when appropriate. This activity generates positive interest rate
spreads on large principal balances with minimal administrative expense.
<PAGE>
Interest Rate and Volume of Interest-Related Assets and Liabilities
Both changes in rate and changes in the composition of the Bank's
interest-earning assets and interest-bearing liabilities can have a significant
effect on net interest income.
For information regarding the total dollar amount of interest income from
interest-earning assets, the average yields, the amount of interest expense from
interest-bearing liabilities and the average rate, net interest income, interest
rate spread, and the net yield on interest-earning assets, refer to page 12 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's 1999 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, 1999, 1998, and 1997 refer
to page 9 of Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Company's 1999 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, 1999, 1998, and 1997 refer to page 13 of Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's 1999
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
145,000 and consists of a diversified industrial economic base with an emphasis
on the production sector that includes major manufacturers of international
scope. Moreover, the distribution sector, primarily in the wholesale and retail
trades, constitutes a substantial portion of the area's economy, both in terms
of product mix, sales receipts, and employment. The most rapid growth has
occurred in the manufacturing sector, especially in the production of automotive
and electronics products, and in the service sector with respect to packaging,
warehousing, and distribution services.
Lending Activities
General
The Bank has attempted to emphasize investments in adjustable-rate
residential mortgages and consumer loans in its market area. In order to lessen
its risk from interest rate fluctuations, the Bank emphasizes the origination of
interest rate sensitive loan products, such as one-year adjustable-rate mortgage
loans, and prime plus equity loans. However, during the recent low interest rate
market, customers preferred fixed rate products. The Bank reacted to this trend
by offering a new mortgage product of a seven-year fixed rate loan, which
converts to a one-year adjustable product at the end of the seventh year. In
this way, the Bank offered a fixed rate product to satisfy the customer demand,
but is not locked into low interest rates for a long period of time. These loans
show on the various charts in this 10-K as fixed rate product, since according
to regulatory treatment, they are considered fixed rate until the repricing
period is below five years. Since this was a new product last year, none of
these loans is currently considered adjustable rate for regulatory reporting
purposes.
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.
<PAGE>
The Bank also offers adjustable-rate mortgage loans. Currently, these loans
generally have interest rates that adjust (up or down) every year. Generally,
these loans provide for a maximum adjustment of 6% over the life of the 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 adjustable-rate mortgage loans assist the Bank in
maintaining 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, 1999, the Bank originated
$127,435,000 of residential loans of which $79,917,000 was five- to 30-year
fixed-rate mortgages and $47,518,000 was 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 is the amounts and percentages of fixed-rate and
adjustable-rate loans (which include consumer loans) in the Bank's portfolio at
September 30, 1999, 1998, and 1997 (Dollars in thousands).
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- -------------------
Fixed Adjustable Fixed Adjustable Fixed Adjustable
-------- ----------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
$259,133 $42,443 $225,270 $46,740 $180,631 $59,025
85.9% 14.1% 82.8% 17.2% 75.4% 24.6%
</TABLE>
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, 1999, the average
contractual maturity of the Bank's portfolio of fixed-rate loans was 10 years
and 3 months, and 15 years and 3 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
The Bank also originates commercial real estate loans. From September 30,
1998, to September 30, 1999, commercial real estate loans increased from
$10,411,049 to $13,167,996, with the percentage of commercial real estate loans
to total loans increasing from 3.80% to 4.30%. 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.
<PAGE>
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 that 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 personally guarantee repayment of the loan.
Consumer and Other Loans
Federal laws and regulations permit a federally-chartered savings
institution to make secured and unsecured consumer loans including home equity
loans (loans secured by the equity in the borrower's residence, but not
necessarily for the purpose of improvement), home improvement loans (loans
secured by a residential second mortgage), loans secured by deposit accounts,
educational loans (insured by the State Student Loan Commission of Indiana), and
credit card loans (unsecured). The Bank offers all of these types of loans and
is currently emphasizing home equity loans to take advantage of the adjustable
interest rate feature of this loan versus the mortgage product. These loans also
carry a higher rate of interest than conventional mortgages, thereby increasing
the profit potential while reducing the interest rate risk.
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, 1999. The estimated maturity reflects
contractual terms at September 30, 1999. 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.
<PAGE>
<TABLE>
<CAPTION>
Due in One Year Due After
One Year Through Five
or Less Five Years Years Total
--------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Type of Loan:
Construction loans --
residential real estate $ 6,998 $ - $ - $ 6,998
Real estate loans:
Mortgage-residential 34,294 56,385 169,917 260,596
Commercial 866 9,256 3,046 13,168
Installment loans --
consumer 11,343 5,376 744 17,463
commercial 1,424 1,825 102 3,351
--------- ---------- ---------- ----------
Total $54,925 $72,842 $173,809 $301,576
========= ========== ========== ==========
</TABLE>
The following table sets forth the total amount of loans due after one year
from September 30, 1999, which have a fixed rate or an adjustable rate. (Dollars
in thousands)
<TABLE>
<CAPTION>
Loans Due
October 1, 2000 and thereafter
- --------------------------------------
Fixed Adjustable Total at September 30, 1999
- ------------- ----------------------- -----------------------------------------
<S> <C> <C>
$162,474 $84,177 $246,651
</TABLE>
Loan Portfolio Composition
The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated. The table includes a reconciliation of
total net loans receivable, after consideration of undisbursed Portion of loans,
deferred loan fees and discounts, and allowance for losses on loans.
<PAGE>
<TABLE>
<CAPTION>
At September 30
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------
TYPE OF LOAN AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
----------- -------- ----------- ------- ---------- ------- ---------- ------- ---------- -------
Residential: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single family units $ 265,992 88.2% $ 243,858 89.7% $ 217,528 90.8% $ 207,028 91.0% $203,211 91.2%
2-4 family units 1,603 0.5% 1,610 0.6% 1,541 0.6% 1,234 0.5% 1,008 0.4%
Over 4 family units 2,525 0.8% 2,687 1.0% 2,813 1.2% 2,769 1.2% 1,738 0.8%
Commercial real estate 9,392 3.1% 6,425 2.4% 4,269 1.8% 4,006 1.8% 3,696 1.7%
Land acquisition and
development 1,251 0.4% 1,299 0.5% 769 0.3% 702 0.3% 838 0.4%
Consumer and other loans 19,861 6.6% 15,157 5.6% 11,915 5.0% 10,959 4.8% 11,337 5.1%
Loans on deposits 952 0.3% 973 0.4% 821 0.3% 877 0.4% 901 0.4%
----------- -------- ----------- ------- ---------- ------- ---------- ------- ---------- -------
301,576 100.0% 272,009 100.0% 239,656 100.0% 227,575 100.0% 222,729 100.0%
----------- -------- ----------- ------- ---------- ------- ---------- ------- ---------- -------
Less:
Undisbursed portion
of loans 2,307 3,081 2,444 2,717 2,237
Deferred loan fees and
discounts 1,394 1,323 1,070 959 916
----------- ----------- ---------- ---------- ----------
3,701 4,404 3,514 3,676 3,153
----------- ----------- ---------- ---------- ----------
Total loans receivable 297,875 267,605 236,142 223,899 219,576
Allowance for losses
on loans 1,005 947 887 888 912
----------- ----------- ---------- ---------- ----------
Net loans $ 296,870 $ 266,658 $ 235,255 $ 223,011 $218,664
=========== =========== ========== ========== ==========
</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. The loan
committee of the Bank can approve residential and commercial loans ranging up to
$200,000. The Bank's Board of Directors must approve loans exceeding $200,000.
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
<PAGE>
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.
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. A consumer loan officer must
approve consumer loans. 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:
<TABLE>
<CAPTION>
Years Ended September 30
-----------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C>
Mortgage loans originated for the purpose of:
Construction-commercial $ - $ 1,425 -
Construction-residential 10,080 8,386 9,120
Purchase/refinance-commercial 2,325 2,324 618
Purchase/refinance-residential 92,772 82,553 53,374
Consumer and other loans originated 22,258 14,463 9,462
--------- --------- ---------
Total loans originated 127,435 109,151 72,574
--------- --------- ---------
Loans purchased - - -
--------- --------- ---------
127,435 109,151 72,574
--------- --------- ---------
Loan credits:
Principal repayments 97,440 77,980 60,368
--------- --------- ---------
Other:
Provision for losses on loans 89 75 50
Amortization of loan fees (426) (380) (271)
Loan foreclosures, net 121 73 183
--------- --------- ---------
(216) (232) (38)
--------- --------- ---------
Total credits, net 97,224 77,748 60,330
--------- --------- ---------
Net increases in mortgage and other
loans receivable, net $ 30,211 $ 31,403 $ 12,244
========= ========= =========
</TABLE>
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
<PAGE>
amortized, generally by the interest method, over the estimated life of the loan
as an adjustment of yield.
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 there from 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>
<CAPTION>
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
------- ------ -------- ------ ------ -------- ------ ------ --------
Real estate: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One to four 15 $587 0.22% 2 $ 75 0.03% 23 $454 0.17%
family
Consumer 6 21 0.10% 5 28 0.13% 5 27 0.13%
------- ------ ------ ------ ----- -------
Total 21 $608 0.20% 7 $103 0.03% 28 $481 0.16%
======= ====== ====== ====== ===== =======
</TABLE>
The following table sets forth the Bank's nonperforming assets at
the dates indicated:
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $474 $729 $658 $ 814 $765
Loans past due 90 days and
still accruing 64 23 64 88 99
------ ------ ------ -------- ------
538 752 722 902 864
Real estate owned, net
of allowance - - - 110 47
------ ------ ------ -------- ------
Total nonperforming
assets $538 $752 $722 $1,012 $911
====== ====== ====== ======== ======
</TABLE>
Consumer loans are placed on n 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.
Interest income that would have been recognized for the year ended September
30, 1999, if nonaccrual loans had been current in accordance with their original
terms, approximated $39,000. Interest income recognized on such loans for the
year ended September 30, 1999, approximated $23,000. At September 30, 1999, the
Bank had no loans that were deemed impaired in accordance with Statement of
Financial Accounting Standards No. 114.
Federal regulations require savings associations to review their assets on
a regular basis and to classify them as: special mention; substandard; doubtful
and loss. Loans classified as special mention, are loans which currently do not
expose the Bank to an unusual risk of loss but based on information available
require the attention of management. This classification usually includes loans
secured by unusual collateral, loans with documentary items that 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, 1999, loan balances were classified by the Bank as
follows:
<PAGE>
<TABLE>
<S> <C>
Loss $ 26,140
Doubtful -0-
Substandard 939,705
Special Mention 590,433
</TABLE>
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, 1999, the allowances for losses on loans and real
estate owned were $1,005,119 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.
<TABLE>
<CAPTION>
September 30,
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
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 $ 869 88.7% $742 91.5% $726 91.7% $594 91.8% $649 92.2%
Commercial Real Estate Loans 76 4.4% 121 2.6% 16 3.0% 15 3.0% 13 2.0%
Consumer Loans 60 6.9% 84 5.9% 37 5.3% 47 5.2% 64 5.8%
Unallocated - - 107 231 186
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $1,005 100.0% $947 100.0% $886 100.0% $887 100.0% $912 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following table is a summary of activity in the Bank's allowance for
loan losses for the periods indicated.
<PAGE>
<TABLE>
<CAPTION>
Summary of Loan Loss Experience
Years ended September 30,
-------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Balance of loan loss allowance at
beginning of year $ 947 $886 $887 $912 $1,034
Charge-offs
Residential - - - - 153
Commercial real estate - - - - -
Commercial - - - - -
Consumer 53 47 84 55 47
------- ------ ------ ------ -------
Total Charge-offs 53 47 84 55 200
------- ------ ------ ------ -------
Recoveries
Residential - - - - -
Consumer 22 33 33 21 28
------- ------ ------ ------ -------
Total Recoveries 22 33 33 21 28
------- ------ ------ ------ -------
Net Charge-offs (Recoveries) 31 14 51 34 172
Provision for loan losses 89 75 50 9 50
------- ------ ------ ------ -------
Balance of loan loss allowance
at end of year $1,005 $947 $886 $887 $ 912
======= ====== ====== ====== =======
Ratio of net charge-offs to
average loans outstanding 0.01% 0.01% 0.02% 0.02% 0.08%
</TABLE>
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, 1999, the Bank's ratio of liquid assets to total assets was 6.0%,
which exceeds the regulatory requirement.
The carrying values of the Bank's investment securities, including its
liquid assets, as of the dates indicated are presented in the following table.
<PAGE>
<TABLE>
<CAPTION>
At September 30,
----------------------------------
1999 1998 1997
--------- ---------- -----------
<S> <C> <C> <C>
Interest-bearing deposits and (Dollars in thousands)
certificates of deposit (1) $ 834 $ 718 $ 8,715
U.S. government and federal
agency securities
Held to maturity - 4,000 8,000
Available for sale 7,139 11,287 19,822
Mortgage backed securities
Held to Maturity 258 372 499
Stock in FHLB of Indianapolis 2,474 2,218 2,062
Other
Held to maturity 610 696 758
Available for sale(2) 9,793 10,591 8,646
--------- --------- ---------
Total investments $21,108 $29,882 $48,502
========= ========= =========
</TABLE>
- ------------------------------------------------
(1) In FHLB of Indianapolis at September 30, 1999; In insured certificates of
deposit at September 30, 1998; In FHLB of Indianpolis ($7,739) and insured
certificates of deposit ($976) at September 30, 1997;
(2) Van Kampen Prime Income Fund $3,677, Van Kampen Senior Income Trust $1,617,
State and Municipal obligations $4,500 at September 30, 1999; Van Kampen
Prime Income Fund $3,784, Van Kampen Senior Income Trust $1,677, State and
Municipal obligations $5,130 at September 30, 1998; Van Kampen Prime Income
Fund $2,564, State and Municipal obligations $6,082 at September 30, 1997.
The following table sets forth information regarding the maturity
distribution of investment securities at September 30, 1999, and the weighted
average yield on those securities.
<TABLE>
<CAPTION>
At September 30, 1999
-------------------------------------------------------------
Available for Sale Held to Maturity
---------------------------------------------- --------------
(Dollars in thousands) Weighted Approximate Weighted Approximate
Amortized Average Fair Amortized Average Fair
Maturity Distribution at September 30: Cost Yield Value Cost Yield Value
--------- -------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 1,047 5.28% $ 1,049 $ 65 5.50% $ 65
Due after one through five years 7,161 5.48% 7,043 455 5.79% 463
Due after five through ten years 3,508 6.54% 3,471 90 6.46% 90
Due after ten years 75 5.70% 77 - -
--------- ----------- --------- ----------
11,791 11,640 610 618
Mortgage-backed securities - - - 258 9.06% 303
Marketable equity securities 5,496 5,294 - -
--------- ----------- --------- ----------
Total $17,287 $16,934 $868 $921
========= =========== ========= ==========
</TABLE>
<PAGE>
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, 1999, maturing during the next five years
and thereafter see the Notes to Consolidated Financial Statements in the
Company's 1999 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.
<TABLE>
<CAPTION>
At September 30,
----------------
1999
------------
<S> <C>
3 months or less $ 4,321
3-6 months 5,871
6-12 months 4,849
over 12 months 5,779
----------
Total $20,820
==========
</TABLE>
Borrowings
As a member of the FHLB System and the FHLB of Indianapolis, the Bank is
eligible to arrange borrowings or advances for various purposes and on various
terms. As of September 30, 1999 and 1998 the Bank had outstanding advances to
the FHLB of Indianapolis of $7,200,000 and $5,000,000. The Bank had no
outstanding advances as of September 30, 1997. Of the $7,200,000 outstanding at
September 30, 1999, $5,000,000 was long-term debt. See page 25 of the annual
report to stockholders for the maturity breakdown of these long-term
instruments.
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended September 30
-------------------------
1999 1998 1997
------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Average balance of short-term borrowings $3,533 $4,166 $2,412
Highest month-end balance of total borrowings 4,417 5,088 3,293
Weighted average interest rate of total borrowings 5.28% 5.21% 4.85%
</TABLE>
<TABLE>
<CAPTION>
At September 30
-------------------------
1999 1998 1997
<S> <C> <C> <C>
Federal Home Loan Bank advances $2,200 $ - $ -
Reverse Repurchase agreements 3,040 4,203 3,162
------- ------- --------
Total short-term borrowings $5,240 $4,203 $3,162
======= ======= =========
Weighted average interest rate 6.33% 5.22% 5.31%
</TABLE>
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, 1999, the Bank's trust department assets totaled
approximately $44,372,000 including self-directed Individual Retirement Accounts
("IRA's"), and it was offering a variety of trust services including estate
planning. As of that date, the trust department was administering approximately
690 trust accounts, including estates, guardianships, revocable and irrevocable
trusts, testamentary trusts, and self-directed IRA accounts. The trust
department also offers and administers self-directed IRA's and Simplified
Employee Pension IRA's for small businesses.
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, 1999 and 1998, PFSI
recorded total income of $90,515 and $97,493, respectively, with net income for
such periods amounting to $24,327 and $50,227, 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.
<PAGE>
Employees
As of September 30, 1999, the Bank employed 89 persons on a full-time basis
and 11 persons on a part-time basis. The Bank's employees are not represented by
any collective bargaining group, and management considers its relations with its
employees to be excellent.
REGULATION
General
The Company, as a savings and loan holding company, and the Bank, as a
federally chartered savings association, are subject to extensive regulation by
the OTS and the FDIC. The lending activities and other investments of the Bank
must comply with various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various regulatory
requirements and for safe and sound operations. The FDIC also has the authority
to conduct examinations. The Bank must file reports with the OTS describing its
activities and financial condition and is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve
System. This supervision and regulation is intended primarily for the protection
of depositors and the deposit insurance funds and not for the protection of
stockholders of the Company. Certain of these regulatory requirements are
referred to below or appear elsewhere herein.
Recent Legislation
Financial Services Modernization Legislation. On November 12, 1999,
President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the
"Financial Services Modernization Act"). The Financial Services Modernization
Act repeals the two affiliation provisions of the Glass-Steagall Act: Section
20, which restricted the affiliation of Federal Reserve Member Banks with firms
"engaged principally" in specified securities activities; and Section 32, which
restricts officer, director, or employee interlocks between a member bank and
any company or person "primarily engaged" in specified securities activities. In
addition, the Financial Services Modernization Act also contains provisions that
expressly preempt any state law restricting the establishment of financial
affiliations, primarily related to insurance. The general effect of the law is
to establish a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms, and other financial service
providers by revising and expanding the Bank Holding Company Act framework to
permit a holding company system to engage in a full range of financial
activities through a new entity known as a "Financial Holding Company."
"Financial activities" is broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking and additional
activities that the Federal Reserve Board, in consultation with the Secretary of
the Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally.
The Financial Services Modernization Act provides that no company may
acquire control of an insured savings association after May 4, 1999, unless that
company engages, and continues to engage, only in the financial activities
permissible for a Financial Holding Company, unless grandfathered as a unitary
savings and loan holding company. The Financial Institution Modernization Act
grandfathers any company that was a unitary savings and loan holding company on
May 4, 1999 (or becomes a unitary savings and loan holding company pursuant to
an application pending on that date). Such a company may continue to operate
under present law as long as the company continues to meet the two tests: it can
control only one savings institution, excluding supervisory acquisitions, and
each such institution must meet the QTL test. It further requires that a
grandfathered unitary savings and loan holding company must continue to control
at least one savings association, or a successor institution, that is controlled
on May 4, 1999.
<PAGE>
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities permitted
under new sections of the Bank Holding Company Act of 1956 ("BHCA") or permitted
by regulation.
The Company and the Bank do not believe that the Financial Services
Modernization Act will have a material adverse effect on the operations of the
Company and the Bank in the near-term. However, to the extent that the act
permits banks, securities firms, and insurance companies to affiliate, the
financial services industry may experience further consolidation. The Financial
Services Modernization Act is intended to grant to community banks certain
powers as a matter of right that larger institutions have accumulated on an ad
hoc basis and which unitary savings and loan holding companies already possess.
Nevertheless, this act may have the result of increasing the amount of
competition that the Company and the Bank face from larger institutions and
other types of companies offering financial products, many of which may have
substantially more financial resources that the Company and the Bank. In
addition, because the Company may only be acquired by other unitary savings and
loan holding companies or Financial Holding Companies, the legislation may have
an anti-takeover effect by limiting the number of potential acquirors or by
increasing the costs of an acquisition transaction by a bank holding company
that has not made the election to be a Financial Holding Company under the new
legislation.
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.
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
<PAGE>
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, 1999, of $2,473,500.
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, 1999,
the Bank had advances totaling $7,200,000 outstanding. See "Business of the
Company--Deposit Activity and Other Sources of Funds" and "--Borrowings."
Liquidity Requirements. Under OTS regulations, a savings association is
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations, and certain other investments) in each calendar quarter
of not less than 4% of either (1) its liquidity base (consisting of certain net
withdrawable accounts plus short-term borrowings) as of the end of the preceding
calendar quarter, or (2) the average daily balance of its liquidity base during
the preceding quarter. The OTS may change this liquidity requirement from time
to time to any amount from 4.0% to 10.0%, depending upon certain factors,
including economic conditions and savings flows of all savings associations. The
Bank maintains liquid assets in compliance with these regulations. Monetary
penalties may be imposed upon an institution for violations of liquidity
requirements.
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, 1999, the Bank was in compliance with its QTL
requirement and met the definition of a domestic building and loan association.
Regulatory Capital Requirements. Under OTS capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
<PAGE>
(a combination of core and "supplementary" capital) equal to 8% of risk-weighted
assets. In addition, OTS regulations which impose certain restrictions on
savings associations that have a total risk-based capital ratio that is less
than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0%
or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0%
if the institution is rated Composite 1 under the OTS examination rating
system).
The OTS has adopted an amendment to its risk-based capital
requirements that requires savings institutions with more than a "normal" level
of interest rate risk to maintain additional total capital (the OTS is delaying
implementation of this requirement). A savings institution's interest rate risk
will be measured in terms of the sensitivity of its "net portfolio value" to
changes in interest rates. Net portfolio value is defined, generally, as the
present value of expected cash inflows from existing assets and off-balance
sheet contracts less the present value of expected cash outflows from existing
liabilities. A savings institution will be considered to have a "normal" level
of interest rate risk exposure if the decline in its net portfolio value after
an immediate 200 basis point increase or decrease in market interest rates
(whichever results in the greater decline) is less than 2% of the current
estimated economic value of its assets. A savings institution with a greater
than normal interest rate risk will be required to deduct from total capital,
for purposes of calculating its risk-based capital requirement, an amount (the
"interest rate risk component") equal to one-half the difference between the
institution's measured interest rate risk and the normal level of interest rate
risk, multiplied by the economic value of its total assets.
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, 1999, the Bank exceeded all regulatory minimum capital
requirements as indicated in the table below. (Dollars in thousands)
<TABLE>
<CAPTION>
1999
--------------------------------------------
Required for Adequate To Be Well
Actual Capital Capitalized
--------------------------------------------
September 30 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (1)(to $36,705 20.5% $14,335 8.0% $17,918 10.0%
risk-weighted assets)
Tier 1 risk-based capital (1) (to $35,726 19.9% $14,335 8.0% $17,918 10.0%
risk-weighted assets)
Core Capital (1) (to adjusted $35,726 11.1% $12,904 4.0% $19,355 6.0%
tangible assets)
Core Capital (1) (to adjusted $35,726 11.1% $12,904 4.0% $16,129 5.0%
total assets)
</TABLE>
(1) As defined by regulatory agencies
<PAGE>
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 September 30, 1999, SAIF members paid within a range of
0 cents to 23 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 Bank pays,
in addition to its normal deposit insurance premium as a member of the SAIF 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. Effective 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 provided
for the merging of the BIF and the SAIF by January 1, 1999, provided there were
no financial institutions still chartered as savings associations at that time.
Although legislation to eliminate the savings association charter had been
proposed at January 1, 1999, financial institutions such as the Bank were still
chartered as Savings associations.
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, 1999, 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
<PAGE>
institution to become undercapitalized. As of September 30, 1999, 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."
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, 1999, the
Bank met the capital requirements of a "well capitalized" institution under
applicable OTS regulations.
<PAGE>
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.
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 that 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.
The OTS has recently established an examination procedure, which contains three
categories of ratings: "Satisfactory," "Needs Improvement," and
"Unsatisfactory." Institutions that receive a year 2000 rating of Unsatisfactory
may be subject to formal enforcement action, supervisory agreements, and cease
and desist orders, civil money penalties, or the appointment of a conservator.
In addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues. The Company is currently addressing the year
2000 issue, as more fully discussed in the Company's Annual Report to
Stockholders for the Year Ended September 30, 1998 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Year 2000."
Item 2. Properties
The Bank owns eight full-service banking offices located in Avilla, Auburn,
Columbia City, Garrett, Kendallville, LaGrange and Waterloo, Indiana.
<PAGE>
The following table provides certain information with respect to the Bank's
full-service offices at September 30, 1999.
<TABLE>
<CAPTION>
Full Service Net Book
Offices Date Opened Value(1)
------------ ----------- --------
<S> <C> <C>
Main Office, Auburn 1973 $149,283
Avilla 1980 120,858
Garrett 1972 54,096
Columbia City-Downtown 1971 136,284
Columbia City-North 1998 554,965
Kendallville 1941 472,883
LaGrange 1972 171,010
Waterloo 1999 -- (2)
</TABLE>
- ---------------------
(1) Of real estate at September 30, 1999.
(2) Waterloo is a temporary leased office and so has no real estate cost.
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,
1999, was $2,285,889.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company, the
Bank or any subsidiary is a party or to which any of their property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Reference is made to page 1 of the Company's Annual Report to Stockholders,
for the year ended September 30, 1999 for the information required by this Item,
which is hereby incorporated by reference.
Item 6. Selected Financial Data
Reference is made to page 16 of the Company's Annual Report to Stockholders
for the year ended September 30, 1999, 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 9 to 15 of the Company's Annual Report to
Stockholders for the year ended September 30, 1999, for the information required
by this Item, which is hereby incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to pages 10 and 11 of the Company's Annual Report to
Stockholders for the year ended September 30, 1999, for the information required
by this item, which is hereby incorporated by reference.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Reference is made to pages 17 to 32 of the Company's Annual Report to
Stockholders for the year ended September 30, 1999 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 the section captioned "The Peoples Bancorp Annual
Meeting-Election of Directors" in the Company's definitive Proxy
Statement/Prospectus for the information required by this Item, which is hereby
incorporated by reference.
Item 11. Executive Compensation
Reference is made to the section captioned "The Peoples Bancorp Annual
Meeting-Executive Officer Compensation" in the Company's definitive Proxy
Statement/Prospectus 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 the section captioned "The Peoples Bancorp Annual
Meeting-Securities Ownership of Certain Beneficial Owners in the Company's
definitive Proxy Statement/Prospectus for the information required by this Item
which is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the section captioned "The Peoples Bancorp Annual
Meeting-Transactions with Certain Related Persons" in the Company's definitive
Proxy Statement/Prospectus for the information required by this Item, which is
hereby incorporated by reference.
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, 1999 are filed as part of this
report:
1. Financial Statements
- REPORT OF OLIVE LLP, INDEPENDENT AUDITORS.
- CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - AS OF SEPTEMBER 30, 1999
AND 1998.
- CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1999,
1998, AND 1997.
- CONSOLIDATED STATEMENT OF CHANGE IN STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED SEPTEMBER 30, 1999, 1998, AND 1997.
<PAGE>
- CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30,
1999, 1998, AND 1997
- 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
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
<S> <C>
3.1 Articles of Incorporation of Peoples Bancorp (1)
3.2 Bylaws of Peoples Bancorp (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)
10.6 Expense and Tax Sharing Agreement between Peoples Bancorp, Peoples
Federal Savings Bank of DeKalb County and Peoples Financial Services,
Inc., dated May 28, 1992 (3)
10.7 New option plan
13 Annual Report to Stockholders
22 Subsidiaries of the Registrant
23 Consent of Auditors
</TABLE>
- ---------------------------------
(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.
<PAGE>
(b) Reports on Form 8-K-On September 23, 1999, the Company filed a report
on form 8-K reporting pursuant to Item 5, that the Company had entered
into a definitive agreement to merge with Three Rivers Financial
Corporation.
The Securities and Exchange Commission maintains a Web sit that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission including the Company.
That address is http://www.sec.gov.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEOPLES BANCORP
December 29, 1999 Roger J. Wertenberger
Chairman of the Board,
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, 1999 Roger J. Wertenberger,
Chairman of the Board,
and Director
December 29, 1999 Maurice F. Winkler III,
President, Chief
Executive Officer and
Director
December 29, 1999 Deborah K. Stanger
Vice President-Chief
Financial Officer
December 29, 1999 Robert D. Ball, Director
December 29, 1999 Bruce S. Holwerda, Director
December 29, 1999 John C. Harvey, Director
December 29, 1999 Douglas D. Marsh, Director
December 29, 1999 Lawrence R. Bowmar, Director
December 29, 1999 John C. Thrapp, Director
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------------------- --------------------------
<S> <C>
Peoples Federal Savings
Bank of DeKalb County United States of America
and its subsidiary
Peoples Financial Services Inc. Indiana
</TABLE>
<PAGE>
Annex E
TABLE OF CONTENTS
1 Financial Highlights
2 Letter to Shareholders and Friends
3 Relationships
3 Convenient Locations
4 Customer Satisfaction
6 Officers and Board of Directors
7 Independent Auditors Report
8 Statement of Management Responsibility
9-15 Managements' Discussion
and Analysis
16 Selected Consolidated Financial Data
17-20 Consolidated Financial Statement
21-32 Notes to Consolidated Statement
33 Corporate Profile
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------
(dollars in thousands except per share data)
<S> <C> <C>
Operating Results:
Net Interest Income $11,766 $ 10,867
Provision for Loan Losses 89 75
Dividends Per Share 0.49 0.45
Average Equity to Average Assets 14.12% 15.08%
At Year End:
Assets 327,563 304,937
Loans 297,875 267,606
Allowance for Loan Losses 1,005 947
Deposits 270,994 248,545
Stockholders' Equity 45,456 44,671
Book Value Per Share 14.28 13.62
</TABLE>
Common Stock Information
Information listed below has been adjusted for stock split
<TABLE>
<CAPTION>
Market Price Dividends
Low High Per Share
<S> <C> <C> <C>
Fiscal 1999
- ----------------------------------------------------------------------
1st QTR $ 19.50 $ 20.88 $ 0.12
2nd QTR 19.75 20.63 0.12
3rd QTR 18.50 20.00 0.12
4th QTR 15.50 19.13 0.13
Fiscal 1998
- ----------------------------------------------------------------------
1st QTR $ 20.83 $ 25.00 $ 0.11
2nd QTR 21.50 23.25 0.11
3rd QTR 21.13 23.00 0.11
4th QTR 20.13 22.75 0.12
</TABLE>
The price of PFDC stock traded on NASDAQ on November 26, 1999 was $xx.xx
This page displays graphs of 5 years data for total assets, net loans,
deposits, and earnings per share. See table below for information contained in
these graphs.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets $ 327,563 $304,937 $290,602 $280,012 $276,608
Net Loans 296,870 266,659 235,256 223,011 218,664
Deposits 270,994 248,545 241,790 235,081 232,747
Earnings Per Share $ 1.42 $ 1.25 $ 1.22 $ 0.91 $ 1.10
</TABLE>
<PAGE>
(Picture of Maurice F. Winkler III and Roger J. Wertenberger)
To Our Stockholders and Friends:
Peoples Bancorp and its subsidiary, Peoples Federal Savings Bank, once
again had record earnings of $4,586,766 or $1.42 per share in fiscal 1999, up
from $1.25 last fiscal year.
This increase is outstanding when you consider the start up costs of our
new Agricultural Loan Department, our new Commercial Loan Department and the
temporary Waterloo Branch that opened this year. Looking forward, construction
has started on our permanent Waterloo branch. This new full service office will
house our Agricultural Lending Department, as well as several support functions.
This will alleviate some of the traffic flow and crowding at our Auburn branch.
On September 21, 1999 Peoples Bancorp announced that they had signed a
definitive agreement providing for the merger of Three Rivers Financial
Corporation, a $101 million Savings and Loan Holding Company, through a stock
transfer with Peoples Bancorp. We are very pleased with the opportunities
presented by this agreement and feel it is in the best interest of our
Shareholders and Employees, as well as the communities we serve on a long-term
basis. Completion of the merger is expected early in 2000.
Speaking of 2000, we are confident there will be no major Y2K related
disruptions or services at the Bank this new year. We have confidence in our
preparation and testing of the computer hardware and software we use. If you
have any questions about Y2K, please feel free to ask. We want to help our
customers avoid Y2K pitfalls, because "We're OK on Y2K," and we want you to be
OK too.
In addition to improvement in buildings and technology, Peoples experienced
personnel changes as well. Effective January 2000, Lawrence R. Bowmar, a former
vice president of the bank and a valued and trusted friend of the Bank will
retire from the board of directors after 25 years of service. Mr. Bowmar has
made many valuable contributions to the direction of this board over the years
and we're fortunate that he has agreed to continue to serve as a Director
Emeritus.
Effective October 1, 1999, Roger J. Wertenberger retired as chief executive
officer of Peoples Federal Savings Bank after 45 years of service. He will
continue to serve as chairman of the board and assist the Bank management team
as a consultant. Maurice F. Winkler III, president and chief operating officer
was given the additional responsibilities of CEO. Mr. Winkler is a 20-year
Peoples employee.
The financial industry continues to experience rapid change as the
super-regional banks acquire regional banks in our markets. Peoples' local
presence gives it the opportunity to expand local services to reach new
customers and respond to requests quickly and effectively as our market share
enjoys healthy growth. While there are many challenges we remain confident about
the long-term opportunities for Peoples and look forward to continued
prosperity. We are very appreciative of the support that you, our shareholders,
have given us over the years.
Roger J Wertenberger
Chairman of the Board
Maurice F. Winkler, III
Chief Executive Officer and President
<PAGE>
Relationship Oriented
Peoples Federal Savings Bank continues to develop total relationships with
its customers. Our customers are comprised of local individuals, small to medium
size businesses and professionals. Our primary market is northeastern Indiana,
which we serve through seven full service branches. Our eighth branch has
recently opened in Waterloo this year.
Peoples focus is clear: Our staff knows our community and builds on local
relationships. The banks operate more effectively than others who are located
elsewhere do. Customers appreciate the helpful response from Peoples Federal
associates who solve problems. This is easier than dealing with a mega bank that
doesn't know its customers. Peoples also emphasizes management's involvement
with customers to provide quick and easy service. The addition of Larry Kummer,
agricultural loan specialist and Lee Dick, commercial loan specialist,
contributes to our ability to be flexible and make timely decisions with bankers
our customers know and trust.
The bottom line is that Peoples Federal meets the banking needs of its
customers, which is the basis of our commitment to provide total relationship
banking. Our customers benefit by having employees who are trained to meet the
ever-changing needs for services. The broad array of financial products offered
includes traditional checking and savings, IRAs and trust services. As our
recent television commercials say, "Nobody's Better."
(Picture of agricultural customers)
<PAGE>
Convenient Locations
Peoples Federal continues its expansion in fiscal year 1999 while many
banking organizations merged and consolidated their presence in our market
locations. Our new office in Columbia City, which opened in April 1998, brings
more banking directly to the neighborhoods where customers live and work. In
this way Peoples is better positioned to meet the needs of its' expanding
customer base.
In addition, a temporary office was opened in Waterloo in August 1999 to
meet customer needs. The completion of the permanent branch in Waterloo will
provide drive-up and ATM services. Peoples will be able to offer products that
stress convenience for customers in that city who have been without a local bank
since April 1999. To serve customers from the farming communities, our new
branch drive-up facility has taller clearances and reinforced concrete to
accommodate large grain trucks.
Peoples Federal knows there will always be a need for strong community
banks that will provide services to small communities. The decision making by
locally owned banks contribute to the economic well being of the northeast
Indiana area. The goal is to continue making banking convenient and enjoyable
for our customers.
(Picture of customer using ATM)
<PAGE>
Customer Satisfaction
For 75 years, Peoples Federal Savings Bank has sought to achieve customer
satisfaction. Our success has been a direct reflection of the quality of our
associates. Up-to-date technology is available to our associates. This
technology includes E-mail, loan origination system on wide area network, and
check imaging which enables them to deliver timely and accurate information.
The bank is a northeast Indiana leader in home mortgage lending and rapidly
growing in the areas of agricultural, commercial lending, and financial
services. We continually search for more ways to serve our present customers,
while being responsive to our total community's needs.
Our staff has spent considerable time and effort to be Y2K compliant, and
to be able to meet customers' expectations with expertise, professionalism and
genuine interest into the next millenium. For some time, Peoples Federal has
been fine tuning all of our mission critical computer systems to ensure that
when the calendar ticks over from the 20th to the 21st century there will be no
interruption in community banking services. Our year 2000 date change
preparedness has been checked, rechecked and tested by Peoples and federal
regulators. We're OK on Y2K.
(Picture of Henderson Construction)
<PAGE>
Board of Directors, Executive Officers, Branch Managers
(Picture of Board of Directors)
Seated left to right: Lloyd M. Cline, Jesse A. (Jack) Sanders, Lawrence R.
Bowmar, Robert D. Ball, Roger J. Wertenberger. Standing left to right: Russell
A. Spice, Jack L. Buttermore, John C, Thrapp, John C. Harvey, Douglas D. Marsh,
Bruce S. Holwerda, Maurice F. Winkler, III.
Board of Directors
Roger J. Wertenberger John C. Harvey John C. Thrapp
Chairman of the Board Retired Physician, Attorney, Thrapp & Thrapp
of the Bank, Auburn, IN Auburn, IN Kendallville, IN
Director since 1954. Director since 1979. Director since 1990.
Maurice F. Winkler, III Bruce S. Holwerda
Chief Executive Officer and Vice President and Chief Operating
President of the Bank, Auburn, Officer Ambassador Steel Corporation,
IN. Director since 1993. Auburn, IN. Director since 1998.
Lawrence R. Bowmar Douglas D. Marsh
Retired Vice President - Consumer Chairman of the Board, Applied
Loans of the Bank, Auburn, IN Innovations, Inc. Chicago, Illinois.
Director from 1974-1992 President, Bridgewater Golf Club
and 1993-present. Auburn, IN. Associate, Fairway
Realtors, Inc., Auburn, IN.
Director since 1982.
Robert D. Ball Jack L. Buttermore Lloyd M. Cline Jesse A. (Jack) Sanders
Director Emeritus Director Emeritus Director Emeritus Director Emeritus
Russell E. Spice
Director Emeritus
Executive Officers of the Bank
Roger J. Wertenberger Donald E. Budd Jeffery L. Grate
Chairman of the Board Vice President-Trust Officer Vice President-Lending
Maurice F. Winkler, III Carole J. Leins
Chief Executive Officer Vice President-Service Herma F. Fields
and President Corporation Vice President-Savings
Deborah K. Stanger John E. Weigel III
Vice President-Chief Financial Officer Corporate Secretary
<PAGE>
Branch Manager and Locations
Duwayne Anderson, Columbia City Downtown
123-129 S. Main St., Columbia City, IN 46725
April Haynes, Columbia City North
507 N. Main St., Columbia City, IN 46725
Cindy Jollief, Avilla
105 North Main St., Avilla, IN 47610
Larry Kummer, Waterloo
(Temporary)
105 North Wayne St., Waterloo, IN 46793
(Permanent 4-1-2000)
625 Wayne St., Waterloo, IN 46793
Richard Lewton, LaGrange
114-118 S. Detroit St., LaGrange, IN 46761
Clark Ream, Kendallville
116 W. Mitchell St., Kendallville, IN 46755
Brenda Strohm, Garrett
1212 S. Randolph St., Garrett, IN 46738
Auburn Office
212 West 7th St., Auburn, IN 47606
Peoples Federal Philosophy of Community Banking
Peoples Federal Savings Bank believes in community banking. Peoples serves
individuals and small to medium-sized businesses in its market areas. We believe
that community banking is the most consistently profitable type of banking.
Peoples believes that community banking operates best with empowerment of
local management you know and trust.
Peoples emphasizes funding of its assets with retail core deposits
generated in its branches and main office. Peoples does not use brokered
deposits and believes borrowings should be kept to a minimum.
Peoples is a secured local lender and always emphasizes credit quality over
asset growth. The costs of poor credit far outweigh the benefits of unwise asset
growth.
Peoples believes it is essential to be well-capitalized with a strong
balance sheet. Capital is the cushion against poor economic times and errors in
credit judgment.
Peoples is very expense control oriented. A profitable community bank must
be a low-cost provider of services.
Peoples is very sales oriented and believes in sharing profits with the
community and with all employees.
Peoples places a high priority on the development of technology to enhance
productivity, customer service and new products. Properly applied technology
reduces costs and enhances services. Peoples is committed to providing extra
services through convenient access, innovative products and good customer
relations. Many of our customers bank with us because we are convenient.
Peoples encourages open employee communications. Peoples promotes from
within whenever possible and places the highest priority on honesty, integrity
and ethical behavior.
Peoples believes in community participation, both financially and through
volunteerism.
Peoples practices affirmative action and does not discriminate against
anyone in employment or the extension of credit.
Peoples Federal is committed to providing affordable housing for low income
people. Several programs are in place with the Federal Home Loan Bank of
Indianapolis ("FHLB") to assist our low income customers with their housing
needs.
<PAGE>
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, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1999, in conformity with generally accepted
accounting principles.
Indianapolis, Indiana
October 21, 1999
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 Maurice F. Winkler III Deborah K. Stanger
Chairman of Board Chief Executive Officer Vice President-Chief
and President Financial Officer
<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 seven full
service offices located in Avilla, Columbia City, Garrett, Kendallville,
LaGrange, and Waterloo 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. Prevailing economic conditions, government policies, regulations,
interest rates, and local competition also significantly affect the Bank.
The Company's earnings are primarily dependent upon the earnings of the
Bank. Interest income is a function of the balance of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amounts of deposits and
borrowings outstanding during the same period and the rates paid on such
deposits and borrowings. Peoples Federal's earnings are also affected by gains
and losses on sales of loans and investments, provisions for loan losses,
service charges, income from subsidiary activities, operating expenses and
income taxes.
On a yearly basis, The Bank updates its long-term strategic plan. This
plan includes, among other things, Peoples Federal's commitment to maintaining a
strong capital base and continuing to improve the organization's return on
assets through asset growth and controlling operating expenses. Continued
careful monitoring of Peoples Federal's interest rate risk is also cited as an
important goal. As a result, continued origination of short-term consumer and
installment loans, prime plus equity loans, adjustable rate mortgage loans, and
fixed-rate real estate loans with original terms of 15 years or less will be
emphasized.
The following table sets forth the weighted average yield on
interest-earning assets and the weighted average rate on interest- bearing
liabilities for the years ending September 30, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
September 30
----------------------
1999 1998 1997
------ ------- ------
<S> <C> <C> <C>
Weighted average interest rate on:
Loans 7.72% 8.03% 8.15%
Securities 6.95 6.02 5.89
Other interest-earning assets 6.05 6.58 6.42
Combined 7.63 7.75 7.76
Weighted average cost of:
NOW and savings deposits 2.82 2.85 2.78
Certificates of deposit 5.20 5.62 5.64
Borrowings 5.17 5.21 4.85
Combined 4.45 4.79 4.80
Interest rate spread 3.18 2.96 2.96
Net yield on weighted average
interest-earning assets 3.77 3.67 3.70
</TABLE>
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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
At September 30
------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Weighted average interest rate on:
Loans 7.73% 7.98% 8.34%
Securities 6.61 5.61 5.41
Other interest-earning assets 7.62 5.01 6.20
Combined 7.66 7.76 7.89
Weighted average cost of:
NOW and savings deposits 3.01 2.78 2.98
Certificates of deposit 5.19 5.72 5.78
Borrowings 6.33 5.22 5.31
Combined 4.50 4.84 4.97
Interest rate spread 3.16 2.92 2.92
</TABLE>
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, 1999. 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, 1999, quarterly report. The data contained in the following report
is the contractual repricing information and does not contain any assumptions
regarding repricing.
<TABLE>
<CAPTION>
At September 30, 1999
(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 $ 7,080 $ 17,366 $ 10 $ 68 $ - $ 24,524
Fixed rate loans 2,478 2,560 4,511 16,563 226,684 252,796
Investment securities 5,293 1,114 2,735 4,763 3,638 17,543
Consumer and other loans 11,342 2,137 2,525 3,092 1,717 20,813
----------- ----------- ----------- ----------- ---------- ---------
Total Assets Subject to Repricing 26,193 23,177 9,781 24,486 232,039 315,676
----------- ----------- ----------- ----------- ---------- ---------
Liabilities Subject to Repricing:
Certificates of deposit 63,776 68,661 46,826 6,395 - 176,337
N.O.W. and other transaction accounts 32,688 - - - - 32,688
Passbook accounts 38,311 - - - - 38,311
Money market accounts 23,187 - - - - 23,187
Borrowings 5,240 - - 2,000 3,000 10,240
----------- ----------- ----------- ----------- ---------- ---------
Total Liabilities Subject to Repricing 163,202 68,661 46,826 8,395 3,000 280,763
----------- ----------- ----------- ----------- ---------- ---------
Excess (deficiency) of rate sensitive
assets over rate sensitive liabilities $(137,009) $ (45,484) $ (37,045) $ 16,091 $ 229,039 $ 34,913
=========== =========== =========== =========== ========== =========
Cumulative excess (deficiency) of rate
sensitive assets over rate sensitive $(137,009) $(182,493) $(219,538) $(203,447) $ 25,592 $ 34,913
=========== =========== =========== =========== ========== =========
liabilities
As a % of Total Assets Subject to Repricing (43.40)% (57.81)% (69.55)% (64.45)% 8.11% 11.06%
</TABLE>
A negative interest rate gap leaves Peoples Federal's earnings
vulnerable to periods of rising interest rates because during such periods, the
interest expense paid on liabilities will generally increase more rapidly than
the interest income earned on assets. Conversely, in a falling interest rate
environment, the total expense paid on liabilities will generally decrease more
rapidly than the interest income earned on assets. A positive interest rate gap
will have the opposite effect. The Company's management believes that the Bank's
interest rate gap in recent periods has generally been maintained within an
acceptable range in view of the prevailing interest rate environment.
The OTS has issued a regulation, which uses a net market value methodology
to measure the interest rate risk exposure of thrift institutions. Under this
OTS regulation, an institution's "normal" level of interest rate risk in the
event of an assumed change in interest rates is a decrease in the institution's
NPV in an amount not exceeding 2% of the present value of its assets. Thrift
institutions with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Institutions that do not meet either of the filing requirements are not required
to file OTS Schedule CMR, but may do so voluntarily. Under the regulation,
institutions that must file are required to take a deduction (the interest rate
risk capital component) from their total capital available to calculate their
risk-based capital requirement if their interest rate exposure is greater than
"normal". The amount of that deduction is one-half of the difference between (a)
the institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets.
Presented below, as of September 30, 1999 and 1998, is an analysis
performed by the OTS of Peoples Federal's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts in the yield
<PAGE>
curve, in 100 basis point increments, up and down 400 basis points. At September
30, 1999 and 1998, 2% of the present value of Peoples Federal's assets were
approximately $6.5 million and $6.2 million. Because the interest rate risk of a
200 basis point increase in market rates (which was greater than the interest
rate risk of a 200 basis point decrease) was $12.0 million at September 30, 1999
and $7.5 million at September 30, 1998, Peoples Federal would have been required
to make a deduction from its total capital available to calculate its risk based
capital requirement. The decrease in interest rate risk from 1998 to 1999 is due
to the large increase in loan volume during 1999 which consisted primarily of
fixed rate loans.
Interest Rate Risk As of September 30, 1999
<TABLE>
<CAPTION>
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ---------- --------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
+300 bp 23,070 (10,664) -45% 7.58% (536)
+200 bp 29,702 (12,032) -29% 9.61% (323)
+100 bp 36,101 (5,633) -13% 11.27% (147)
0 bp 41,734 - 0% 12.74% -
- -100 bp 45,518 3,784 9% 13.67% 93
- -200 bp 48,072 6,338 15% 14.26% 151
- -300 bp 50,646 8,912 23% 14.83% 209
</TABLE>
Interest Rate Risk As of September 30, 1998
<TABLE>
<CAPTION>
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ---------- --------- ------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
+300 bp 29,960 (12,811) -30% 10.33% (357)
+200 bp 35,253 (7,517) -18% 11.88% (203)
+100 bp 39,709 (3,061) -7% 13.11% (79)
0 bp 42,770 - 0% 13.91% -
- -100 bp 44,320 1,550 4% 14.26% 35
- -200 bp 46,360 3,590 8% 14.73% 82
- -300 bp 49,198 6,428 15% 15.40% 149
</TABLE>
In evaluating the Bank's exposure to interest rate risk, certain
shortcomings, inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and liabilities
may have similar maturities or 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. Further, in the event of a change in interest rates, prepayments
and early withdrawal levels could deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ from that presented in the
foregoing table.
Interest Income
Net interest income decreases during periods when the spread is
narrowed between the Bank's weighted average rate at which new loans are
originated and its weighted average cost of liabilities. In addition, the Bank's
ability to originate and sell mortgage loans is affected by market factors such
as interest rates, competition, consumer preferences, the supply of and demand
for housing, and the availability of funds.
<PAGE>
The following table sets forth the weighted average yields earned on
the Bank's assets and the weighted average rate paid on deposits and borrowings.
<TABLE>
<CAPTION>
Years ended September 30
(Dollars in Thousands)
---------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ----------------------------- -----------------------------
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) $285,296 $22,028 7.72% $252,520 $20,266 8.03% $230,278 $18,758 8.15%
Investment securities(2) 17,447 1,213 6.95 33,665 2,025 6.02 34,992 2,060 5.89
Other interest-earning assets 9,684 586 6.05 10,069 663 6.58 16,822 1,080 6.42
---------- -------- ----------- -------- ------------ --------
Total interest-earning assets 312,427 23,827 7.63 296,254 22,954 7.75 282,092 21,898 7.76
---------- ----------- ------------
Allowance for loan losses (977) (906) (883)
Other assets 7,325 4,291 3,484
---------- ----------- ------------
Total Assets $318,775 $299,639 $284,693
========== =========== ============
Interest-bearing liabilities:
NOW and savings deposits $85,866 2,415 2.81 $ 74,516 2,124 2.85 $ 70,004 1,949 2.78
Certificates of deposit 177,194 9,221 5.20 171,963 9,670 5.62 166,557 9,402 5.64
Borrowings 8,046 425 5.28 5,623 293 5.21 2,412 117 4.85
---------- -------- ----------- -------- ------------ --------
Total interest-bearing liabilities 271,106 12,061 4.45 252,102 12,087 4.79 238,973 11,468 4.80
---------- -------- ----------- ------------
Other liabilities 2,664 2,332 2,358
Stockholders' equity 45,005 45,205 43,362
---------- ----------- ------------
Total Liabilities and
Stockholders' equity $318,775 $299,639 $284,693
========== =========== ============
Net interest income/spread $11,766 3.18 $10,867 2.96 $10,430 2.96
======== ======== =========
Net yield on interest earning assets 3.77 3.67 3.70
</TABLE>
(1) Average balances include nonaccrual balances.
(2) Yield on investment securities is computed based on amortized cost.
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>
<CAPTION>
Years ended September 30,
-----------------------------------------------------------------------------
1999 vs 1998 1998 vs 1997 1997 vs 1996
------------------------- ------------------------ -------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due to Total
-------------- Increase -------------- Increase -------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------- ------ ---------- ------- ------ --------- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income from:
Loans $2,565 $(803) $1,762 $1,779 $(271) $1,508 $453 $(345) $108
Investment securities (1,089) 277 (812) (83) 48 (35) (86) 82 (4)
Other interest-earning assets (25) (52) (77) (445) 28 (417) 20 38 58
------- ------ ---------- ------- ------ --------- ------ ------ ---------
Total interest income 1,451 (578) 873 1,251 (195) 1,056 387 (225) 162
------- ------ ---------- ------- ------ --------- ------ ------ ----------
Interest expense from:
NOW and savings deposits 322 (22) 300 126 49 175 (1) 104 103
Certificates of deposit 288 (737) (449) 301 (33) 268 159 (98) 61
Borrowings 125 (2) 123 167 9 176 80 (6) 74
------- ------ ---------- ------- ------ --------- ------ ------ ----------
Total interest expense 735 (761) (26) 594 25 619 238 - 238
------- ------ ---------- ------- ------ --------- ------ ------ ----------
Net interest income (expense) $ 716 $ 183 $ 899 $ 657 $(220) $ 437 $149 $(225) $(76)
======= ====== ========== ======= ====== ========= ====== ====== ==========
</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
1.73%, 1.57%, and 1.46% for fiscal years ended September 30, 1999, 1998, and
1997, respectively.
The Bank continuously seeks to reduce operating expenses. In this
regard, the budget committee of the Board of Directors monitors the Bank's
current operating budget on at least a quarterly basis to ascertain that expense
levels remain within projected ranges and to establish competitive, as opposed
to aggressive, rates for the Bank's various deposit accounts. The Bank's efforts
to contain operating expense also include underwriting policies that attempt to
reduce potential losses and conservative expansion of personnel.
Liquidity and Capital Resources
The standard measure of liquidity for savings banks is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year. The minimum required ratio is currently set by
OTS regulation at 4%, of which 1% must be comprised of short-term investments
(i.e., generally with a term of less than one year). Liquid assets consist of
cash and eligible investments, which include certain United States Treasury
obligations, securities of various federal agencies, certificates of deposit at
insured banks, federal funds, and bankers' acceptances. At September 30, 1999,
the Bank had liquid assets of $16,812,791. This represents a ratio of liquid
assets to total assets of 6.0%.
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 ($4,163,200
at September 30, 1999, all for residential mortgage loans), consumer loan
commitments ($14,252,697 at September 30, 1998, primarily for home equity lines)
and other obligations and expenditures.
During the year ended September 30, 1999 cash and cash equivalents
increased over $2.1 million. This increase along with an increase in loans of
$29.9 million was funded by a decrease in investment securities of $9.1 million,
and increases in deposits of $22.3million and borrowings of $1.0 million.
Operations provided $4.3million.
During the year ended September 30, 1998 cash and cash equivalents
decreased over $7.1 million. This decrease was used to fund an increase in loans
of $31.5 million. A decrease in investment securities of $10.8 million, and
increases in deposits of $6.8 million and borrowings of $6.0 million funded the
balance of the increase. Operations provided $4.2 million.
<PAGE>
Results of Operations, Fiscal Year Ended September 30, 1999 Compared to Fiscal
Year Ended September 30, 1998
The Company's net interest income increased $899,248 to $11,766,185 for the
fiscal year ended September 30, 1999. The increase was primarily attributable to
the increased volume of loans in 1999 versus 1998. Interest expense decreased
slightly due to lower rates paid on certificates of deposit accounts. This
decrease was almost entirely offset by increases due to higher deposit volume,
and higher borrowing volumes necessary to fund the loans. Interest expense
decreased $26,067 to $12,061,198.
Provision for loan losses increased $14,348 to $88,969 reflecting
adjustments due to management's continuing review of its earning asset
portfolio. Management's review of its loan portfolio is based on historical
information, review of specific loans, and general economic conditions.
Other income increased $96,038 to $853,720. This increase was a combination
of higher fiduciary fees collected this year and higher fees charged on deposit
accounts. Other income decreased due to last year's gains on securities sold
which were not repeated this year.
Total non-interest expense for the year was $5,459,307, an increase of
$712,399. This increase consisted of increased salaries and benefits of
$262,720, equipment and occupancy expense of $152,994, and other expenses of
$295,838. These increases were caused by additional personnel added to begin a
commercial and agricultural lending department, new equipment purchased in
anticipation of year 2000, and amortization of a low income housing investment
for tax losses.
The effective tax rate for the Company for the years ended September 30,
1998 and 1997 was 35.1% and 38.2% respectively.
Results of Operations, Fiscal Year Ended September 30, 1998 Compared to Fiscal
Year Ended September 30, 1997
The Company's net interest income increased to $10,792,316 for the fiscal
year ended September 30, 1998, an increase of $412,076 over the previous year.
The increase was primarily attributable to the increased volume of loans this
year versus last. The increase in loan income was partially offset by increased
interest expense due to higher volumes of deposits, and higher borrowing volumes
necessary to fund the loans. Interest expense increased $619,706 to $12,087,265.
Provision for loan losses increased $24,621 to $74,621 reflecting
adjustments due to management's continuing review of its earning asset
portfolio. Management's review of its loan portfolio is based on historical
information, review of specific loans, and general economic conditions.
Other income increased $113,518 to $757,682. This increase was a
combination of higher fiduciary fees collected this year, and gains on
securities sold.
Total non-interest expense for the year was $4,746,908, an increase of
$518,456. This increase consisted of increased salaries and benefits of
$270,147, equipment and occupancy expense of $173,995, and data processing
expense of $118,963. The addition of a second branch in Columbia City, and the
addition of four ATM machines during this year caused these increases. Deposit
insurance expense decreased $65,625 due to the lower premium rate being in
effect for the entire fiscal year.
The effective tax rate for the Company for the years ended September 30,
1998 and 1997 was 38.2%.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial condition and operating results in
terms of historical dollars or fair value without considering changes in the
relative purchasing power of money over time due to inflation.
Virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or with
the same magnitude as the prices of goods and services, since such prices are
affected by inflation. In a volatile interest rate environment, liquidity and
the maturity structure of the Bank's assets and liabilities are critical to the
maintenance of acceptable performance levels.
Year 2000
The Company has an ongoing program to ensure that its operational and
financial systems will not be adversely affected by year 2000 software failures.
They have begun testing mission critical software and hardware applications, and
expect to be finished with this testing process well in advance of December 31,
1999. Software and hardware, which has been deemed not to be year 2000
compliant, has, or is being replaced. While the Company believes it is taking
all appropriate steps to assure year 2000 compliance, it is dependent on vendor
compliance to some extent. The Company is requiring its systems and software
vendors to represent that the services and products provided are, or will be,
year 2000 compliant. The Company estimates that the cost to redevelop, replace
or repair its technology will not have a material impact on its financial
results.
In addition to possible expenses related to our own systems and those of
our service providers, we could incur losses if Year 2000 problems affect any of
our depositors or borrowers. Such problems could include delayed loan payments
due to Year 2000 problems affecting any of our significant borrowers or
impairing the payroll systems of large employers in our market area. Because our
loan portfolio to individual borrowers is diversified and our market area does
not depend significantly upon one employer or industry, we do not expect any
such Year 2000 related difficulties that may affect our depositors and borrowers
to significantly affect our net earnings or cash flow.
Current Accounting Issues
Accounting for Derivative Instruments and Hedging Activities. Statement of
Financial Accounting Standards ("SFAS") No. 133 requires companies to record
derivatives on the balance sheet at their fair value. SFAS No. 133 also
acknowledges that the method of recording a gain or loss depends on the use off
the derivative. If certain conditions are on the use of the derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
o For a derivative designated as hedging the exposure to changes in the
fair value of a recognized asset or liability or a firm commitment
<PAGE>
(referred to as a fair value hedge), the gain or loss is recognized in
earnings in the period of change together with the offsetting loss or
gain on the hedged item attributable to the risk of being hedged. The
effect of that accounting is to reflect in earnings the extent to
which the hedge is not effective in achieving offsetting changes in
fair value.
o For a derivative designated as hedging the exposure to variable cash
flows of a forecasted transaction (referred to as a cash flow hedge),
the effective portion of the derivative's gain or loss is initially
reported as a component of other comprehensive income (outstanding
earnings) and subsequently reclassified into earnings when the
forecasted transaction affects earnings. The ineffective proportion of
the gain or loss is reported as earnings immediately.
o For a derivative designated as hedging the foreign operation of a net
investment in a foreign operation, the gain or loss is reported in
other comprehensive income (outside earnings) as part of the
cumulative translation adjustment. The accounting for a fair value
hedged described above applies to derivative designated as a hedge of
the foreign exposure of an unrecognized firm commitment or an
available-for-sale security. Similarly, the accounting for a cash flow
hedge described above applies to a derivative designated as a hedge of
the foreign currency exposure of a foreign-currency-denominated
forecasted transaction.
o For a derivative designated as a hedging instrument, the gain or loss
is recognized in earnings in the period of change.
The new statement applies to all entities. If hedge accounting is elected
by the entity, the method of assessing the effectiveness of the hedging
derivative and the measurement approach of determining the hedge's
ineffectiveness must be established in the inception of the hedge.
SFAS No. 133 amends SFAS No.52 and supercedes SFAS Nos. 80, 105, and 119.
SFAS No. 107 is amended to include the disclosure provisions about the
concentrations of credit risk from SFAS No. 105. Several Emerging Issue Task
Force consensuses's are also changed or nullified by the provisions of SFAS No.
133.
SFAS No. 133 was to be effective for all fiscal years beginning after June
15, 1999. The implementation date was deferred, and SFAS No. 133 will now be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000.
SFAS 133 is not expected to have a significant impact on the operations of
the Company.
Accounting for Mortgage-Backed securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. SFAS No. 134
establishes accounting standards for certain activities of mortgage banking
enterprises and for other enterprises with similar mortgage operations. This
Statement amends SFAS No. 65.
SFAS No. 65 are previously amended by SFAS Nos. 115 and 125, required a
mortgage banking enterprise to classify a mortgage-backed security as a trading
security following the securitization of the mortgage loans held for sale, an
entity engaged in mortgage banking activities must classify the resulting
mortgage-backed security of other retained interests based on the entity's
ability and intent to sell or hold those investments.
The determination of the appropriate classification for securities retained
after the securitization of mortgage loans by a mortgage banking enterprise now
conforms to SFAS No. 115. The only requirement the new SFAS No. 134 adds is that
if an entity has a sales commitment in place, the security must be classified
into trading.
This statement is in effect for the first fiscal quarter beginning after
December 15, 1998. On the date this Statement is initially applied, an entity
may reclassify mortgage-backed securities and other beneficial interest retained
after the securitization of mortgage loans held for sale from the trading
category. Except for those with sales commitments in place. Those securities and
other interest shall be classified based on the entity's present ability and
intent to hold the investments.
SFAS 134 is not expected to have a significant impact on the operations of
the Company.
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
September 30
----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $327,562,551 $304,936,781 $290,601,595 $280,011,850 $276,607,771
Loans receivable, net 296,869,920 266,658,583 235,255,669 223,011,251 218,663,928
Investments and other
interest-earning assets 21,108,106 27,664,033 46,439,468 47,970,950 47,811,103
Deposits 270,994,094 248,545,280 241,790,139 235,081,440 232,747,018
Borrowed funds 10,239,739 9,202,653 3,162,400 - 1,000,000
Long term debt 5,000,000 5,000,000 - - -
Stockholders' equity 45,456,219 44,670,627 44,298,170 42,676,765 41,624,026
</TABLE>
<TABLE>
<CAPTION>
For Year Ended September 30
----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Interest income $ 23,827,383 $ 22,954,202 $ 21,897,799 $ 21,736,000 $ 20,685,111
Interest expense 12,061,198 12,087,265 11,467,559 11,229,590 10,727,454
------------ ------------ ------------ ------------ ------------
Net interest income 11,766,185 10,866,937 10,430,240 10,506,410 9,957,657
Provision
for losses on loans 88,969 74,621 50,000 8,824 50,058
------------ ------------ ------------ ------------ ------------
Net interest income
after provision
for losses on loans 11,677,216 10,792,316 10,380,240 10,497,586 9,907,599
Other income 1,050,025 757,682 644,164 640,928 630,064
Other expenses 5,655,599 4,746,908 4,228,452 5,930,049 4,146,191
------------ ------------ ------------ ------------ ------------
Income before income taxes 7,071,642 6,803,090 6,795,952 5,208,465 6,391,472
Income tax expense 2,484,876 2,596,395 2,593,760 1,996,007 2,492,042
------------ ------------ ------------ ------------ ------------
Net income $ 4,586,766 $ 4,206,695 $ 4,202,192 $ 3,212,458 $ 3,899,430
============ ============ ============ ============ ============
Basic Net income per common share $1.42 $1.25 $1.22 $0.91 $1.10
============ ============ ============ ============ -===========
Dividends per common share $0.49 $0.45 $0.41 $0.37 $0.31
============ ============ ============ ============ ============
Other Data:
Average yield on all interest-
earning assets 7.63% 7.75% 7.76% 7.85% 7.68%
Average cost of all interest-
bearing liabilities 4.45 4.79 4.80 4.79 4.65
-------------- ------------ ------------ ------------ ------------
Interest rate spread 3.18% 2.96% 2.96% 3.06% 3.03%
============== ============ ============ ============ ============
Number of full service banking offices 8 7 7 6 6
Return on assets (net income divided by
average total assets) 1.44% 1.40% 1.47% 1.15% 1.43%
Return on equity (net income divided
by average total equity) 10.19 9.31 9.69 7.50 9.66
Dividend payout ratio
(dividends per common share divided by
net income per common share) 34.51 36.00 33.61 40.66 41.82
Equity to assets ratio (average total equity
divided by average total assets) 14.12 15.08 15.22 15.37 14.84
</TABLE>
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30
1999 1998
-------------- --------------
<S> <C> <C>
Assets
Cash and due from banks $ 4,838,115 $ 3,567,625
Interest-bearing deposits 834,134 -
-------------- --------------
Total cash and cash equivalents 5,672,249 3,567,625
Interest-bearing time deposits 718,000
Investment securities
Available for sale 16,932,913 21,877,758
Held to maturity (fair value of $921,651 and $5,103,570) 867,559 5,068,275
-------------- --------------
Total investment securities 17,800,472 26,946,033
Loans, net of allowance for loan losses of $1,005,119 and $947,008 296,869,920 266,658,583
Premises and equipment 2,285,889 2,396,878
Federal Home Loan Bank of Indianapolis stock, at cost 2,473,500 2,217,700
Other assets 2,460,521 2,431,962
-------------- --------------
Total assets $327,562,551 $304,936,781
============== ==============
Liabilities
Bank overdraft - 1,171,306
NOW and savings deposits 94,238,078 75,428,503
Certificates of deposit 176,756,016 173,116,777
Short-term borrowings 5,239,739 4,202,653
Long-term debt 5,000,000 5,000,000
Other liabilities 872,499 1,346,915
-------------- --------------
Total liabilities 282,106,332 260,266,154
-------------- --------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $1 par value
Authorized and unissued--5,000,000 shares
Common stock, $1 par value
Authorized--7,000,000 shares
Issued and outstanding--3,183,717 and 3,280,684 shares 3,183,717 3,280,684
Additional paid-in capital 1,203,696 3,020,798
Retained earnings 41,282,725 38,272,422
Accumulated other comprehensive income (213,919) 96,723
-------------- --------------
Total stockholders' equity 45,456,219 44,670,627
-------------- --------------
Total liabilities and stockholders' equity $327,562,551 $304,936,781
============== ==============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended September 30
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income
Loans $22,028,006 $20,271,263 $18,758,262
Investment securities 843,675 1,793,778 2,052,480
Other interest and dividend income 955,702 889,161 1,087,057
----------- ----------- -----------
23,827,383 22,954,202 21,897,799
----------- ----------- -----------
Interest Expense
Deposits
NOW and savings deposits 2,423,709 2,124,060 1,948,834
Certificates of deposit 9,221,122 9,669,669 9,401,639
Short-term borrowings 135,842 198,113 117,086
Long-term debt 280,525 95,423 --
----------- ----------- -----------
12,061,198 12,087,265 11,467,559
----------- ----------- -----------
Net Interest Income 11,766,185 10,866,937 10,430,240
Provision for loan losses 88,969 74,621 50,000
----------- ----------- -----------
Net Interest Income After Provision
for Loan Losses 11,677,216 10,792,316 10,380,240
----------- ----------- -----------
Other Income
Fiduciary activities 125,255 98,246 54,689
Fees and service charges 547,455 455,089 448,124
Other income 181,009 204,347 141,351
----------- ----------- -----------
Total other income 853,719 757,682 644,164
----------- ----------- -----------
Other Expenses
Salaries and employee benefits 2,771,597 2,508,878 2,238,731
Net occupancy expenses 376,420 319,856 294,372
Equipment expenses 473,952 377,522 229,011
Data processing expense 461,310 403,291 284,328
Deposit insurance expense 149,564 150,359 215,984
Other expenses 1,226,450 987,002 966,026
----------- ----------- -----------
Total other expenses 5,459,293 4,746,908 4,228,452
----------- ----------- -----------
Income Before Income Tax 7,071,642 6,803,090 6,795,952
Income tax expense 2,484,876 2,596,395 2,593,760
----------- ----------- -----------
Net Income $ 4,586,766 $ 4,206,695 $ 4,202,192
=========== =========== ===========
Basic Earnings per Share $1.42 $1.25 $1.22
Diluted Earnings per Share 1.42 1.25 1.22
Weighted Average Shares Outstanding 3,226,894 3,370,468 3,432,177
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
----------------------- Paid-In Comprehensive Retained Comprehensive
Outstanding Amount Capital Income Earnings Income Total
----------- ----------- ----------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances October 1, 1996 2,325,494 $2,325,494 $7,690,289 $32,762,852 $(101,870) $42,676,765
Comprehensive income
Net income -- -- -- $4,202,192 4,202,192 -- 4,202,192
Other comprehensive income, net
of tax
Unrealized gains on securities 171,172 171,172 171,172
-------------
Comprehensive income $4,373,364
=============
Cash dividends ($0.41 per share) -- -- -- (1,391,751) -- (1,391,751)
Repurchase of treasury stock (64,170) (64,170) (1,296,038) -- -- (1,360,208)
Stock split 1,130,662 1,130,662 (1,130,662) -- -- --
------------ ----------- ----------- ------------ ------------- ------------
Balances September 30, 1997 3,391,986 3,391,986 5,263,589 35,573,293 69,302 44,298,170
Comprehensive income
Net income -- -- -- $4,206,695 4,206,695 -- 4,206,695
Other comprehensive income, net
of tax
Unrealized gains on
securities, net of 27,421 27,421 27,421
reclassification adjustment
-------------
Comprehensive income $4,234,116
=============
Cash dividends ($0.45 per share) -- -- -- (1,507,566) -- (1,507,566)
Repurchase of treasury stock (111,302) (111,302) (2,242,791) -- -- (2,354,093)
------------- ----------- ----------- ------------ ------------- ------------
Balances September 30, 1998 3,280,684 3,280,684 3,020,798 38,272,422 96,723 44,670,627
Comprehensive income
Net income -- -- -- $4,586,766 4,586,766 -- 4,586,766
Other comprehensive income, net
of tax
Unrealized losses on (310,642) (310,642) (310,642)
securities
-------------
Comprehensive income $4,276,124
=============
Cash dividends ($0.49 per share) -- -- -- (1,576,463) -- (1,576,463)
Repurchase of treasury stock (96,967) (96,967) (1,817,102) -- -- (1,914,069)
------------- ----------- ----------- ------------ ------------- ------------
Balances September 30, 1999 3,183,717 $3,183,717 $1,203,696 $41,282,725 $(213,919) $45,456,219
============= =========== =========== ============ ============= ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities
Net income $ 4,586,766 $ 4,206,695 $4,202,192
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for loan losses 88,969 74,621 50,000
Depreciation and amortization 439,605 381,035 255,095
Investment securities accretion, net (79,166) (40,769) (36,876)
Amortization of deferred loan fees (426,077) (379,997) (271,410)
Gain on sale of investment securities -- (73,541) --
Change in
Deferred income tax (459,581) (138,060) 617,401
Interest receivable (35,974) 44,804 116,711
Interest payable 179,596 32,522 (26,034)
Other adjustments (17,390) 81,608 (1,435,368)
------------ ------------ ------------
Net cash provided by operating activities 4,276,748 4,188,918 3,471,711
------------ ------------ -------------
Investing Activities
Net change in interest-bearing deposits 718,000 258,000 (976,000)
Purchases of securities available for sale (7,459,930) (3,625,859) (14,636,858)
Purchases of securities held to maturity -- -- (320,000)
Proceeds from maturities and paydowns of securities held to maturity 4,216,989 4,203,955 5,342,664
Proceeds from maturities and paydowns of securities available for sale 11,980,245 10,597,951 14,929,330
Proceeds from sale of security available for sale -- 2,661,344 --
Net change in mutual funds -- (2,896,947) (2,563,954)
Net change in loans (29,874,229) (31,212,564) (12,205,762)
Purchases of premises and equipment (328,616) (1,079,132) (492,605)
Proceeds from sale of equipment -- 13,993 --
Proceeds from sales of real estate owned 143,566 115,026 277,254
Purchases of Federal Home Loan Bank of Indianapolis stock (255,800) (155,500) (57,800)
Other investing activities 33,349 (337,500) (225,000)
------------ ------------ ------------
Net cash used by investing activities (20,826,426) (21,457,233) (10,928,731)
------------ ------------ ------------
Financing Activities
Net change in
NOW and savings deposits 18,795,930 4,885,569 2,192,329
Certificates of deposit 3,464,428 1,837,050 4,542,405
Short-term borrowings (1,162,914) 1,040,253 3,162,400
Net change in advances by borrowers for taxes and insurance -- (593) (1,859)
Net change in bank overdraft (1,171,306) 1,171,306 --
Proceeds from Federal Home Loan Bank advances 2,200,000 5,000,000 --
Cash dividends (1,557,767) (1,475,696) (1,377,648)
Repurchase of common stock (1,914,069) (2,354,093) (1,360,208)
------------ ------------ ------------
Net cash provided by financing activities 18,654,302 10,103,796 7,157,419
------------ ------------ ------------
Net Change in Cash and Cash Equivalents 2,104,624 (7,164,519) (299,601)
Cash and Cash Equivalents, Beginning of Year 3,567,625 10,732,144 11,031,745
------------ ------------ ------------
Cash and Cash Equivalents, End of Year $ 5,672,249 $ 3,567,625 $10,732,144
============ ============ ============
Additional Cash Flows and Supplementary Information:
Interest paid $11,860,610 $12,054,743 $11,493,593
Income tax paid 2,861,591 2,612,502 1,511,993
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Peoples Bancorp ("Company"), its
wholly owned subsidiary, Peoples Federal Savings Bank of DeKalb County ("Bank"),
and the Bank's wholly owned subsidiary, Peoples Financial Services, Inc.
("Peoples Financial") conform to generally accepted accounting principles and
reporting practices followed by the thrift industry. The more significant of the
policies are described below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Bank. The Bank operates under a federal thrift
charter and provides full banking services, including trust services. As a
federally chartered thrift, the Bank is subject to the regulation of the Office
of Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation.
The Bank generates mortgage and consumer loans and receives deposits from
customers located primarily in DeKalb County, Indiana and surrounding counties.
The Bank's loans are generally secured by specific items of collateral including
real property and consumer assets.
Consolidation--The consolidated financial statements include the accounts
of the Company, the Bank and Peoples Financial after elimination of all material
intercompany transactions.
Investment Securities--Debt securities are classified as held to maturity
when the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity and marketable equity securities
are classified as available for sale. Securities available for sale are carried
at fair value with unrealized gains and losses reported separately, net of tax,
in accumulated other comprehensive income. The Company holds no securities for
trading.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded as net
security gains (losses). Gains and losses on sales of securities are determined
on the specific-identification method.
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Allowance for loan and real estate losses are maintained to absorb loan and
real estate losses based on management's continuing review and evaluation of the
loan and real estate portfolios and its judgment as to the impact of economic
conditions on the portfolios. The evaluation by management includes
consideration of past loss experience, changes in the composition of the
portfolios, the current condition and amount of loans and foreclosed real estate
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses and the
valuation of real estate is based on estimates that are particularly susceptible
to significant changes in the economic environment and market conditions.
Management believes that, as of September 30, 1999 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.
Investment in Limited Partnership is included in other assets as of
September 30, 1999 and 1998. The Company utilizes the equity method of
accounting for this investment. At September 30, 1999 and 1998, the amount
included in other assets totalled $529,200 and $562,500.
Pension plan costs are based on actuarial computations and charged to
current operations. The funding policy is to pay at least the minimum amounts
required by ERISA.
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to or greater than the fair value of the shares at the date
of grant. The Company accounts for and will continue to account for stock option
grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, recognizes no compensation expense for the stock
option grants.
Income tax in the consolidated statement of income includes deferred income
tax provisions or benefits for all significant temporary differences in
recognizing income and expenses for financial reporting and income tax purposes.
The Company files consolidated income tax returns with its subsidiaries.
Earnings per share have been computed based upon the weighted average
common shares outstanding during each year.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 2 -- Restriction On Cash
The Bank is required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at September 30, 1999, was
$1,048,000.
Note 3 -- Investment Securities
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $ 7,268,786 $ -- $129,320 $ 7,139,466
State and municipal obligations 4,522,436 14,007 36,772 4,499,671
Marketable equity securities 5,495,920 -- 202,144 5,293,776
----------- ---------- ----------- -----------
Total available for sale 17,287,142 14,007 368,236 16,932,913
----------- ---------- ----------- -----------
Held to maturity
State and municipal obligations 609,852 8,596 -- 618,448
Mortgage-backed securities 257,707 45,496 -- 303,203
----------- ---------- ----------- ----------
Total held to maturity 867,559 54,092 -- 921,651
----------- ---------- ----------- -----------
Total investment securities $18,154,701 $68,099 $368,236 $17,854,564
=========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $11,202,286 $ 84,130 $ -- $11,286,416
State and municipal obligations 5,046,357 84,753 669 5,130,441
Marketable equity securities 5,460,901 -- -- 5,460,901
----------- ---------- ----------- -----------
Total available for sale 21,709,544 168,883 669 21,877,758
----------- ---------- ----------- -----------
Held to maturity
Federal agencies 4,000,000 4,374 313 4,004,061
State and municipal obligations 695,993 16,723 -- 712,716
Mortgage-backed securities 372,282 14,511 -- 386,793
----------- ---------- ----------- -----------
Total held to maturity 5,068,275 35,608 313 5,103,570
----------- ---------- ----------- -----------
Total investment securities $26,777,819 $204,491 $982 $26,981,328
=========== ========== =========== ===========
</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, 1999, 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.
<TABLE>
<CAPTION>
1999
------------------------------------------
Held to Maturity Available for Sale
------------------ -----------------------
Amortized Fair Amortized Fair
Maturity Distributions at September 30 Cost Value Cost Value
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Within one year $ 65,000 $ 65,000 $ 1,046,916 $ 1,048,747
One to five years 454,852 463,448 7,160,635 7,042,875
Five to ten years 90,000 90,000 3,508,407 3,470,998
After ten years -- -- 75,264 76,517
--------- -------- ----------- -----------
609,852 618,448 11,791,222 11,639,137
Mortgage-backed securities 257,707 303,203 -- --
Marketable equity securities -- -- 5,495,920 5,293,776
--------- -------- ----------- -----------
$867,559 $921,651 $17,287,142 $16,932,913
========= ======== =========== ===========
</TABLE>
Securities with a carrying value of $7,300,000 and $7,545,000 were pledged
at September 30, 1999 and 1998 to secure Federal Home Loan Bank advances and
repurchase agreements.
Proceeds from sales of securities available for sale during 1998 were
$2,661,344. Gross gains of $74,900 and gross losses of $1,359 were realized on
those sales. There were no sales of securities during the years ended September
30, 1999 or 1997. The income tax expense on the security gains for the year
ended September 30, 1998 was $29,130.
There were no sales of securities held to maturity.
Note 4 -- Loans and Allowance
<TABLE>
<CAPTION>
September 30,
1999 1998
- - -------------- --------------
<S> <C> <C>
Commercial and industrial loans $ 3,351,263 $ --
Real estate loans 273,764,397 247,758,749
Construction loans 6,997,963 8,120,336
Individuals' loans for household and
other personal expenditures 17,462,456 16,130,224
-------------- --------------
301,576,079 272,009,309
-------------- --------------
Less:
Undisbursed portion of loans 2,307,327 3,080,628
Deferred loan fees and discounts 1,393,713 1,323,090
Allowance for loan losses 1,005,119 947,008
-------------- --------------
4,706,159 5,350,726
-------------- --------------
Total loans $296,869,920 $266,658,583
============== ==============
</TABLE>
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Year Ended September 30 1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Allowance for loan losses
Balances, October 1 $ 947,008 $886,567 $887,478
Provision for losses 88,969 74,621 50,000
Recoveries on loans 22,546 32,769 33,188
Loans charged off (53,404) (46,949) (84,099)
------------ ---------- ----------
Balances, September 30 $1,005,119 $947,008 $886,567
============ ========== ==========
</TABLE>
Note 5 -- Premises and Equipment
<TABLE>
<CAPTION>
September 30,
1999 1998
------------ ------------
<S> <C> <C>
Land $ 438,238 $ 356,238
Buildings 3,134,565 3,135,359
Equipment 2,351,581 2,104,172
------------ ------------
Total cost 5,924,384 5,595,769
Accumulated depreciation (3,638,495) (3,198,891)
------------ ------------
Net $2,285,889 $2,396,878
============ ============
</TABLE>
Note 6 -- Deposits
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Demand deposits $ 55,875,165 $ 40,440,817
Savings deposits 38,310,995 34,949,413
Certificates and other time deposits
of $100,000 or more 20,820,333 20,124,050
Other certificates and time deposits 155,516,445 152,748,299
Interest payable 471,156 282,701
-------------- --------------
Total Deposits $270,994,094 $248,545,280
============== ==============
</TABLE>
Certificates and other time deposits maturing in years ending September 30:
<TABLE>
<S> <C>
2000 $123,115,508
2001 38,379,968
2002 8,446,386
2003 4,706,109
2004 1,688,807
--------------
$176,336,778
==============
</TABLE>
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 7 -- Short-term Borrowings
<TABLE>
<CAPTION>
September 30,
1999 1998
------------ ------------
<S> <C> <C>
Federal Home Loan Bank advances $2,200,000 $ --
Securities sold under repurchase agreements 3,039,739 4,202,653
------------ ------------
Total short-term borrowings $5,239,739 $4,202,653
============ ============
</TABLE>
Securities sold under agreement to repurchase totaling $3,039,739 and
$4,202,653 at September 30, 1999 and 1999, 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 1999 totaled $4,417,940 and the average of
such agreements totaled $3,532,600. The agreements at September 30, 1999 matured
on October 1, 1999.
Note 8 -- Long-Term Debt
Long-term debt at September 30, 1999 and1998 totaling $5,000,000 consisted
of Federal Home Loan Bank advances at various rates maturing at various dates
through May 5, 2008. The Federal Home Loan Bank advances are secured by first
mortgage loans and investment securities totaling $256,550,000. Advances are
subject to restrictions or penalties in the event of repayment.
<TABLE>
<CAPTION>
Maturities in years ending September 30
<S> <C>
2003 $1,000,000
2004 1,000,000
Thereafter 3,000,000
------------
$5,000,000
============
</TABLE>
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 9 -- Income Tax
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal $2,326,871 $2,054,730 $1,518,553
State 617,586 679,725 457,806
Deferred
Federal (278,965) (110,448) 489,827
State (180,616) (27,612) 127,574
------------ ------------ ------------
Total income tax expense $2,484,876 $2,596,395 $2,593,760
============ ============ ============
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $2,404,353 $2,313,044 $2,310,624
Tax exempt interest (102,618) (104,677) (94,100)
Nondeductible expenses 2,853 4,600 3,931
Effect of state income taxes 288,400 430,395 386,351
Effective of low income housing credits (140,700) (15,482) --
Other 32,588 (31,485) (13,046)
------------ ------------ ------------
Actual tax expense $2,484,876 $2,596,395 $2,593,760
============ ============ ============
</TABLE>
A cumulative net deferred tax asset (liability) is included in other assets
(liabilities). The components of the asset (liability) are as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Allowance for loan losses $ 427,176 $ 375,015
Loan fees 528,296 444,889
Net unrealized losses on
securities available for sale 140,310 --
Other 23,141 --
------------ ------------
Total assets 1,118,923 819,904
------------ ------------
Liabilities
Depreciation 20,192 68,493
State income tax 59,300 47,773
Other -- 109,170
Tax bad debt reserves in excess of base year 803,398 964,077
FHLB of Indianapolis stock dividend 84,278 78,527
Net unrealized gains on securities
available for sale -- 71,490
------------ ------------
Total liabilities 967,168 1,339,530
------------ ------------
$ 151,755 $ (519,626)
============ ============
</TABLE>
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Retained earnings at September 30, 1999, 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,
1999.
Note 10 -- Other Comprehensive Income
<TABLE>
<CAPTION>
Year Ended September 30,
1999
--------------------------------
Before-Tax Tax Net-of-Tax
Amount Benefit Amount
----------- ---------- ----------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising during the year $(514,393) $(203,751) $(310,642)
=========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
1998
---------------------------------
Before-Tax Tax Net-of-Tax
Year Ended September 30 Amount Expense Amount
----------- ---------- ----------
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding gains arising during the year $118,947 $ 47,115 $ 71,832
Less: reclassification adjustment for gains
realized in net income 73,541 29,130 44,411
----------- ---------- ----------
Net unrealized gains $ 45,406 $ 17,985 $ 27,421
=========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
1997
---------------------------------
Before-Tax Tax Net-of-Tax
Amount Expense Amount
----------- ---------- ----------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding gains arising during the year $283,444 $112,272 $171,172
=========== ========== ==========
</TABLE>
Note 11 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying consolidated financial statements. The Banks'
exposure to credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit is represented by the
contractual or notional amount of those instruments. The Bank uses the same
credit policies in making such commitments as it does for instruments that are
included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk at
September 30, 1999 and 1998 consisted of commitments to extend credit totaling
$18,416,000 and $20,359,000, respectively.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 one officer which include
provisions for payment to them of three years' salary in the event of their
termination in connection with any change in ownership or control of the
Company, other than by agreement. The agreements have terms of three years which
may be extended annually for successive periods of one year.
The Company and subsidiary are also subject to possible claims and lawsuits
which arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate determination of such possible
claims or lawsuits will not have a material adverse effect on the consolidated
financial position of the Company.
Note 12 -- Year 2000
Like all entities, the Company and subsidiaries are exposed to risks
associated with the Year 2000 Issue, which affects computer software and
hardware; transactions with customers, vendors, and other entities; and
equipment dependent upon microchips. The Company has begun, and is continuing,
the process of identifying and remediating potential Year 2000 problems. It is
not possible for any entity to guarantee the results of its own remediation
efforts or to accurately predict the impact of the Year 2000 Issue on third
parties with which the Company and subsidiaries do business. If remediation
efforts of the Company or third parties with which the Company and subsidiaries
do business are not successful, the Year 2000 Issue could have negative effects
on the Company's financial condition and results of operations in the near term.
Note 13 -- Dividends and Capital Restrictions
Without prior approval, current regulations allow the Bank to pay dividends
to the Company not exceeding net profits (as defined) for the current calendar
year to date plus those for the previous two years which amounts to $1,736,000
as of September 30, 1999. The Bank normally restricts dividends to a lesser
amount because of the need to maintain an adequate capital structure.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 14 -- Regulatory Capital
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies and is assigned to a capital category. The
assigned capital category is largely determined by ratios that are calculated
according to the regulations. The ratios are intended to measure capital
relative to assets and credit risk associated with those assets and off-balance
sheet exposures of the entity. The capital category assigned to an entity can
also be affected by qualitative judgments made by regulatory agencies about the
risk inherent in the entity's activities that are not part of the calculated
ratios.
There are five capital categories defined in the regulations, ranging from
well capitalized to critically undercapitalized. Classification of a bank in any
of the undercapitalized categories can result in actions by regulators that
could have a material effect on a bank's operations. At September 30, 1999 and
1998, the Bank is categorized as well capitalized and met all subject capital
adequacy requirements. There are no conditions or events since September 30,
1999 that management believes have changed the Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------
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) $36,705,000 20.5% $14,335,000 8.0% $17,918,000 10.0%
Tier 1 risk-based capital(1)
(to risk-weighted assets) 35,726,000 19.9% 14,335,000 8.0% 17,918,000 10.0%
Core capital(1)
(to adjusted tangible assets) 35,726,000 11.1% 12,904,000 4.0% 19,355,000 6.0%
Core capital(1)
(to adjusted total assets) 35,726,000 11.1% 12,904,000 4.0% 16,129,000 5.0%
</TABLE>
The Bank's tangible capital at September 30, 1999 was $35,726,000, which
amount was 11.0 percent of tangible assets and exceeded the required ratio of
1.5 percent.
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------------
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) $35,951,000 22.5% $12,793,000 8.0% $15,992,000 10.0%
Tier 1 risk-based capital(1)
(to risk-weighted assets) 35,029,000 21.9% 12,793,000 8.0% 15,922,000 10.0%
Core capital(1)
(to adjusted tangible assets) 35,029,000 11.8% 8,938,000 3.0% 17,875,000 6.0%
Core capital(1)
(to adjusted total assets) 35,029,000 11.8% 8,938,000 3.0% 14,896,000 5.0%
</TABLE>
(1) As defined by regulatory agencies
The Bank's tangible capital at September 30, 1998 was $35,029,000, which
amount was 11.8 percent of tangible assets and exceeded the required ratio of
1.5 percent.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 15 -- 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 $7,036,
$3,884 and $10,698 for 1999, 1998 and 1997. This plan provides pension benefits
for substantially all of the Bank's employees.
The Company had established an employee stock ownership plan ("ESOP")
covering substantially all employees of the Company. The ESOP was designed to
enable eligible employees to acquire Company common stock. The cost of the ESOP
was 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 were allocated to each
participating employee and held until the employee's termination, retirement or
death. During the year ended September 30, 1999, the Company merged the ESOP
into the Company's Employees' Savings and Profit Sharing Plan and Trust
effective May 1, 1999. All assets in the ESOP were transferred to employee
accounts in the Profit Sharing Plan.
At September 30, 1998, the Trust owned 51,623 shares of the Company's
common stock, of which 50,823 had been allocated to employee accounts. Employees
could vote allocated shares, and the trustees could vote unallocated shares.
Plan contributions charged to expense totaled $86,233 and $77,932 for 1998 and
1997, respectively.
The Profit Sharing Plan is maintained for the benefit of substantially all
of Company employees and allows for both employee and company contributions. The
Company contribution consists of a matching contribution of 50% of employee
contributions, up to 6% of eligible employee compensation. The Company
contribution to the plan was $24,588 for 1999.
Note 16 -- Stock Option Plan
Under the Company incentive stock option plan approved in 1998, which is
accounted for in accordance with Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees, and related interpretations, the
Company grants selected executives and other key employees stock option awards
which vest and become fully exercisable at the end of five years of continued
employment. During the year ended September 30, 1999, the Company authorized the
grant of options for up to 200,000 shares of the Company's common stock. The
exercise price of each option, which has a ten-year life, was equal to or
greater than the market price of the Company's stock on the date of grant;
therefore, no compensation expense was recognized.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Although the Company has elected to follow APB No. 25, SFAS No. 123
requires pro forma disclosures of net income and earnings per share as if the
Company had accounted for its employee stock options under that Statement. The
fair value of each option grant was estimated on the grant date using a present
value calculation with the following assumptions:
<TABLE>
<CAPTION>
September 30, 1999
---------------------
<S> <C>
Risk-free interest rates 5.02%
Dividend yields 2.48%
Volatility factors of expected market price of common stock 19.52
Weighted-average expected life of the options 10 years
</TABLE>
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------
<S> <C> <C>
Net income As reported $4,586,766
Pro forma 4,563,646
Basic earnings per share As reported $1.42
Pro forma $1.41
Diluted earnings per share As reported $1.42
Pro forma $1.41
</TABLE>
The following is a summary of the status of the Company's stock option plan
and changes in that plan as of and for the year ended September 30, 1999.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------
Weighted-
Average
Options Shares Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of year -- $ --
Granted 30,000 21.50
Exercised -- --
Forfeited/expired -- --
Outstanding, end of year 30,000 --
Options exercisable at year end -- --
Weighted-average fair value of options granted during the year $ 5.78
</TABLE>
As of September 30, 1999, the 30,000 options outstanding have an exercise
price of $21.50 and a weighted-average remaining contractual life of 9.5 years.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 17 -- Earnings Per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
September 30, 1999
Weighted Average Per-Share
Income Shares Amount
<S> <C> <C> <C>
Basic Earnings Per Share
Net income available to common stockholders $4,586,766 3,226,894 $1.42
Effect of Dilutive Securities
Stock options -- -- --
---------- --------- -----
Diluted Earnings Per Share
Income available to common stockholders and
assumed conversions $4,586,766 3,226,894 $1.42
========== ========= =====
</TABLE>
Options to purchase 30,000 shares of common stock at per share were
outstanding at September 30, 1999, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
Note 18 -- Acquisition
On September 21, 1999, the Company entered into an agreement with Three
Rivers Financial Corporation (Three Rivers) to acquire the outstanding shares of
Three Rivers in exchange for Company stock. The agreement is subject to
regulatory and shareholder approval. Terms of the agreement include the Company
issuing 1.08 shares of its stock in exchange for each outstanding share of Three
Rivers as of the effective date of the acquisition, which is yet to be
determined. The transaction will be recorded under the purchase method of
accounting.
Note 19 -- 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.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
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
carrying value.
Federal Home Loan Bank advances--The fair value of these borrowings is
estimated using a discounted cash flow calculation, based on current rates for
similar advances.
Advances by Borrowers for Taxes and Insurance--The fair value of advances
by borrowers for taxes and insurance approximates carrying value.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 5,672,249 $ 5,672,249 $ 3,567,625 $ 3,567,625
Interest-bearing deposits -- -- 718,000 718,000
Investment securities available for sale 16,932,913 16,932,913 21,877,758 21,877,758
Investment securities held to maturity 867,559 921,651 5,068,275 5,103,570
Loans 297,875,039 295,533,000 267,605,591 276,023,000
Interest receivable 1,822,340 1,822,340 1,748,311 1,748,311
Stock in FHLB 2,473,500 2,473,500 2,217,700 2,217,700
Liabilities
Bank overdraft -- -- 1,171,306 1,171,306
Deposits 270,552,938 270,012,000 248,262,579 249,793,299
Short-term borrowings 5,545,280 5,239,739 4,202,653 4,202,653
Federal Home Loan Bank advances 5,000,000 4,874,000 5,000,000 4,963,000
Interest payable 483,289 483,289 282,701 282,701
</TABLE>
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 20 -- Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
Net Provision Average Earnings
Quarter Interest Interest Interest For Loan Net Shares Per
Ending Income Expense Income Losses Income Outstanding Share
- ------- ------------ ----------- ----------- ------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Dec 98 $ 5,845,682 $ 3,044,300 $ 2,801,382 $30,942 $1,084,291 3,270,559 $0.33
Mar 99 5,865,500 2,954,982 2,910,518 10,275 1,068,598 3,253,664 0.33
Jun 99 6,047,475 3,017,009 3,030,466 24,896 1,186,278 3,202,623 0.37
Sep 99 6,068,726 3,044,907 3,023,819 22,856 1,247,599 3,183,717 0.39
----------- ----------- ----------- ------- ----------
$23,827,383 $12,061,198 $11,766,185 $88,969 $4,586,766
=========== =========== =========== ======= ==========
Dec 97 $5,643,863 $ 3,004,754 $ 2,639,109 $ 5,121 $1,025,188 3,391,460 $0.30
Mar 98 5,725,235 2,967,025 2,758,210 2,542 1,120,265 3,382,787 0.33
Jun 98 5,778,664 3,035,049 2,743,615 34,253 1,005,684 3,368,281 0.30
Sep 98 5,806,440 3,080,437 2,726,003 32,705 1,055,558 3,353,829 0.32
----------- ----------- ----------- ------- ----------
$22,954,202 $12,087,265 $10,866,937 $74,621 $4,206,695
=========== =========== =========== ======= ==========
</TABLE>
Note 21 -- 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.
<TABLE>
<CAPTION>
Condensed Balance Sheet
September 30,
1999 1998
------------- -------------
<S> <C> <C>
Assets
Cash $ 2,791,444 $ 45,597
Securities purchased from
subsidiary under agreement to resell 2,308,904 4,189,956
Investment in subsidiary 35,651,696 35,077,294
Securities available for sale 4,892,395 5,535,658
Securities held to maturity 150,000 185,000
Interest receivable 90,411 74,869
------------- -------------
Total assets $45,884,850 $45,108,374
============= =============
Liabilities
Dividends payable on common stock $ 412,378 $ 393,682
Other 16,253 44,065
------------- -------------
Total liabilities 428,631 437,747
------------- -------------
Stockholders' equity
Common stock 3,183,717 3,280,684
Additional paid-in capital 1,203,696 3,020,798
Retained earnings 41,282,725 38,272,422
Accumulated other comprehensive income (213,919) 96,723
------------- -------------
45,456,219 44,670,627
------------- -------------
Total liabilities and stockholders' equity $45,884,850 $45,108,374
============= =============
</TABLE>
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Condensed Statement of Income
Year Ended September 30
1999 1998
------------ ------------
<S> <C> <C>
Income
Dividends from subsidiary $3,500,000 $3,000,000
Interest on investments 394,487 412,548
Expenses (79,901) (84,142)
------------ ------------
Income before equity in undistributed
income of subsidiary and income tax expense
3,814,586 3,328,406
Equity in undistributed income of subsidiary 802,880 915,439
------------ ------------
Income before income tax 4,617,466 4,243,845
Income tax expense 30,700 37,150
------------ ------------
Net income $4,586,766 $4,206,695
============ ============
</TABLE>
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30
1999 1998
----------- ------------
<S> <C> <C>
Net cash provided by operating activities $3,757,824 $ 3,339,173
----------- ------------
Cash flows from investing activities
Purchases of securities available for sale (905,698) (628,859)
Proceeds from maturities of securities held to maturity 25,000 30,000
Proceeds from maturities and calls of securities available for sale 1,480,245 1,381,016
Net change in mutual fund (20,742) (405,217)
Proceeds from sale of securities available for sale -- 255,625
Net change in securities purchased under agreement to resell 1,881,052 (125,877)
----------- ------------
Net cash provided by investing activities 2,459,857 506,688
----------- ------------
Cash flows from financing activities
Stock repurchased (1,914,069) (2,354,093)
Cash dividends (1,557,765) (1,475,696)
----------- ------------
Net cash used by financing activities (3,471,834) (3,829,789)
----------- ------------
Net change in cash 2,745,847 16,072
Cash at beginning of year 45,597 29,525
----------- ------------
Cash at end of year $2,791,444 $ 45,597
=========== ============
</TABLE>
<PAGE>
Corporate Profile
Peoples Bancorp ("the company') is a holding company formed in 1990. Its
stock is traded on the NASDAQ National Market System under the symbol PFDC.
The Company's primary asset is Peoples Federal Savings Bank of Dekalb
County ("the Bank"). The Bank was formed in 1925 and has grown to assets of more
than $327 million.
The Bank's main office is located in Auburn, Indiana with full service in
Avilla, two branches in Columbia City, Garrett, Kendallville, LaGrange, and
Waterloo.
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.
Executive Officers of Bancorp
Roger J. Wertenberger
Chairman of the Board
Maurice F. Winkler, III
Chief Executive Officer and President
Deborah K. Stanger
Treasurer
John E. Weigel, III
Corporate Secretary
Independent Auditors
Olive, LLP
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 Services
38 Fountain Square Plaza
Cincinnati, OH 45263
Tel: 513-579-5320
800-837-2755
Annual Meeting
The annual meeting of stockholders of Peoples Bancorp will be held
Wednesday, January 12, 2000, at 2:00 p.m. at Ramada Limited, 306 Touring Drive,
Auburn, Indiana 46706.
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
stock-holders of the company upon request to the Secretary, Peoples Bancorp, 212
West 7th ST., P.O. Box 231, Auburn, Indiana 46706. As of the close of business
on September 30, 1999, the Company had approximately 1,500 stock-holders.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNEX F
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended June 30, 1999, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
_____________
Commission file number 1-13826
THREE RIVERS FINANCIAL CORPORATION
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
DELAWARE 38-3235452
- --------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
123 PORTAGE AVENUE, THREE RIVERS, MICHIGAN 49093
- ------------------------------------------ ------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(616) 279-5117
----------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange On Which Registered
- --------------------------------------------------------------------------------
COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject, to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $7,965,798
------------
As of September 20, 1999, there were issued and outstanding 702,734 shares
of the registrant's common stock.
The issuer's voting stock trades on the American Stock Exchange under the
symbol "THR." The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing sale price of the
registrant's common stock on September 20, 1999, was $5,789,553 ($11.00 per
share based on 526,323 shares of common stock outstanding).
Transitional Small Business Disclosure Format
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1999 (Parts I and II).
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS OF THE COMPANY
Three Rivers Financial Corporation (the "Company"), a Delaware
corporation, was formed at the direction of First Savings Bank, A Federal
Savings Bank (the "Bank"), for the purpose of becoming a holding company for the
Bank as part of the Bank's conversion from the mutual to the stock form of
organization (the "Conversion"). The Bank completed the Conversion on August 23,
1995, and the Company acquired all of the capital stock of the Bank.
The Company is classified as a unitary savings and loan holding company
subject to regulation by the Office of Thrift Supervision ("OTS"). As a unitary
savings and loan holding company, the Company is generally not restricted in the
types of activities in which the Company may engage provided the Bank maintains
a specified amount of assets in housing-related investments. To date, the
Company has not conducted any significant activity other than manage its
investment in the Bank and invest the net proceeds retained by the Company in
connection with the Conversion.
BUSINESS OF THE BANK
The Bank was formed in 1886 as a Michigan-chartered mutual savings and
loan association. In 1933, the Bank became a member of the Federal Home Loan
Bank ("FHLB") of Indianapolis and in 1939 obtained federal deposit insurance.
The Bank converted to a federal mutual savings bank in 1987 and adopted its
present name. The Bank operates through six full service offices in Three Rivers
(two offices), Schoolcraft, and Union, Michigan, and Howe and Middlebury,
Indiana.
The Bank's deposits are insured by the Savings Association Insurance
Fund ("SAIF") as administered by the Federal Deposit Insurance Corporation
("FDIC") up to applicable limits for each depositor. The Bank is subject to
comprehensive examination, supervision and regulation by the OTS and the FDIC.
This regulation is intended primarily for the protection of depositors of the
Bank and not for the protection of shareholders of the Company.
The Bank is principally engaged in the business of accepting deposits
from the general public through a variety of deposit programs and investing
those deposits together with other funds in originating loans secured by
one-to-four family residential properties located in its market area, loans
secured by multi-family residential and commercial properties, construction
loans, second mortgage loans on single-family residences, home equity lines of
credit, and secured and unsecured consumer loans, including loans secured by
savings accounts.
MARKET AREA AND COMPETITION
The Bank considers its primary market area to consist of St. Joseph and
Cass Counties, Michigan, the southwest portion of Kalamazoo County, Michigan, La
Grange County, Indiana, and the eastern portion of Elkhart County, Indiana.
Management believes that most of the Bank's depositors and borrowers are
residents of these counties. The Bank's primary market area has an agricultural
and diversified industrial economic base (which includes the cyclical automobile
industry), with an emphasis on the production sector that includes major
manufacturers of international scope. Moreover, the
1
<PAGE>
distribution sector, primarily in the wholesale and retail trades, constitutes a
substantial portion of the area's economy in terms of product mix, sales
receipts, and employment. Large local employers include American Axle
(automotive), Johnson Corporation (steam specialties), Eaton Corporation
(automotive parts), Lear Siegler (refrigeration equipment) and Coachman
Industries (manufactured housing and recreational vehicles).
The Bank experiences competition both in attracting and retaining
deposits and in the making of mortgage and other loans. Direct competition for
deposits in the Bank's market area comes from one savings institution, two
credit unions, and three commercial banks which have offices in its market area.
Significant competition for the Bank's other deposit products and services come
from money market mutual funds, brokerage firms, and insurance companies. The
primary factors in competing for loans are interest rates and loan origination
fees and the range of services offered by various financial institutions.
Competition for the origination of real estate loans primarily comes from other
financial institutions and mortgage companies.
LENDING ACTIVITIES
GENERAL. The Bank's primary lending activity is the origination of
conventional mortgage loans for the purpose of constructing, purchasing, or
refinancing owner-occupied one-to-four family residential properties in its
primary market area. To a lesser extent, the Bank originates multi-family
residential, commercial real estate, and church loans. The Bank also originates
consumer loans.
The Bank has sought to build an interest rate sensitive loan portfolio
by originating adjustable rate mortgage ("ARM") loans and five-year balloon
mortgage loans. The Bank is also involved to a limited extent in the origination
of fixed-rate mortgage loans on owner-occupied, single-family residential
properties. As of June 30, 1999, 77.60% of the mortgage loan portfolio was
comprised of ARM loans. The Bank's ARM loans have an interest rate that adjusts
periodically based on the 1- or 3-year U.S. Treasury index. The interest rates
on these loans have an initial adjustment period of one or three years, with a
maximum adjustment of 2% per year and 6% over the life of the loan. All ARM
loans originated by the Bank are retained in the Bank's loan portfolio.
2
<PAGE>
LOAN PORTFOLIO COMPOSITION: The following information presents the
composition of the Bank's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowance for loan losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1999 1998
------------------------------ --------------------------
Amount Percent Amount Percent
-------------- ----------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
One-to-four family ......................... $48,771 68.88% $43,296 67.80%
Secured by other real estate(1)............. 6,068 8.57 5,959 9.33
Construction loans ......................... 2,034 2.87 2,480 3.89
---------- --------- -------- ----------
Total real estate loans ................ $56,873 80.32 51,735 81.02
----------
----------
OTHER LOANS:
Consumer Loans:
Automobile ................................. 3,421 4.83 2,800 4.38
Home equity ................................ 2,752 3.89 2,800 4.38
Other ...................................... 4,705 6.64 4,328 6.78
---------- --------- -------- ----------
Total consumer loans ................... 10,878 15.36 9,928 15.54
---------- --------- -------- ----------
Commercial business loans .................. 3,060 4.32 2,195 3.44
---------- --------- -------- ----------
Total other loans ...................... 13,938 19.68 12,123 18.98
---------- --------- -------- ----------
Total loans ................................... 70,811 100.00% 63,858 100.00%
--------- ----------
--------- ----------
LESS:
Loans in process (undisbursed) ............. 1,058 801
Unearned discounts ......................... -- 2
Deferred origination fees .................. 527 446
Allowance for loan losses .................. 520 489
---------- ---------
Total loans receivable, net ............ $68,706 $62,120
---------- ---------
---------- ---------
</TABLE>
- ----------------------------
(1) Includes multi-family and commercial real estate.
3
<PAGE>
The following table sets forth certain information at June 30, 1999
regarding the net dollar amount of loans maturing in the Bank's portfolio, based
on contractual terms to maturity. The table does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------------------
Secured by Other Consumer and
One- to-four Family Real Estate (1) Construction Commercial Business Total
------------------- --------------- ------------ ------------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DUE DURING YEARS ENDING JUNE 30,
2000 (2) ....................... $ 376 8.15% $ 10 9.50% $ 2,034 8.54% $ 3,888 9.13% $ 6,308 8.88%
2001 ........................... 198 7.46 590 8.73 -- --.-- 941 9.51 1,729 9.01
2002 ........................... 136 8.48 58 10.34 -- --.-- 1,715 9.17 1,909 9.16
2003 and 2004 .................. 1,558 7.99 1,463 8.32 -- --.-- 4,088 8.84 7,109 8.55
2005 to 2007 ................... 2,006 8.11 602 9.06 -- --.-- 1,274 9.70 3,882 8.78
2008 to 2022 ................... 18,441 8.03 3,223 9.01 -- --.-- 2,032 9.47 23,696 8.29
2023 and following ............. 26,056 7.48 122 9.20 -- --.-- -- -.-- 26,178 7.49
------- ------- ------- -------- -------
Total ................. $48,771 7.74% $ 6,068 8.84% $ 2,034 8.54% $13,938 9.18% $70,811 8.14%
------- ----- ------- ------ ------- ----- -------- ------ ------- -------
------- ----- ------- ------ ------- ----- -------- ------ ------- -------
</TABLE>
- ---------------------------
(1) Includes multi-family and commercial real estate.
(2) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after June 30, 1999 which have
predetermined or fixed interest rates is $26.7 million, while the total amount
of loans due after such date which have floating or adjustable interest rates is
$44.1 million.
4
<PAGE>
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. In
addition, "due-on-sale" clauses in mortgage loans generally give the Bank the
right to declare a loan due and payable in the event, among other things, that a
borrower sells the real property subject to the mortgage and the loan is not
repaid. Due-on-sale clauses are a means of increasing the rate on existing
mortgage loans during periods of rising interest rates and increasing the
turnover of mortgage loans in the Bank's portfolio. The average life of mortgage
loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and tends to decrease
when current mortgage loan market rates are substantially lower than rates on
existing mortgage loans.
ONE-TO-FOUR FAMILY REAL ESTATE LENDING. The primary emphasis of the
Bank's lending activity is the origination and, to a lesser extent, the purchase
of loans secured by first mortgages on owner-occupied, one-to-four family
residential properties. At June 30, 1999 $48.7 million or 68.88% of the Bank's
gross loan portfolio consisted of loans secured by one-to-four family
residential real properties which were owner-occupied, single-family residences
primarily located in the Bank's market area.
The Bank offers fixed-rate mortgages with 15 to 30 year terms.
Fixed-rate loans are made only on single family, owner occupied homes. The Bank
also originates loans on condominiums, duplex dwellings, and town homes in its
market area. The Bank generally sells its fixed-rate loans in the secondary
market, with servicing retained.
The Bank offers residential adjustable rate mortgage loans ("ARMs"),
all of which are tied to the 1 or 3 year U.S. Treasury index. The ARMs'
adjustment periods are either one or three years, with interest rate adjustments
of not more than 2% per year and a limit on adjustments over the life of the
loan of not more than 6%. The Bank's residential ARM loans are for terms of up
to 30 years, amortized on a monthly basis, with principal and interest due each
month. Residential real estate loans often remain outstanding for significantly
shorter periods than their contractual terms. Borrowers may refinance or prepay
loans at their option without penalty. The Bank offers five and seven year
fixed-rate mortgage products with 30 year amortization schedules that convert to
one year ARMs at the end of the term. The Bank also offers three, five, and
ten-year balloon mortgages with amortization periods of 10 to 30 years. These
loans are considered to be a declining part of the loan portfolio and are not
considered to be a significant risk.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 95% of the
lesser of the appraised value or purchase price. When the Bank makes a loan in
excess of 80% of the appraised value or purchase price, private mortgage
insurance is required for at least the amount of the loan in excess of 80% of
the appraised value. The maximum loan-to-value ratio on mortgage loans secured
by non-owner-occupied properties and/or used for refinancing purposes is
generally 70%.
The retention of ARM loans in the Bank's portfolio helps reduce the
Bank's exposure to changes in interest rates. However, there are unquantifiable
credit risks resulting from potential increased costs to the borrower as a
result of repricing of adjustable-rate mortgage loans. It is possible that
during periods of rising interest rates, the risk of default on adjustable-rate
mortgage loans may increase due to the upward adjustment of interest cost to the
borrower. Further, although adjustable-rate mortgage loans allow the Bank to
increase the sensitivity of its asset base to changes in interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime
interest rate adjustment limitations. Accordingly, there can be no assurance
that yields on the Bank's adjustable-rate mortgages will adjust
5
<PAGE>
sufficiently to compensate for increases, if any, in the Bank's cost of funds.
The Bank intends to continue actively monitoring the interest rate environment,
prepayment activity, interest rate risk and other factors in developing its
strategy with respect to the volume and pricing of its fixed-rate loans and in
its lending activities.
CONSTRUCTION LENDING. The Bank engages in construction lending
involving loans to qualified borrowers for construction of one-to-four family
residential and commercial properties, with the intent of such loans converting
to permanent financing upon completion of construction. These properties are
primarily located in the Bank's market area. At June 30, 1999, the Bank's loan
portfolio included $2.0 million of loans secured by properties under
construction, all of which were construction/permanent loans structured to
become permanent loans upon the completion of construction and none of which was
an interim construction loan structured to be repaid in full upon completion of
construction and receipt of permanent financing. All construction loans are
secured by a first lien on the property under construction. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
Construction/permanent loans may have either adjustable or fixed interest rates
and are underwritten in accordance with the same terms and requirements as the
Bank's permanent mortgages. Construction/permanent loans generally provide for
disbursement in stages during a construction period of up to six months, during
which period the borrower is not required to make monthly payments. Accrued
interest must be paid at completion of construction and regular monthly payments
begin one month from the date the loan is converted to permanent financing.
Borrowers must also execute a Construction Loan Agreement with the Bank.
Construction financing generally is considered to involve a higher
degree of risk of loss than one-to-four family residential mortgage lending.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value that is insufficient to assure full repayment. The
ability of a developer to sell developed lots or completed dwelling units will
depend on, among other things, demand, pricing, availability of comparable
properties and economic conditions. The Bank has sought to minimize this risk by
limiting construction lending to qualified borrowers in the Bank's market area
and by limiting the aggregate amount of outstanding construction loans.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The multi-family and
commercial real estate loans originated by the Bank have generally been made to
individuals, small businesses and partnerships and have primarily been secured
by first mortgages on retail and office buildings, manufacturing facilities,
churches, and other properties. The Bank benefits from originating such loans
due to the higher origination fees and interest rates, as well as shorter terms
to maturity, than can be obtained on one-to-four family residential mortgage
loans. The Bank also purchases participations in commercial loans originated by
other financial institutions. The Bank's multi-family residential and commercial
real estate loans generally have terms of 20 years or less, have adjustable
rates, and have loan-to-value ratios not exceeding 75%. At June 30, 1999, loans
on multi-family and commercial real estate properties constituted approximately
$6.1 million, or 8.57%, of the Bank's gross loan portfolio.
Multi-family and commercial real estate lending entails significant
additional risks as compared to one-to-four family residential lending. Such
loans typically involve large loan amounts to a single
6
<PAGE>
borrower or group of related borrowers. In addition, the payment experience on
such loans is typically dependent on the successful operation of the project,
and these risks can be significantly affected by the supply and demand
conditions in the market for commercial property and multi-family residential
units. To minimize these risks, the Bank generally limits itself to its market
area and to borrowers with which it has substantial experience or who are
otherwise well known to the Bank. It is the Bank's current practice to obtain
personal guarantees and current financial statements from all principals
obtaining commercial real estate loans. Substantially all of the properties
securing the Bank's commercial real estate loans are inspected by the Bank's
lending personnel before the loan is made. The Bank also obtains appraisals on
each property in accordance with applicable regulations. If such loans later
become delinquent, the Bank contacts and works with the borrower to resolve the
delinquency before initiating foreclosure proceedings.
CONSUMER LENDING. The Bank originates consumer loans on a secured and
unsecured basis. Consumer loans consist of personal loans, automobile, boat, and
recreational vehicle loans, savings account loans, and home improvement and home
equity loans. At June 30, 1999, consumer loans amounted to $10.9 million, or
15.36%, of the Bank's total loan portfolio.
Consumer lending generally involves more risk as compared to
one-to-four family residential mortgage lending. Loan collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness, or personal bankruptcy.
Further, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered. In addition, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of damage, loss or depreciation, and the remaining deficiency often does
not warrant further substantial collection efforts against the borrower. In
underwriting consumer loans, the Bank considers the borrower's credit history,
an analysis of the borrower's income, expenses, and ability to repay the loan,
and the value of the collateral.
COMMERCIAL BUSINESS LOANS. The Bank offers commercial business loans
which generally include equipment loans with varying terms and working capital
lines of credit secured by inventory and accounts receivable. Working capital
lines of credit are generally renewable and made for a one-year term. Interest
rates on commercial business loans are generally indexed to the prime rate. As
with commercial real estate loans, the Bank generally requires annual financial
statements from its commercial business borrowers and may require personal
guarantees if the borrower is a corporation. At June 30, 1999, commercial
business loans amounted to $3.1 million, or 4.32%, of the Bank's total loan
portfolio. At June 30, 1999, the Bank's largest commercial lending relationship
was with a manufacturing corporation with an outstanding balance of $943,000
which was current.
Commercial business lending generally involves greater risk as compared
to one-to-four family residential mortgage lending and involves risks that are
different from those associated with residential, commercial, and multi-family
real estate lending. Although commercial business loans are often collateralized
by equipment, inventory, accounts receivable, or other business assets, the
liquidation of collateral in the event of a borrower default is often not a
sufficient source of repayment because accounts receivable may be uncollectible
and inventories and equipment may be obsolete or of limited use, among other
things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors) and the
successful operation of the commercial enterprise, while liquidation of
collateral is a secondary source of repayment.
7
<PAGE>
LOAN SOLICITATION, PROCESSING, AND COMMITMENTS. Loan originations are
derived from a number of sources. Residential mortgage, consumer, and other loan
originations primarily come from walk-in customers and referrals by Realtors,
depositors, and borrowers. Loan applications may be taken by the President or a
Vice President of the Bank, and are then submitted to the Bank's Loan Committee
consisting of the President, Vice President of Lending, and the Chief Financial
Officer. Upon receipt of a loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment, income, and credit standing. An
appraisal of the real estate intended to secure the proposed loan is undertaken
by an independent appraiser approved by the Bank.
Under the Bank's lending policy, all loans to customers with
outstanding borrowings in excess of $250,000 must be approved by the Board of
Directors. Loans under $250,000 may be approved by the Loan Committee or
individual officers up to certain authorized amounts as specified in the lending
policy.
Loan applicants are promptly notified of the decision of the Bank.
Interest rates on approved loans are subject to the market rate at the time of
the loan closing. The Bank will grant a 30-day commitment locking in an interest
rate upon the payment of a commitment fee. At June 30, 1999, the Bank had $2.3
million of commitments to originate mortgage loans. It has been management's
experience that substantially all approved loans are funded. Fire and casualty
insurance, as well as flood insurance, are required for all loans as
appropriate, and title insurance is required for loans secured by real estate.
INTEREST RATES AND LOAN FEES. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan rates reflect factors such as general interest rate
levels, the supply of money available to the savings industry and the demand for
such loans. These factors are in turn affected by general economic conditions,
the monetary policies of the federal government, including the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.
In addition to the interest earned on loans, the Bank receives fees in
connection with loan commitments and originations, loan modifications, late
payments and fees for miscellaneous services related to its loans. The Bank
charges a processing fee for its adjustable-rate mortgage loans and fixed-rate
mortgage loans. All fee income is recognized by the Bank in accordance with
guidelines established by Statement of Financial Accounting Standards ("SFAS")
No. 91.
To the extent that loans are originated or acquired for the portfolio,
SFAS No. 91 limits immediate recognition of loan origination or acquisition fees
as revenues and requires that such income (net of certain loan origination or
acquisition costs) be recognized over the estimated life of such loans and
thereby reduces the amount of revenue recognized by the Bank at the time such
loans are originated or acquired. At June 30, 1999, net deferred loan fees
amounted to approximately $527,000, which are being recognized as income over
the estimated lives of the related loans.
LOANS-TO-ONE BORROWER. Savings institutions generally are subject to
the lending limits applicable to national banks. With certain limited
exceptions, the maximum amount that a savings institution or a national bank may
lend to any borrower (including certain related entities of the borrower) at one
time may not exceed 15% of the unimpaired capital and surplus of the
institution, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by readily marketable collateral. Savings institutions are
additionally authorized to make loans to one borrower, for any purpose, in an
8
<PAGE>
amount not to exceed $500,000 or, by order of the Director of OTS, in an amount
not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus
to develop residential housing, provided: (i) the purchase price of each
single-family dwelling in the development does not exceed $500,000; (ii) the
savings institution is in compliance with its fully phased-in capital
requirements; (iii) the loans comply with applicable loan-to-value requirements,
and (iv) the aggregate amount of loans made under this authority does not exceed
150% of unimpaired capital and surplus. As of June 30, 1999, the Bank was in
compliance with these lending limits.
NON-PERFORMING LOANS AND OTHER PROBLEM ASSETS. Management reviews the
Bank's loans on a regular basis. The policy of the Bank is to place on
nonaccrual status any mortgage loan that has remained delinquent for 90 days or
more, unless the loan is well-secured and in the process of collection. Consumer
and commercial loans not secured by real estate are charged off, or any expected
loss is specifically reserved against the allowance for loan losses, after the
loans become more than 90 days past due.
The Bank's collection procedures provide that late payment notices are
mailed on the 15th day following the due date of the loan payment. After a loan
becomes 30 days delinquent, the customer will be contacted by the lending
officer with an attempt to collect the delinquent payments or establish a work
out plan to remove the loan from the delinquent status. After a loan becomes 90
days or more past due, management will generally initiate legal proceedings,
unless a plan to resolve the delinquency has been developed with the borrower.
Real estate acquired by the Bank as a result of, or in lieu of,
foreclosure is classified as real estate owned until such time as it is sold.
When such property is acquired, it is recorded at fair value at the date of
foreclosure. Any required write-down of the loan to its fair value upon
foreclosure is charged against the allowance for loan losses. Subsequent to
foreclosure, in accordance with generally accepted accounting principles, if it
is periodically determined that the carrying value of the property exceeds its
estimated net realizable value, the amount of the difference is charged against
operations.
9
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets at the dates indicated. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful, as discussed above.
Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1999 1998
------------- --------------
(Dollars in thousands)
<S> <C> <C>
NON-ACCRUING LOANS:
One-to-four family..................................... $246 $455
Consumer............................................... 5 198
------ ------
Total 251 653
ACCRUING LOANS DELINQUENT MORE THAN 90 DAYS:
One-to-four family..................................... 368 --
Consumer............................................... 2 --
------ ------
Total 370 --
FORECLOSED ASSETS:
One-to-four family..................................... -- 29
Secured by other real estate........................... -- --
Consumer............................................... 3 --
------ ------
Total 3 682
------ ------
Total non-performing assets................................ $623 $682
------ ------
------ ------
Total as a percentage of total assets...................... 0.62% 0.69%
------ ------
------ ------
</TABLE>
During the year ended June 30, 1999, gross interest income of $35,872
would have been recorded on loans accounted for on a non-accrual basis if the
loans had been current throughout the respective periods. Interest recognized in
income on nonaccrual loans during such period amounted to $4,622.
At June 30, 1999, the Bank had approximately $67,000 in loans
considered by management to be potential problem loans that were not reflected
in the preceding table. As to these loans, information about possible credit
problems of borrowers have caused management to have concerns about the ability
of the borrowers to comply with present loan repayment terms. These loans are
subject to increased management attention and their classification is reviewed
on a quarterly basis.
The following table sets forth information concerning delinquent
mortgage and consumer and commercial loans at June 30, 1999. The amounts
presented represent the total remaining principal balances of the related loans,
rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
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 Ctegory
------ ------ -------- ------ ------ -------- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four family. 1 $95 0.19% 5 $135 0.28% 8 $613 1.26%
Consumer and
commercial......... -- -- --.-- -- -- --.-- -- -- --.--
Other.................. 3 21 0.15 5 21 0.15 3 7 0.05
---- ----- ---- ----- ---- ----
Total..... 4 $116 0.16% 10 $156 0.22% 11 $620 0.88%
---- ----- ----- ---- ----- ----- ---- ---- -----
---- ----- ----- ---- ----- ----- ---- ---- -----
</TABLE>
10
<PAGE>
ASSET CLASSIFICATION AND ALLOWANCE FOR LOAN LOSSES. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful," or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specified allowances for
loan losses in the amount of 100% of the portion of the asset classified loss,
or charge off such amount. An asset which does not currently warrant
classification but which possesses weaknesses or deficiencies deserving close
attention is required to be designated as "special mention." Currently, general
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. See "Regulation - Regulation of the
Bank Regulatory Capital Requirements." OTS examiners may disagree with the
insured institution's classifications and amounts reserved. If an institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the OTS. Management of the Bank reviews assets on a monthly
basis, and at the end of each quarter prepares an asset classification listing,
which is reviewed by the Board of Directors. At June 30, 1999, management had
$67,000 of assets classified as special mention, $456,000 of assets classified
as substandard and no assets classified as doubtful or loss. For additional
information, see "Non-Performing Loans and Other Problem Assets." See also
"Multi-Family and Commercial Real Estate Lending."
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Bank's past
loan loss experience, known and inherent risks in the loan portfolio, adverse
situations that may affect the borrower's ability to repay the estimated value
of any underlying collateral, and current economic conditions. The Bank
increases its allowance for loan losses by charging provisions for loan losses
against the Bank's income and decreases the allowance by charge-offs (net of
recoveries).
General allowances are made pursuant to management's assessment of
inherent risk in the Bank's loan portfolio as a whole. Specific allowances are
provided for individual loans when ultimate collection is considered
questionable by management after reviewing the current status of loans which are
contractually past due and considering the net realizable value of the security
for the loan. Management continues to actively monitor the Bank's asset quality
and to charge off loans against the allowance for loan losses when appropriate
or to provide specific loss reserves when necessary. Although management
believes it has sufficient information available to make determinations with
respect to the allowance for loan losses, future adjustments may be necessary if
economic conditions differ substantially from the economic conditions in the
assumptions used in making the initial determinations.
The Bank was last examined by the OTS in July 1999 and its loan loss
allowance was considered by the OTS to be adequate as of that time. While the
Bank believes it has established its existing allowances for loan losses to a
level considered adequate based on its evaluation of the quality of the loan
portfolio, there can be no assurance that regulators, in reviewing the Bank's
loan portfolio during future examinations, will not request the Bank to increase
its allowance for loan losses, thereby negatively affecting the Bank's financial
condition and earnings.
The increase in the ratio of the allowance to non-performing loans
relates primarily to one residential real estate loan considered non-performing
at June 30, 1998 but completely paid off by June 30, 1999. The allowance for
loan losses has increased by 6.3% from June 30, 1998 to June 30, 1999.
11
<PAGE>
After considering a variety of factors, including but not limited to the facts
that the composition of the loan portfolio has remained relatively unchanged and
that there has not been a significant change in classified loans, management did
not consider an increase to the provision for losses necessary during the year
ended June 30, 1999.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period ........... $ 489 $ 487
CHARGE-OFFS:
One-to-four family ................... (10) (11)
Consumer and commercial business ..... (27) (57)
----- -----
Total charge-offs ............... (37) (68)
----- -----
RECOVERIES:
Consumer and commercial business ..... 8 10
----- -----
Total recoveries ................ 8 10
----- -----
Net charge-offs .......................... (29) (58)
Provision charged to operations .......... 60 60
----- -----
Balance at end of period ................. $ 520 $ 489
----- -----
----- -----
Ratio of net charge-offs during
the period to average loans
outstanding during the period ....... 0.04% 0.08%
----- -----
----- -----
Ratio of allowance to non-performing loans 83.47% 74.89%
----- -----
----- -----
</TABLE>
The following table sets forth the breakdown of the allowance
for loan losses by loan category at the dates indicated. Management believes
that the allowance can be allocated by category only on an approximate basis.
The allocation of the allowance to each category is not necessarily indicative
of future losses and does not restrict the use of the allowance to absorb losses
in any category.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------
1999 1998
--------------------- -----------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family ......... $179 68.88% $159 67.80%
Secured by other real estate 51 8.57 60 9.33
Construction ............... 3 2.87 25 3.89
Consumer ................... 82 15.36 95 15.54
Commercial business ........ 30 4.32 52 3.44
-------- --------
Unallocated ................ 175 98
------ ------
Total .................... $520 100.00% $489 100.00%
------ -------- ------ --------
------ -------- ------ --------
</TABLE>
12
<PAGE>
INVESTMENT ACTIVITIES
GENERAL. The Bank invests in securities in order to diversify its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory authorities. Such investments generally include
federal funds, federal government and agency securities and qualified deposits
in other financial institutions. In accordance with SFAS No. 115, the Bank
classifies securities as either held to maturity or available for sale. For
further information, see Notes 1 and 3 of Notes to Consolidated Financial
Statements.
INVESTMENT SECURITIES. The Bank is permitted under federal law to make
certain investments, including investments in securities issued by various
federal agencies and state and municipal governments, deposits at the FHLB of
Indianapolis, certificates of deposit in federally insured institutions, certain
bankers' acceptances and federal funds. The Bank may also invest, subject to
certain limitations, in commercial paper having one of the two highest
investment ratings of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Bank to maintain an investment in FHLB of Indianapolis stock and a
minimum amount of liquid assets which may be invested in cash and specified
securities. From time to time, the OTS adjusts the percentage of liquid assets
that savings institutions are required to maintain. For additional information,
see "Regulation - Regulation of the Bank - Liquid Assets."
MORTGAGE-BACKED SECURITIES. The Bank invests in mortgage-backed and
related securities, including mortgage participation certificates which are
insured or guaranteed by U.S. government agencies and government sponsored
enterprises and collateralized mortgage obligations ("CMOs") and real estate
mortgage investment conduits ("REMICs"). Mortgage-backed securities represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Bank. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include the Federal
Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA"), and the Government National Mortgage Association ("GNMA").
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgages (I.E., fixed-rate or
adjustable-rate), as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages.
The Bank's mortgage-backed securities include CMOs, which include
securities issued by entities which have qualified under the Internal Revenue
Code of 1986, as amended ("Code"), as REMICs. CMOs and REMICs (collectively
CMOs) have been developed in response to investor concerns regarding the
uncertainty of cash flows associated with the prepayment option of the
underlying mortgagor and are typically issued by government agencies, government
sponsored enterprises and special purpose entities, such as trusts, corporations
or partnerships, established by financial institutions or other similar
institutions. A CMO can be collateralized by loans or securities which are
insured or guaranteed by FNMA, FHLMC, or GNMA. In contrast to pass-through
mortgage-backed securities, in which cash flow is received pro rata by all
security holders, the cash flow from the mortgages underlying a CMO is segmented
and paid in accordance with a predetermined priority to investors holding
various CMO classes. Consequently, the maturity of a particular CMO class may be
substantially less than the
13
<PAGE>
contractual maturity of the underlying security. By allocating the principal and
interest cash flows from the underlying collateral among the separate CMO
classes, different classes of securities are created, each with its own stated
maturity, estimated average life, coupon rate and prepayment characteristics.
Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the insurance or guarantees that back them. However,
mortgage-backed securities are subject to interest rate and prepayment risk. In
that regard, at June 30, 1999, the Bank's mortgage-backed securities portfolio
included net unrealized losses of $15,000. Although the Bank has the ability and
the intention to hold such securities to maturity, the Bank's net interest
income may be adversely affected as a result of such securities carrying below
market rates of interest.
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------
1999 1998
--------------------- ---------------------
Book Fair Book Fair
Value Value Value Value
----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning time deposits in other
financial institutions .................. $ 4,155 $ 4,155 $ 4,065 $ 4,065
------- ------- ------- -------
------- ------- ------- -------
Investment Securities:
U.S. Government securities and agency
obligations ........................ -- -- $ 1,500 $ 1,502
Obligations of states and
political subdivisions.............. 375 389 375 398
Other ................................. -- -- 103 103
------- ------- ------- -------
Subtotal ........................... 375 389 1,978 2,003
------- ------- ------- -------
FHLB stock ................................ 1,162 1,162 1,162 1,162
------- ------- ------- -------
Mortgage-Backed Securities:
FNMA certificates ..................... 4,085 4,082 3,938 3,974
GNMA certificates ..................... 4,960 4,979 2,635 2,676
FHLMC certificates .................... 2,738 2,707 3,073 3,077
Collateralized mortgage obligations ... 1,855 1,854 3,378 3,383
------- ------- ------- -------
Subtotal ........................... 13,638 13,622 13,024 13,110
------- ------- ------- -------
Total investment securities, FHLB stock and
mortgage-backed securities .............. $15,175 $15,173 $16,164 $16,275
------- ------- ------- -------
------- ------- ------- -------
Average remaining life of
U.S. Government and Agency securities... -- 7.1 years
Obligations of states and political
subdivisions......................... 8.2 years 9.2 years
</TABLE>
14
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------------------------------------------
Less than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years
------------------ ------------------------------------- --------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- --------- ------------------ -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
Obligations of states and
political subdivisions......... $-- --.--% $ -- --.--% $375 5.31% $ -- --.--%
Other............................ -- --.-- -- --.-- -- --.-- -- --.--
----- ------ ------ ------
Total investment securities held
to maturity.................. -- --.-- -- --.-- -- --.-- -- --.--
Mortgage-backed securities....... 7 7.50 4,390 5.31 1,457 5.92 6,011 6.60
----- ------ ------ ------
Total securities held
to maturity................. 7 7.50 4,390 5.31 1,832 5.80 6,011 6.60
----- ------ ------ ------
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities....... -- -- -- --.-- -- --.-- 1,773 6.66
Total securities available
for sale.................... -- --.-- -- --.-- -- --.-- 1,773 6.66
----- ------ ------ ------
Total investment and mortgage
-backed securities............... $ 7 7.50% $4,390 5.31% $1,832 5.80% $7,784 6.61%
----- ------ ------ ------ ------ ------ ------ ------
----- ------ ------ ------ ------ ------ ------ ------
<CAPTION>
June 30, 1999
---------------------------------
Total Investment Securities
--------------------------------
Carrying Average Market
Value Yield Value
----------- ---------- -------
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY:
Obligations of states and
political subdivisions......... $ 375 5.31% $ 389
Other............................ -- --.-- --
-------- -------
Total investment securities held
to maturity.................. -- --.-- --
Mortgage-backed securities....... 11,865 6.04 11,850
-------- -------
Total securities held
to maturity................. 12,240 12,239
-------- -------
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities....... 1,773 6.66 1,772
Total securities available
for sale.................... 1,773 6.66 1,772
-------- -------
Total investment and mortgage
-backed securities............... $14,013 6.10% $14,011
-------- ------- -------
-------- ------- -------
</TABLE>
15
<PAGE>
The Bank's securities portfolio at June 30, 1999 contained no
securities of any issuer with an aggregate book value in excess of 10% of the
Bank's shareholders' equity, excluding those securities issued by the U.S.
Government or its agencies.
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments, maturing investment, and mortgage-backed
securities and interest payments. Loan repayments and interest payments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
The Bank also has the ability to obtain advances from the FHLB as an additional
source of funds.
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 savings 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 ("IRAs").
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.
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1999.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
------- ------- ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit of $100,000 or more.......... $1,911 $1,344 $1,297 $1,406 $5,958
</TABLE>
The Bank does not offer premiums for deposits, does not generally offer
interest rates on deposits which exceed the average rates offered by other
financial institutions in its market area, and usually does not institute
promotional programs that result in increased rates being paid on deposits. The
Bank does, however, offer above-average rates on certificates of deposit if
management believes that the deposit will entail administrative savings by the
Bank as well as contribute to the stability of the Bank's core deposit base.
These strategies are consistent with management's goals of keeping the Bank's
cost of funds at reduced levels and maintaining slow and measurable growth for
the Bank.
BORROWINGS
Savings deposits historically have been the primary source of funds for
the Bank's lending and investment activities and for its general business
activities. The Bank is authorized, however, to use advances from the FHLB of
Indianapolis to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB are secured under a blanket
collateral agreement by
16
<PAGE>
the Bank's stock in the FHLB, one to four family residential mortgage loans
contained in the Bank's loan portfolio, and a portion of the Bank's investment
and mortgage-backed securities.
The FHLB of Indianapolis functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. See "Regulation - Regulation of the
Bank - Federal Home Loan Bank System."
The following table sets forth certain information as to FHLB advances
at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
----------- ---------
(Dollars in thousands)
<S> <C> <C>
FHLB advances..................................................... $20,657 $22,744
----------- ---------
Total borrowings............................................. $20,657 $22,744
----------- ---------
----------- ---------
Weighted average interest rate of FHLB advances................... 5.30% 5.58%
</TABLE>
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended
June 30,
---------------------------
1999 1998
-------- ----------
(Dollars in thousands)
<S> <C> <C>
MAXIMUM BALANCE:
FHLB advances........................ $22,744 $22,744
AVERAGE BALANCE:
FHLB advances........................ $20,562 $20,331
</TABLE>
SUBSIDIARY ACTIVITIES
The Company has one wholly-owned subsidiary, the Bank. The Bank is
permitted to invest an amount equal to 2% of its assets in subsidiaries with an
additional investment of 1% of assets where such investment serves primarily
community, inner-city, and community development purposes. Under such
limitations, as of June 30, 1999 the Bank was authorized to invest up to
approximately $3.0 million in the stock of or loans to subsidiaries including
the additional 1% investment for community inner-city and community development
purposes. Institutions meeting regulatory capital requirements, such as the
Bank, may invest up to 50% of their regulatory capital in conforming first
mortgage loans to subsidiaries in which they own 10% or more of the capital
stock.
The Bank's only service corporation is Alpha Financial, Inc., a
corporation organized under the laws of the state of Michigan in 1975. The
Bank's investment in Alpha Financial, Inc. was $100,000 at June 30, 1999. The
assets of the service corporation consist of cash and stock in MIMLIC Life
Insurance Company, which reinsures credit life insurance policies written on the
lives of borrowers of various financial institutions.
EMPLOYEES
Substantially all of the activities of the Company are conducted by the
Bank. Therefore, as of June 30, 1999, the Company did not have any salaried
employees. As of June 30, 1999, the Bank had 41
17
<PAGE>
full-time employees and five part-time employees, none of whom was represented
by a collective bargaining agreement.
REGULATION
Set forth below is a brief description of certain laws that relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
REGULATION OF THE COMPANY
GENERAL. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, which also permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for the
benefit of stockholders of the Company.
QUALIFIED THRIFT LENDER TEST. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test or meets the
definition of domestic building and loan association pursuant to section 7701 of
the Internal Revenue Code of 1986, as amended (the "Code"). If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL or domestic building and loan association and were acquired in
a supervisory acquisition. See "- Regulation of the Bank - Qualified Thrift
Lender Test."
RESTRICTIONS ON ACQUISITIONS. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval. These provisions also prohibit, among other things, any director
or officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of a savings and loan holding
company, from acquiring control of any savings association not a subsidiary of
the savings and loan holding company, unless the acquisition is approved by the
OTS.
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.
18
<PAGE>
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.
REGULATION OF THE BANK
GENERAL. As a federally chartered, SAIF-insured savings bank, the Bank
is subject to extensive regulation by the OTS and the FDIC. Lending activities
and other investments of the Bank must comply with various statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements of the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies found in the operations of the Bank. The relationship between the
Bank and depositors and borrowers is also regulated by federal and state laws,
especially in such matters as the ownership of savings accounts and the form and
content of mortgage documents utilized by the Bank.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the
19
<PAGE>
FDIC, or the Congress could have a material adverse impact on the Company, the
Bank, and their operations.
INSURANCE OF DEPOSIT ACCOUNTS. The Bank's deposit accounts are insured
by the SAIF to the maximum of $100,000 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, the Bank pays deposit insurance premiums ranging from 0 to 27
basis points per $100 of deposits. 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, the Bank paid a special assessment of $411,000
on November 27, 1996 to recapitalize the SAIF. This expense was recognized
during the first quarter of fiscal 1997.
Pursuant to the Act, the Bank pays, in addition to its normal deposit
insurance premium as a member of the SAIF, 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 provided for the merging
of the BIF and the SAIF by January 1, 1999 provided there were no financial
institutions still chartered as savings associations at that time. Because there
were still institutions chartered as savings associations, the insurance funds
were not merged. 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.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require
savings associations to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) leverage capital (core capital) equal to
3% of total adjusted assets, and (3) risk-based capital equal to 8.0% of total
risk-based assets. The Bank must meet each of these standards in order to be
deemed in compliance with OTS capital requirements. In addition, the OTS may
require a savings association to maintain capital above the minimum capital
levels.
Under OTS regulations, a savings bank with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component in calculating its total capital for purposes of determining whether
it meets its risk-based capital requirement. Interest rate exposure is measured,
generally, as the decline in an institution's net portfolio value that would
result from a 200 basis point increase or decrease in market interest rates
(whichever would result in lower net portfolio value), divided by the estimated
economic value of the savings association's assets. The interest rate risk
component to be deducted from total capital is equal to one-half of the
difference between an institution's measured exposure and "normal" IRR exposure
(which is defined as 2%), multiplied by the estimated economic value of the
institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation. Based on information voluntarily supplied
to the OTS, at June 30, 1999, the Bank would not have been required to deduct an
IRR component in calculating total risk-based capital had the IRR component of
the capital regulations been in effect.
20
<PAGE>
These capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries, or other persons, or savings associations
with which it has significant business relationships. The Bank is not subject to
any such individual minimum regulatory capital requirement.
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of June 30, 1999.
<TABLE>
<CAPTION>
Percent of
Amount Adjusted Assets
--------- ----------------
(Dollars in Thousands)
<S> <C> <C>
GAAP Capital ........................... $10,789 10.76%
------- ------
------- ------
TANGIBLE CAPITAL: (1)
Regulatory requirement ................. $ 1,503 1.50%
Actual capital ......................... 9,786 9.76
------- ------
Excess .............................. $ 8,283 8.26%
------- ------
------- ------
LEVERAGE (CORE) CAPITAL: (1)
Regulatory requirement ................. $ 3,007 3.00%
Actual capital ......................... 9,786 9.76
------- ------
Excess .............................. $ 6,779 6.76%
------- ------
------- ------
RISK-BASED CAPITAL: (2)
Regulatory requirement ................. $ 4,326 8.00%
Actual capital ......................... 10,304 19.06
------- ------
Excess .............................. $ 5,978 11.06%
------- ------
------- ------
</TABLE>
- ------------
(1) Regulatory capital reflects modifications from GAAP capital due to
goodwill and other intangible assets not permitted to be included in
regulatory capital.
(2) Based on risk-weighted assets of $54.1 million.
A savings bank's failure to maintain capital at or above the minimum
capital requirements may be deemed an unsafe and unsound practice and may
subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is required
to submit a capital plan that addresses the bank's need for additional capital
and meets certain additional requirements. While the capital plan is being
reviewed by the OTS, the savings bank must certify, among other things, that it
will not, without the approval of its appropriate OTS Regional Director, grow
beyond net interest credited or make capital distributions. If a savings bank's
capital plan is not approved, the savings bank will become subject to additional
growth and other restrictions. In addition, the OTS, through a capital directive
or otherwise, may restrict the ability of a savings bank not in compliance with
21
<PAGE>
the capital requirements to pay dividends and compensation, and may require such
a bank to take one or more of certain corrective actions, including, without
limitation: (i) increasing its capital to specified levels, (ii) reducing the
rate of interest that may be paid on savings accounts, (iii) limiting receipt of
deposits to those made to existing accounts, (iv) ceasing issuance of new
accounts of any or all classes or categories except in exchange for existing
accounts, (v) ceasing or limiting the purchase of loans or the making of other
specified investments, and (vi) limiting operational expenditures to specified
levels.
The Home Owners' Loan Act ("HOLA") permits savings banks not in
compliance with the OTS capital standards to seek an exemption from certain
penalties or sanctions for noncompliance. Such an exemption will be granted only
if certain strict requirements are met, and must be denied under certain
circumstances. If an exemption is granted by the OTS, the savings bank still may
be subject to enforcement actions for other violations of law or unsafe or
unsound practices or conditions.
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 June 30, 1999, 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.
CAPITAL DISTRIBUTION LIMITATIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. In general, the Bank may not declare or pay a cash dividend on
its capital stock if the effect thereof would cause the Bank to fail to meet one
of its regulatory capital requirements.
Under the regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has not
been notified by the OTS that it is in need of more than normal supervision (a
"Tier 1 association") may, after prior notice to but without the approval of the
OTS, make capital distributions during a calendar year up to the higher of: (i)
100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its surplus capital ratio at the beginning of the
calendar year, or (ii) 75% of its net income over the most recent four-quarter
period. A Tier 1 association may make capital distributions in excess of the
above amount if it gives notice to the
22
<PAGE>
OTS and the OTS does not object to the distribution. A savings association that
meets its regulatory capital requirements both before and after a proposed
distribution but does not meet its fully phased-in capital requirement (a "Tier
2 association") is authorized, after prior notice to the OTS but without OTS
approval, to make capital distributions in an amount up to 75% of its net income
over the most recent four-quarter period, taking into account all prior
distributions during the same period. Any distribution in excess of this amount
must be approved in advance by the OTS. A savings association that does not meet
its current regulatory capital requirements (a "Tier 3 association") cannot make
any capital distribution without prior approval from the OTS, unless the capital
distribution is consistent with the terms of a capital plan approved by the OTS.
At June 30, 1999, the Bank qualified as a Tier 1 association for
purposes of the capital distribution rule. The OTS may prohibit a proposed
capital distribution that would otherwise be permitted if the OTS determines
that the distribution would constitute an unsafe or unsound practice.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation. Under
the proposed regulation, an institution that would remain at least adequately
capitalized after making a capital distribution, and that was owned by a holding
company, would be required to provide notice to the OTS prior to making a
capital distribution. "Troubled" associations and undercapitalized associations
would be allowed to make capital distributions only by filing an application and
receiving OTS approval, and such applications would be approved under certain
limited circumstances.
THRIFT CHARTER. Congress has been considering legislation in various
forms that would require, among other things, federal thrifts, such as the Bank,
to convert their charters to national or state bank charters. In the absence of
appropriate "grandfather" provisions, legislation eliminating the thrift charter
could have a material adverse effect on the Bank and the Company because, among
other things, the regulatory, capital, and accounting treatment for national and
state banks and savings associations differs in certain significant respects.
Also, under current law, unitary savings and loan holding companies are
permitted to engage in activities that would not be permitted for a bank holding
company. The Company cannot determine whether, or in what form, such legislation
may eventually be enacted and there can be no assurance that any legislation
that is enacted would contain adequate grandfather rights for the Bank and the
Company.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings
associations have a responsibility under the Community Reinvestment Act ("CRA")
and related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, at a minimum, result in
regulatory restrictions on its activities and the denial of certain
applications, and failure to comply with the Fair Lending Laws could result in
enforcement actions by the OTS, as well as other federal regulatory agencies and
the Department of Justice.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank ("FHLB") system. Among other benefits, each FHLB serves as a reserve
or central bank for its members within its assigned region. Each FHLB is
financed primarily from the sale of consolidated obligations of the FHLB system.
Each FHLB makes available to members loans (I.E., advances) in accordance with
the policies and procedures established by the Board of Directors of the
individual FHLB.
As a member, the Bank is required to own capital stock in an FHLB in an
amount equal to the greater of: (i) 1% of its aggregate outstanding principal
amount of its residential mortgage loans, home
23
<PAGE>
purchase contracts and similar obligations at the beginning of each calendar
year, (ii) 0.3% of total assets, or (iii) 5% of its FHLB advances (borrowings).
At June 30, 1999, the Bank had $1.2 million in FHLB stock, which was in
compliance with this requirement.
LIQUID ASSETS. Under OTS regulations, a savings association is required
to maintain an average daily balance of liquid assets (including cash, certain
time deposits and savings accounts, bankers' acceptances, certain government
obligations, and certain other investments) in each calendar quarter of not less
than 4% of either (1) its liquidity base (consisting of certain net withdrawable
accounts plus short-term borrowings) as of the end of the preceding calendar
quarter, or (2) the average daily balance of its liquidity base during the
preceding quarter. This liquidity requirement may be changed from time to time
by the OTS to any amount between 4.0% to 10.0%, depending upon certain factors,
including economic conditions and savings flows of all savings associations. The
Bank maintains liquid assets in compliance with these regulations. Monetary
penalties may be imposed upon an institution for violations of liquidity
requirements.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At June
30, 1999 the Bank was in compliance with these requirements.
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 June 30, 1998, the Bank was in compliance with its QTL
requirement and met the definition of a domestic building and loan association.
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.
The OTS has recently established an examination procedure which contains three
categories of ratings: "Satisfactory," "Needs Improvement," and
"Unsatisfactory." Institutions that receive a year 2000 rating of Unsatisfactory
may be subject to formal enforcement action, supervisory agreements, cease and
desist orders, civil money penalties, or the appointment of a conservator. In
addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues.
24
<PAGE>
The Company is currently addressing the year 2000 issue, as more fully discussed
in the Company's Annual Report to Stockholders for the Year Ended June 30, 1999
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Year 2000."
ITEM 2. DESCRIPTION OF PROPERTIES
(a) Properties.
The Company owns no real property but utilizes the offices of the Bank.
The following table sets forth the location and certain additional information
regarding the Bank's offices at June 30, 1999.
<TABLE>
<CAPTION>
Total
Approximate Net Book Value
Date Square at June 30,
LocatIon Acquired Footage 1999
--------------- ------------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Main Office 1981 17,092 $1,254
123 Portage
Three Rivers, Michigan 49093
(616) 279-5117
Branch Office 1971 3,400 96
500 N. Grand
Schoolcraft, Michigan 49087
(616) 674-5271
Branch Office 1988 1,661 254
15534 U.S. 12
Union, Michigan 49130
(616) 641-7979
Branch Office 1988 2,443 135
1213 West Michigan Avenue
Three Rivers, Michigan 49093
(616) 273-8681
Branch Office 1998 5,171 358
303 Defiance
Howe, Indiana 46746
(219) 562-3300
Branch Office 1998 1,908 643
420 N. Main
Middlebury, Indiana 46540
(219) 825-2255
</TABLE>
The Bank owns all of its offices. The total net book value of the
Bank's premises and equipment (including land, building and leasehold
improvements and furniture, fixtures, and equipment) at June 30, 1999 was $2.7
million. See Note 5 of Notes to Consolidated Financial Statements.
FIserv, Inc., West Allis, Wisconsin, performs data processing and
record keeping services for the Bank.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. All of the
25
<PAGE>
Bank's investment policies are reviewed and approved by the Board of Directors
of the Bank, and such policies, subject to regulatory restrictions (if any), can
be changed without a vote of stockholders. The Bank's investments are primarily
acquired to produce income, and to a lesser extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate.
See "Item 1. Business - Lending Activities," "Item 1. Business - Regulation of
the Bank," and "Item 2. Description of Property. (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1.
Business - Lending Activities" and "Item 1. Business - Regulation - Regulation
of the Bank."
(3) Investments in Securities of or Interests in Persons
Primarily Engaged in Real Estate Activities. See "Item 1. Business - Lending
Activities," "Item 1. Business - Regulation of the Bank," and "Item 1. Business
- - Subsidiary Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
ITEM 3. LEGAL PROCEEDINGS
Although the Company and the Bank, from time to time, are involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which the Company, the Bank, or its subsidiary is
a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders for a vote during the quarter
ended June 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained under the caption "Market Price of TRFC's
Common Shares and Related Shareholder Matters" in the Company's Annual Report to
Stockholders for the fiscal year ended June 30, 1999 (the "Annual Report") is
incorporated herein by reference.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
The information contained under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The financial statements contained in the Annual Report, Item 13
herein, are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(b) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth for the directors of the Company, such
individual's name, age, the year the nominees first became directors of the
Company, and the number of shares and percentage of the Common Stock
beneficially owned.
<TABLE>
<CAPTION>
Shares of
Year First Current Common Stock
Name of Individual or Elected or Term to Beneficially Percent
Number of Persons in Group Age (1) Apointed (2) Expire Owned (3)(4) of Class
- -------------------------- ---------- ------------------- --------------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Larry A. Clark 58 1989 1999 8,503 (5) 1.21%
G. Richard Gatton 56 1990 1999 31,417 (6) 4.47%
G. Verglea Gotfryd 71 1989 2000 8,723 (7) 1.24%
Thomas O. Monroe, Sr. 75 1982 2000 11,693 (8) 1.66%
Stephen R. Olson 56 1983 2000 15,301 (9) 2.18%
Philip Halverson 78 1968 2001 4,103 (10) 0.58%
DIRECTOR EMERITUS
John A. Mathews 75 1974 n/a 7,206 (11) 1.03%
All directors, directors emeritus, and 116,265 (12) 16.54%
executive officers as a group (11 persons)
- --------------------------------------------- -------------------- ----------------- ---------------------- ------------
</TABLE>
- -------------
(1) As of June 30, 1999.
(2) Refers to the earlier of the year the individual became a director of
the Company or the Bank. All directors of the Bank became directors of
the Company upon its formation in April 1995.
(3) As of the Voting Record Date.
(4) Unless otherwise indicated, includes all shares held directly by the
named individuals as well as by spouses, minor children in trust, and
other forms of indirect ownership, over which shares the named
individual effectively exercises sole voting and investment power with
respect to the indicated shares. Excludes 42,118 unallocated shares of
Common Stock held under the ESOP for which such individuals may serve
as a member of the ESOP Committee. Excludes 18,028 unvested shares of
Common Stock held by the Company's Recognition and Retention Plan and
Trust ("RRP") for which such individuals may serve as a member of the
RRP Committee or Trustee Committee. Such individuals disclaim
beneficial ownership with respect to such shares held in a fiduciary
capacity. See Item 10 - Executive Compensation "- Benefits - Employee
Stock Ownership Plan" and "- Recognition and Retention Plan and Trust."
(5) Includes 2,145 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date.
(6) Includes 9,900 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date. Also, includes 12,474 shares
of Common Stock for which Mr. Gatton shares voting or dispositive power
with his spouse.
(7) Includes 2,145 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date. Also, includes 6,006 shares
of Common Stock for which Ms. Gotfryd shares voting or dispositive
power with her son.
(8) Includes 2,145 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date. Also includes 550 shares of
Common Stock owned by the spouse of Mr. Monroe for which Mr. Monroe has
no voting or dispositive power and which Mr. Monroe disclaims
beneficial ownership.
(9) Includes 2,145 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date. Also, includes 4,202 shares
of Common Stock for which Mr. Olson shares voting or dispositive power
with his spouse
27
<PAGE>
and 616 shares of Common Stock owned by the spouse of Mr. Olson for
which Mr. Olson has no voting or dispositive power and which Mr. Olson
disclaims beneficial ownership
(10) Includes 2,145 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date. Also, includes 1,100 shares
of Common Stock for which Mr. Halverson shares voting or dispositive
power with his spouse.
(11) Includes 5,000 shares of Common Stock for which Mr. Mathews shares
voting or dispositive power with his spouse.
(12) Includes 36,223 shares of Common Stock subject to options exercisable
within 60 days of the Voting Record Date.
EXECUTIVE OFFICERS
The individuals set forth below hold the offices in the Company set
forth opposite their names.
<TABLE>
<CAPTION>
Name Age (1) Position Held With the Company
- ---- ------- ------------------------------
<S> <C> <C>
G. Richard Gatton 56 President, Chief Executive Officer, and Director
Martha Romig 60 Senior Vice President, Secretary, Treasurer, and Chief
Financial Officer
</TABLE>
- --------------
(1) As of June 30, 1999.
The Executive Officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation, or removal by the Board of Directors.
BIOGRAPHICAL INFORMATION
The principal occupation during the past five years of each director
and executive officer is set forth below. All directors and executive officers
have held their present positions for at least five years, unless otherwise
stated.
LARRY A. CLARK was employed by GTE Corporation, an independent
telephone company, from 1963 until his retirement in 1994. Mr. Clark last served
as Manager--Administrative Support in GTE's Muskegon, Michigan regional office.
G. RICHARD GATTON has served as President, Chief Executive Officer, and
a director of the Bank since December 1990. From September 1988 to December
1990, Mr. Gatton served as President and Chief Executive Officer of First
National Bank of Wabash, Indiana. Mr. Gatton has been involved in the banking
industry since 1966. He also serves as President and a director of Alpha
Financial, Inc. ("Alpha Financial"), a subsidiary of the Bank.
G. VERGLEA GOTFRYD is an independent life insurance agent licensed in
the State of Michigan. From 1949 to 1990, Ms. Gotfryd was associated with the
Paul F. Noecker Insurance Agency, serving in various capacities during that
time, including manager and owner. Ms. Gotfryd also serves on the board of
directors of the Three Rivers Area Hospital.
PHILIP HALVERSON is the former owner of Halverson Chapel, a funeral
home located in Three Rivers, Michigan, which he founded in 1949. Mr. Halverson
also serves on the board of directors of Three Rivers Area Foundation, a
charitable foundation.
THOMAS O. MONROE, SR. currently serves as Chairman Emeritus and a
member of the board of directors of Johnson Corporation, a manufacturer of steam
valves and other steam specialties. From 1986 through 1991, Mr. Monroe served as
president of Johnson Corporation and has held a variety of positions
28
<PAGE>
with that company since 1947. Mr. Monroe also serves on the boards of directors
of Camp Wakeshma and the local American Red Cross.
STEPHEN R. OLSON has served as Manager of Morton Buildings, Inc., a
construction company located in Three Rivers, Michigan, since 1970. Mr. Olson is
also on the board of directors of Camp Wakeshma, a non-profit summer youth camp.
MARTHA ROMIG has been employed by the Bank since 1970. She currently
serves as Senior Vice President, Secretary, Treasurer, and Chief Financial
Officer of the Company and the Bank. She also serves as a director and
Secretary/Treasurer of Alpha Financial.
COMPLIANCE WITH SECTION 16(b) OF THE EXCHANGE ACT
The Common Stock is registered with the SEC pursuant to Section 12(b)
of the 1934 Act. The officers and directors of the Company and beneficial owners
of greater than 10% of the Common Stock ("10% beneficial owners") are required
to file reports on Forms 3, 4, and 5 with the SEC disclosing changes in
beneficial ownership of the Common Stock.. Based solely on the Company's review
of such ownership reports, to the Company's knowledge, no officer, director, or
10% beneficial owner of the Company failed to file such ownership reports on a
timely basis for the fiscal year ended June 30, 1999.
ITEM 10. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Each non-employee director of the Company receives $350 per quarter for
meetings of the Board of Directors of the Company. Each non-employee director of
the Bank receives a retainer of $3,000 per year plus $255 per monthly Board
meeting attended and $250 for attendance at the annual meeting of the Board of
Directors of the Bank. Fees paid to all directors totaled $41,405 for the fiscal
year ended June 30, 1999.
Directors are also eligible to receive options to purchase Common Stock
pursuant to the Company's Stock Option and Incentive Plan. See "- Benefits -
Stock Option Plans."
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the name and
compensation of the Chief Executive Officer of the Company for the fiscal years
ended June 30, 1999, 1998, and 1997. No other executive officer received a
salary and bonus in excess of $100,000 during the fiscal years ended June 30,
1999, 1998, and 1997. All compensation was paid by the Bank.
<TABLE>
<CAPTION>
Long term
Annual Compensation Compensation
------------------------------------------ --------------------------
Other Restricted Securities
annual Stock Underlying All other
Name and Principal Position Year Salary Bonus Compensation(1) Award($)(2) Options (#)(3) Compensation
- --------------------------- ------ --------- ----------- ----------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
G. Richard Gatton 1999 $100,235 $15,000 -- $21,468 5,500 $19,163 (4)
President, Chief 1998 $96,246 $14,000 -- -- -- $27,261 (5)
Executive 1997 $92,708 $14,000 -- -- -- $21,550 (6)
Officer, and Director
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------
(1) For the fiscal years ended June 30, 1999, 1998, and 1997, there were no
(a) perquisites over the lesser of $50,000 or 10% of any of Mr. Gatton's total
salary and bonus; (b) payments of above-market preferential earnings on deferred
compensation; (c) tax payment reimbursements; or (d) preferential discounts on
stock.
(2) Represents the dollar value of the award of Common Stock (calculated by
multiplying $14.09 per share, the average of the bid and ask price of the
Company's unrestricted stock on the date of grant, by 1,385 shares, the number
of shares of restricted stock awarded) under the RRP.
29
<PAGE>
Dividends received on the RRP shares are held in arrears until the restricted
stock becomes vested. At June 30, 1999, the RRP held shares of Common Stock
subject to forfeiture for the benefit of Mr. Gatton with a fair market value of
$34,441 (calculated by multiplying $12.625 per share, the average of the bid and
ask price of the Company's unrestricted stock on June 30, 1999, by 2,728 shares,
the number of shares of Common Stock that remain restricted).
(3) By their terms, options vest at a rate of 20% per year beginning on the
one year anniversary date of the grant.
(4) Represents $3,003 contributed to the Bank's 401(k) plan for the account
of Mr. Gatton and the value of 1,280 shares of Common Stock allocated to Mr.
Gatton's ESOP account for the fiscal year ended June 30, 1999.
(5) Represents $2,887 contributed to the Bank's 401(k) plan for the account
of Mr. Gatton and the value of 1,258 shares of Common Stock allocated to Mr.
Gatton's ESOP account for the fiscal year ended June 30, 1998.
(6) Represents $2,781 contributed to the Bank's 401(k) plan for the account
of Mr. Gatton and the value of 1,155 shares of Common Stock allocated to Mr.
Gatton's ESOP account for the fiscal year ended June 30, 1997.
EMPLOYMENT AGREEMENT. The Bank entered into an employment agreement on
August 23, 1999 (the "Employment Agreement") with G. Richard Gatton, President
and Chief Executive Officer of the Company and the Bank. The Employment
Agreement provides for a term of three years, with an annual base salary payable
by the Bank in the amount of $104,500. On each anniversary date of the
Employment Agreement, the term of the Employment Agreement may be extended for
an additional one-year period beyond the then effective expiration date, upon a
determination by the Board of Directors that the performance of Mr. Gatton has
met the required performance standards and that such Employment Agreement should
be extended. Unless the Employment Agreement is not renewed by the Board, the
Employment Agreement will terminate automatically upon Mr. Gatton attaining age
65, except that any vested rights will not be affected.
The Employment Agreement will terminate upon the Executive's death and
is terminable by the Bank for "just cause" as defined in the Employment
Agreement. In the event of termination for just cause, no severance benefits are
available. If the Company or the Bank terminates Mr. Gatton without just cause,
Mr. Gatton will be entitled to a continuation of his salary and benefits for the
remaining term of the Employment Agreement. If his employment is terminated due
to "disability" (as defined in the Employment Agreement), Mr. Gatton will
receive compensation for a period of two years or the remaining term of the
Employment Agreement, whichever is longer. Mr. Gatton may voluntarily terminate
his Employment Agreement by providing 60 days written notice to the Boards of
Directors of the Bank and the Company, in which case Mr. Gatton is entitled to
receive only his compensation and benefits up to the date of termination, except
that any vested rights will not be affected.
The Employment Agreement contains provisions stating that in the event
of Mr. Gatton's involuntary termination of employment in connection with, or
within one year after, any change in control of the Bank or the Company, other
than for "just cause," Mr. Gatton will be paid an amount equal to the difference
between (i) 2.99 times his "base compensation," as defined in OTS Regulatory
Bulletin 27a, and (ii) the sum of any other parachute payments, as defined under
Section 280G(b)(2) of the Internal Revenue Code, that Mr. Gatton receives on
account of the change in control. The Employment Agreement also provides for a
similar lump sum payment to be made in the event of the Mr. Gatton's voluntary
termination of employment within one year following a change in control, upon
the occurrence of, or within 90 days thereafter, certain specified events
following the change in control.
These provisions may tend to discourage a non-negotiated takeover
attempt of the Company due to the increased expenses arising out of a change in
ownership or control of the Company.
BENEFITS
401(K) PLAN. Effective April 1, 1995, the Bank established a 401(k)
plan for all eligible employees. To be eligible, an employee must attain age 21
and complete one year of service with the Bank. Annual contributions to the plan
are made at the discretion of the Bank's Board of Directors under a formula
provided in the plan based upon each employee's salary. Contributions are
allocated among
30
<PAGE>
employee members of the plan who were in the employ of the Bank on the last day
of the plan year and who have at least 1,000 hours of service during the plan
year. Participants may elect to contribute to the plan between 1% and 10% of
their base salary. Contributions are matched by the Bank at a rate of $0.50 for
every $1.00 contributed by the participant up to the first 6% of the
participant's base salary.
Contributions by the Bank vest over a six year period commencing at the
end of the second full year of plan membership as to 20% of the Bank's
contribution and rising 20% a year to 100% at the end of the sixth full year of
plan membership. If a participant's employment is terminated for any reason, the
participant is entitled only to the vested portion, if any, of his or her
account.
PENSION PLAN. Effective December 1, 1994, the Bank became a
participating employer in a multi-employer pension plan sponsored by the
Financial Institutions Retirement Fund (the "Pension Plan"). The terms of the
Pension Plan as it relates to the Bank were determined in March 1995. All
full-time employees of the Bank are eligible to participate after one year of
service and attainment of age 21. A qualifying employee becomes fully vested in
the Pension Plan upon completion of five years of service or upon attainment of
the normal retirement age of 65. The Pension Plan is intended to comply with the
Employee Retirement Income Security Act of 1974, as amended.
The Pension Plan provides for monthly payments to each participating
employee at normal retirement age. The annual allowance payable under the
Pension Plan is based on an integrated fixed percentage formula which uses the
highest five consecutive years' average salary. A participant who is vested in
the Pension Plan may take an early retirement and elect to receive a reduced
monthly benefit beginning at age 55. The Pension Plan also provides for payments
in the event of disability or death. At June 30, 1999, G. Richard Gatton had
seven years of credited service under the Pension Plan. If Mr. Gatton were to
have retired as of June 30, 1999, Mr. Gatton would be entitled to a pension
payment of $1,525 per month beginning upon his attainment of age 65.
EMPLOYEE STOCK OWNERSHIP PLAN. In August 1995, the Bank's Board of
Directors adopted an ESOP for the exclusive benefit of participating employees.
Participating employees are all employees of the Company, the Bank, and their
subsidiaries who have attained age 21 and completed one year of service with the
Company. The ESOP received a favorable determination letter from the IRS as to
the tax-qualified status of the ESOP, subject to certain minor changes to the
ESOP.
The ESOP is funded by contributions made by the Company or the Bank in
cash or shares of Common Stock. The ESOP borrowed $687,700 from the Company to
purchase 68,770 shares of the Common Stock from the Bank in connection with the
Bank's conversion from mutual to stock form. This loan is secured by the shares
of Common Stock purchased and earnings thereon. Shares purchased with such loan
proceeds are held in a suspense account for allocation among participants as the
loan is repaid over a period of 10 years. For the fiscal years ended June 30,
1999 and 1998, $70,044 and $70,004 in principal payments were made on the ESOP
loan, respectively. The ESOP compensation expense for the fiscal years ended
June 30, 1999 and 1998, was $107,543 and $135,867, respectively. At June 30,
1999, 29,275 shares of Common Stock had been allocated to participants under the
ESOP.
Contributions to the ESOP and shares released from the suspense account
are allocated among accounts of participants on the basis of their annual wages,
plus any amounts withheld under a plan qualified under Sections 125 or 401(k) of
the Code and sponsored by the Company or the Bank. Dividends paid on allocated
shares may be used as repayment on the ESOP loan, credited to participant
accounts within the ESOP, or paid to participants. Dividends on unallocated
shares are expected to be used to repay the ESOP loan.
31
<PAGE>
The Company has appointed Directors Larry A. Clark, G. Verglea Gotfryd,
and Stephen R. Olson to serve on the ESOP Committee which administers the
day-to-day operations of the ESOP. First Bankers Trust Company, N.A. serves as
trustee of the ESOP (the "ESOP Trustee"). The ESOP Trustee must vote all
allocated shares held in the ESOP in accordance with the instructions of the
participants. The ESOP Trustee will not vote allocated shares for which no
timely direction is received and will vote unallocated shares in accordance with
the direction of the ESOP Committee.
STOCK OPTION PLANS. In April 1996, the Company's Board of Directors
adopted, and the stockholders approved, the Company's Stock Option and Incentive
Plan (the "Option Plan"). The purpose of the Option Plan is to provide
additional incentive to directors and key employees by facilitating their
purchase of the Common Stock or comparable ownership interest in the Company.
The Option Plan provides for a term of 10 years from the date of its approval by
the Company's stockholders, after which no awards may be made, unless the plan
is earlier terminated by the Board of Directors of the Company. Under the Option
Plan, 94,558 shares of Common Stock are reserved for issuance by the Company, in
the form of newly-issued or treasury shares, upon exercise of stock options or
stock appreciation rights. Options granted under the Option Plan are either
incentive stock options (options that afford favorable tax treatment to
recipients upon compliance with certain restrictions pursuant to Section 422 of
the Code and that do not result in tax deductions to the Company unless
participants fail to comply with Section 422 of the Code) and options that do
not so qualify.
The Option Plan is administered by a committee consisting of Directors
Larry A. Clark, G. Verglea Gotfryd, and Stephen R. Olson (the "Option
Committee"). The Option Committee will select the employees to whom awards are
to be granted, the number of shares to be subject to such awards, and the terms
and conditions of such awards (provided that any discretion exercised by the
Option Committee must be consistent with resolutions adopted by the Board of
Directors and the terms of the Option Plan).
During the fiscal year ended June 30, 1999, 21,780 options were granted
and no options were exercised under the Option Plan. As of June 30, 1999,
options to purchase 86,955 shares had been granted and are outstanding under the
Option Plan.
The following tables sets forth certain information concerning stock
option grants and exercises during the fiscal year ended June 30, 1999 and
unexercised options held at such date for the person named in the Summary
Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent of Potential Realizable Value at
Number of Total Assumed Annual Rates of Stock
Securities Options/SARs Price Appreciation for
Underlying Granted To Exercise or Option Term
Option/SARs Employees in Base Price Expiration ------------------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) (1) 10% ($)(1)
--------------------- ----------------- --------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
G. Richard Gatton 5,500 25% 14.09 10.28/08 $48,730 $123,530
</TABLE>
- ---------------
(1) Based on the difference between the assumed annual rates of stock price
appreciation and $14.09, the exercise price of the options, multiplied
by the number of shares subject to the options. Actual performance of
the Common Stock may differ significantly.
32
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED JUNE 30, 1999
AND FY-END OPTION VALUES
Value of
Number of unexercised
Shares unexercised in-the-money
acquired Value options at FY- End options at FY-end
Name on exercise realized exercisable/unexercisable exercisable/unexercisable (1)
--------------------- ----------- -------- ------------------------- -----------------------------
<S> <C> <C> <C> <C>
G. Richard Gatton -- $-- 9,900 / 12,100 $6,881 / $4,587
</TABLE>
- ---------------
(1) The value of unexercised in-the-money options is the difference between
$12.625, the average of the bid and asked price of the Common Stock on
June 30, 1999, and $11.93, the exercise price of the options,
multiplied by the number of exercisable and unexercisable shares
subject to the options, respectively.
RECOGNITION AND RETENTION PLAN AND TRUST. In April 1996, the Company's
Board of Directors adopted, and the stockholders approved, the RRP as a means of
providing the directors and employees of the Bank and the Company with an
ownership interest in the Company in a manner designed to encourage such persons
to continue their service with the Bank and the Company. Directors Larry A.
Clark, G. Verglea Gotfryd, and Stephen R. Olson serve as trustees of the RRP. In
June 1996, the RRP acquired 37,824 shares of Common Stock in the open market.
For the fiscal year ended June 30, 1999, 7,385 shares of restricted stock were
granted pursuant to the RRP.
Awards are nontransferable and nonassignable, and during the lifetime
of the recipient can only be earned by and made to him or her. The shares which
are subject to an award vest and are earned by the recipient at a rate of 20% of
the shares awarded at the end of each full 12 months of service with the Bank
after the date of grant of the award. Awards are adjusted for capital changes
such as stock dividends and stock splits. Awards will be 100% vested upon
termination of employment or service due to death or disability. If employment
or service were to terminate for other reasons, the recipient's nonvested awards
will be forfeited. If employment or service is terminated for cause (as defined
in the RRP), or if conduct would have justified termination or removal for
cause, shares not already delivered under the RRP, whether or not vested, could
be forfeited by resolution of the Board of Directors of the Company.
When shares become vested and could actually be distributed in
accordance with the RRP, the participants would also receive amounts equal to
accrued dividends and other earnings or distributions payable with respect
thereto. Prior to vesting, recipients of awards could direct the voting of the
shares allocated to them. Allocated shares and shares for which no instructions
were received would be voted by the Trustee of the RRP in the same proportion as
the shares that had been awarded and vested were voted.
ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners.
Information concerning the security ownership of management is included under
Item 9 -- Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(b) of the Exchange Act and is incorporated herein by
reference.
33
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF SHARES OF
NAME AND ADDRESS AMOUNT AND NATURE OF COMMON STOCK
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OUTSTANDING
- ------------------- ------------------------ -----------
<S> <C> <C>
THREE RIVERS FINANCIAL CORPORATION EMPLOYEE STOCK 75,647 (2) 10.76%
OWNERSHIP PLAN
c/o First Bankers Trust Company, Trustee
Broadway at 12th Street
Quincy, Illinois 62305-3566
JEFFREY S. HALIS 52,930 (3) 7.53%
TYNDALL PARTNERS, L.P.
MADISON AVENUE PARTNERS, L.P.
500 Park Avenue, Fifth Floor
New York, New York 10002
JEFFREY L. GENDELL 42,000 (4) 5.98%
TONTINE PARTNERS, L.P.
TONTINE FINANCIAL PARTNERS, L.P.
200 Park Avenue, Suite 3900
New York, New York 10166
</TABLE>
- ------------------------------------------------------ -------------------------
- ----------------------------------
(1) Unless otherwise indicated, includes all shares held directly by the
named individuals as well as in other forms of indirect ownership, over
which shares the named individual effectively exercises sole voting and
investment power with respect to the indicated shares.
2) Shares held by the ESOP and allocated to participating employees will
be voted by the ESOP Trustee in accordance with instructions by such
employees. The ESOP Trustee will not vote allocated shares for which no
timely direction is received and will vote unallocated shares in
accordance with the direction of the ESOP Committee. See "Compensation
of Directors and Executive Officers - Benefits - Employee Stock
Ownership Plan."
(3) Based on a Schedule 13D dated September 7, 1995, as amended on October
18, 1995, October 31, 1995, and May 3, 1999, Jeffrey S. Halis has sole
voting and dispositive power with respect to these shares as he is the
general partner of Halo Capital Partners, L.P. which is the general
partner of Tyndall Partners, L.P. and Madison Avenue Partners, L.P.
(4) Based on a Schedule 13D filed as of April 14, 1997. Jeffrey L Gendell
has shared voting and dispositive power with respect to these shares.
Mr. Gendell serves as the managing member of Tontine Management, L.L.C.
which is the general partner of Tontine Partners, L.P. and Tontine
Financial Partners, L.P.
(b) Security Ownership of Management.
Information required by this item is incorporated herein by
reference to the Item 9 -- Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(b)
of the Exchange Act.
(c) Changes in Control.
On September 21, 1999, the Three Rivers Financial Corporation
and Peoples Bancorp, Auburn, Indiana, jointly announced that
they had entered into a definitive agreement providing for the
merger of the Company with and into Peoples Bancorp. Under the
terms of the agreement, each shareholder of the Company would
receive in a tax-free exchange 1.08 shares of Peoples Bancorp
common stock for each share of Company common stock then
owned. The proposed merger is subject to the approval of
shareholders of Peoples Bancorp and the Company and the Office
of Thrift Supervision, the receipt of a fairness opinion, and
other customary conditions. The parties contemplate that the
merger will become effective during the first quarter of 2000.
34
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank, like many financial institutions, has followed a policy of
granting various types of loans to its officers and directors. The
loans made to such persons: (a) were made in the ordinary course of
business; (b) were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with other customers of the Bank; and (c) did
not involve more than the normal risk of collectibility or present
other unfavorable features. All loans by the Bank to its officers and
directors are subject to OTS regulations restricting loans and other
transactions with affiliated persons of the Bank. Savings institutions
are permitted to make loans to executive officers, trustees, and
principal stockholders ("Insiders") on preferential terms, provided the
extension of credit is made pursuant to a benefit or compensation
program of the Bank that is widely available to employees of the
Company or its affiliates and does not give preference to any Insider
over other employees of the Company or affiliates.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits are either attached as part of this Report or incorporated
by reference herein.
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
3.1 Certificate of Incorporation of Three Rivers Financial
Corporation(1)
3.2 Bylaws of Three Rivers Financial Corporation(1)
4 Form of Common Stock Certificate of Three Rivers Financial
Corporation(1)
10.1 Employment Agreement between First Savings Bank, A Federal
Savings Bank and G. Richard Gatton(2)
10.1.1 Amendment No. 1 to Employment Agreement between First Savings
Bank, A Federal Savings Bank and G. Richard Gatton(5)
10.2 Severance Agreement between First Savings Bank, A Federal
Savings Bank and Martha Romig(2)
10.2.1 Amendment No. 1 to Severance Agreement between First Savings
Bank, A Federal Savings Bank and Martha Romig(5)
10.3 Severance Agreement between First Savings Bank, A Federal
Savings Bank and R. Orville Poling(2)
10.3.1 Amendment No. 1 to Severance Agreement between First Savings
Bank, A Federal Savings Bank and R. Orville Poling(5)
10.4 Three Rivers Financial Corporation Employee Stock Ownership
Plan and Trust(2)
10.5 Employer's Resolution and Application to Participate in the
Financial Institutions Retirement Fund's Comprehensive
Retirement Program(3)
35
<PAGE>
<S> <C>
10.6 First Savings Bank, A Federal Savings Bank 401(k) Plan
Adoption Agreement(4)
10.7 Stock Option and Incentive Plan(5)
10.8 Recognition and Retention Plan and Trust(5)
10.9 Expense and Tax Sharing Agreement(5)
13 Annual Report to Stockholders for the fiscal year ended
June 30, 1999
21 Subsidiaries of the Registrant(2)
27 Financial Data Schedule (6)
</TABLE>
- -------------------------
(1) Incorporated by reference to Exhibit bearing the same number in the
Company's Registration Statement on Form S-1, filed on April 20, 1995,
as amended on June 16, 1995 (Reg. No. 33-91380) (the "Form S-1").
(2) Incorporated by reference to the exhibit bearing the same number in the
Company's Annual Securities Report on Form 10-KSB for the year ended
June 30, 1995.
(3) Incorporated by reference to Exhibit 10.8 of the Form S-1.
(4) Incorporated by reference to Exhibit 10.9 of the Form S-1.
(5) Incorporated by reference to the exhibit bearing the same number in the
Company's Annual Securities Report on Form 10-KSB for the year ended
June 30, 1996.
(6) Electronic filing copy only.
(b) Reports on Form 8-K
None.
36
<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.
THREE RIVERS FINANCIAL CORPORATION
September 28, 1999 By: /s/ G. Richard Gatton
------------------------------------------------
G. Richard Gatton
President, Chief Executive Officer and Director
(Duly Authorized Representative)
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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ G. Richard Gatton President, Chief Executive Officer, September 28, 1999
- ------------------------------------ and Director
G. Richard Gatton
(Principal Executive Officer)
/s/ Martha Romig Senior Vice President, Chief Financial September 28, 1999
- ------------------------------------ Officer, Secretary and Treasurer
Martha Romig (Principal Financial and Accounting
Officer)
/s/ Stephen R. Olson Chairman of the Board September 28, 1999
- ------------------------------------
Stephen R. Olson
/s/ Larry A. Clark Director September 28, 1999
- ------------------------------------
Larry A. Clark
/s/ G. Verglea Gotfryd Director September 28, 1999
- ------------------------------------
G. Verglea Gotfryd
/s/ Philip Halverson Director September 28, 1999
- ------------------------------------
Philip Halverson
/s/ Thomas O. Monroe, Sr. Director September 28, 1999
- ------------------------------------
Thomas O. Monroe, Sr.
</TABLE>
37
<PAGE>
ANNEX G
TABLE OF CONTENTS
<TABLE>
<S> <C>
MESSAGE TO SHAREHOLDERS................................................. 1
BUSINESS OF THREE RIVERS FINANCIAL CORPORATION.......................... 2
MARKET PRICE OF TRFC COMMON SHARES AND RELATED SHAREHOLDER
MATTERS............................................................... 2
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA.............. 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................. 6
INDEPENDENT AUDITOR'S REPORT............................................ 20
FINANCIAL STATEMENTS
Consolidated Balance Sheets........................................ 21
Consolidated Statements of Income.................................. 22
Consolidated Statements of Comprehensive Income.................... 23
Consolidated Statements of Changes In Shareholders' Equity......... 24
Consolidated Statements of Cash Flows.............................. 26
Notes to Consolidated Financial Statements......................... 28
OFFICERS AND DIRECTORS.................................................. 48
SHAREHOLDER INFORMATION................................................. 49
</TABLE>
<PAGE>
MESSAGE TO SHAREHOLDERS
Dear Fellow Shareholder:
It is a pleasure to report to you that Three Rivers Financial Corporation (the
"Company") and its subsidiary, First Savings Bank (the "Bank") completed another
successful year. Although net income was down from the previous year, the
decrease resulted from the Bank's recent expansion to Indiana, Year 2000 ("Y2K")
expenses and the purchase of new computer hardware and software.
For the year ended June 30, 1999, the Company reported net income of $598,000.
At June 30, 1999, total deposits were $67.2 million, net loans totaled $68.7
million and total assets stood at $100.4 million. The deposit and loan totals
represent significant increases from the previous fiscal year.
During the past year, the Company declared a 10% stock dividend, successfully
repurchased 167,000 shares of its common stock (adjusted for the stock
dividend), and increased its quarterly dividend to $.115 per share. There were
702,734 shares outstanding as of June 30, 1999 and we continue to explore ways
to improve the liquidity of our stock.
By now, you have no doubt been exposed to information about the so called "Y2K
computer problem". Maintaining your confidence has always been our priority. We
have taken the "Y2K" glitch seriously and we've upgraded or replaced all of our
computer systems to bring them into Y2K compliance. We have completed testing of
our mission-critical systems and we are pleased to report that the tests were
successful. We are now using Y2K-ready systems in all our daily operations.
On behalf of the Board of Directors, it is important to acknowledge and
recognize the tireless efforts of our employees and officers. To our valued
shareholders, we thank you for your support. We look forward to the ensuing year
and will make every effort to justify your continued confidence and support.
G. Richard Gatton
President and
Chief Executive Officer
1
<PAGE>
BUSINESS OF THREE RIVERS FINANCIAL CORPORATION
Three Rivers Financial Corporation, a unitary savings and loan holding company
incorporated under the laws of the State of Delaware ("TRFC" or "the Company"),
owns all of the issued and outstanding common stock of First Savings Bank, a
Federal savings bank, chartered under the laws of the United States ("First
Savings Bank" or the "Bank"). In August 1995, TRFC acquired all of the common
stock issued by First Savings Bank upon its conversion from a mutual savings
bank to a stock savings bank (the "Conversion"). TRFC's activities have been
limited primarily to holding the common stock of First Savings Bank.
Serving the Three Rivers, Michigan area since 1886, First Savings Bank conducts
business from its main office at 123 Portage Avenue in Three Rivers and from its
full-service branches located in Three Rivers, Schoolcraft and Union, Michigan,
and Howe and Middlebury, Indiana. The Howe and Middlebury branches began
operation in 1998. First Savings Bank is engaged principally in originating
loans secured by residential real estate. First Savings Bank also originates
consumer loans, loans secured by multi-family residential and commercial
properties, commercial business loans, construction loans, second mortgages on
single-family residences, home equity lines of credit and loans secured by
savings accounts. First Savings Bank also invests in U.S. Government and agency
obligations, obligations of states and political subdivisions, mortgage-backed
securities, collateralized mortgage obligations, and other investments permitted
by applicable law. Funds for lending and other investment activities are
obtained primarily from deposits, loan principal repayments and borrowings from
the Federal Home Loan Bank ("FHLB") of Indianapolis.
As a savings and loan holding company, TRFC is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of Treasury (the "OTS"). As a savings bank chartered under the
laws of the United States, First Savings Bank is subject to regulation,
supervision and examination by the OTS and the Federal Deposit Insurance
Corporation (the "FDIC"). Deposits in First Savings Bank are insured up to
applicable limits by the FDIC. First Savings Bank is also a member of the FHLB
of Indianapolis.
MARKET PRICE OF TRFC'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
As of September 10, 1999, there were 702,734 common shares of TRFC outstanding
held by approximately 257 shareholders of record. The following table sets forth
the high and low sales prices and dividends declared per share of common stock
for the periods indicated. The prices do not include retail markups, markdowns
or commissions. TRFC's common shares are listed on the American Stock Exchange
("AMEX"), under the symbol "THR".
<TABLE>
<CAPTION>
Dividends
Quarter Ended High Low Declared
------------------ ----- ---- -----------
<S> <C> <C> <C>
September 30, 1998 17.73 13.64 $ .121
December 31, 1998 14.66 12.68 .115
March 31, 1999 14.25 13.00 .115
June 30, 1999 14.38 12.50 .115
September 30, 1997 15.28 14.20 $ .09
December 31, 1997 19.77 15.11 .09
March 31, 1998 21.70 18.98 .10
June 30, 1998 19.55 17.39 .10
</TABLE>
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. All share and per share amounts have been retroactively adjusted
for the October of 1998 10% stock dividend.
(Continued)
2
<PAGE>
The income of TRFC consists of dividends which may periodically be declared and
paid by the Board of Directors of First Savings Bank on the common shares of
First Savings Bank held by TRFC and earnings on the net proceeds retained by
TRFC from the sale of TRFC's common shares in connection with the Conversion.
In addition to certain federal income tax considerations, OTS regulations impose
limitations on the payment of dividends and other capital distributions by
savings associations. Under OTS regulations applicable to converted savings
associations, First Savings Bank is not permitted to pay a cash dividend on its
common shares if First Savings Bank's regulatory capital would, as a result of
the payment of such dividend, be reduced below the amount required for the
Liquidation Account (the account established for the purpose of granting a
limited priority claim on the assets of First Savings Bank in the event of a
complete liquidation to those members of First Savings Bank before the
Conversion who maintain a savings account at First Savings Bank after the
Conversion) or applicable regulatory capital requirements prescribed by the OTS.
OTS regulations applicable to all savings institutions provide that a savings
institution which immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution has total capital (as defined by OTS
regulations) that is equal to or greater than the amount of its capital
requirements is generally permitted without OTS approval (but subsequent to 30
days' prior notice to the OTS) to make capital distributions, including
dividends, during a calendar year in an amount not to exceed the greater of (1)
100% of its net earnings to date during the calendar year, plus an amount equal
to one-half the amount by which its total capital to assets ratio exceeded its
required capital to assets ratio at the beginning of the calendar year, or (2)
75% of its net earnings for the most recent four-quarter period. Savings
institutions with total capital in excess of the capital requirements that have
been notified by the OTS that they are in need of more than normal supervision
will be subject to restrictions on dividends. A savings institution that fails
to meet current minimum capital requirements is prohibited from making any
capital distributions without the prior approval of the OTS.
First Savings Bank currently meets all of its capital requirements and, unless
the OTS determines that First Savings Bank is an institution requiring more than
normal supervision, First Savings Bank may pay dividends in accordance with the
foregoing provisions of the OTS regulations. Unrestricted retained earnings of
First Savings Bank at June 30, 1999, available for the payment of dividends to
TRFC under the foregoing regulations was approximately $3,288,000.
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
AND OTHER DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------At June 30,-------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected Financial Condition Data: (In Thousands)
- ---------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 100,406 $ 98,885 $ 95,130 $ 87,151 $ 73,300
Cash and cash equivalents 7,966 12,281 7,438 4,112 3,822
Interest-earning time deposits in other
financial institutions 4,155 4,065 3,471 3,868 2,676
Securities and Federal Home Loan Bank stock 15,174 16,165 18,967 19,887 9,256
Loans receivable, net 68,706 62,120 61,813 56,043 54,377
Deposits 67,160 61,516 60,345 63,724 63,138
Federal Home Loan Bank advances 20,657 22,744 20,344 9,211 3,845
Shareholders' equity 10,789 12,688 12,803 12,786 5,395
</TABLE>
<TABLE>
<CAPTION>
-------------------------Years Ended June 30,---------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected Operating Results Data: (In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total interest income $ 7,214 $ 7,248 $ 6,795 $ 6,295 $ 5,484
Total interest expense 3,925 3,848 3,437 3,209 2,782
----------- ----------- ----------- ----------- ------------
Net interest income 3,289 3,400 3,358 3,086 2,702
Provision for loan losses 60 60 60 65 87
----------- ----------- ----------- ----------- ------------
Net interest income after provision for loan losses 3,229 3,340 3,298 3,021 2,615
----------- ----------- ----------- ----------- ------------
Noninterest income:
Service charges and fees 385 312 276 253 243
Gains on sales of interest-earning assets 228 127 44 84 27
Other noninterest income 139 219 208 160 95
----------- ----------- ----------- ----------- ------------
Total noninterest income 752 658 528 497 365
Total noninterest expense 3,185 2,856 3,047 2,504 2,014
----------- ----------- ----------- ----------- ------------
Income before income taxes 796 1,142 779 1,014 966
Income tax expense 198 320 269 344 314
----------- ----------- ----------- ----------- ------------
Net income $ 598 $ 822 $ 510 $ 670 $ 652
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Basic earnings per share 1, 2 $ .84 $ 1.00 $ .61 $ .72 N/A
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Diluted earnings per share 1, 2 $ .83 $ .97 $ .61 $ .72 N/A
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
</TABLE>
(Continued)
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
AND OTHER DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------Years Ended June 30,----------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data:
- -----------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net income to average total assets) .60% .85% .57% .80% .90%
Interest rate spread 2.83 3.17 3.46 3.45 3.58
Net interest margin(3) 3.55 3.78 3.95 3.95 3.89
Ratio of operating expense to average total assets 3.17 2.96 3.39 2.98 2.77
Return on shareholders' equity (ratio of net income to average equity) 5.12 6.28 4.50 5.19 13.00
Asset Quality Ratios:
Non-performing assets to total assets at end of period(4) .62 .69 .60 .69 .76
Allowance for loan losses to non-performing loans
at end of period 83.42 74.89 312.30 272.12 274.82
Capital Ratios:
Shareholders' equity to total assets at end of period 10.75 12.83 13.46 14.67 7.36
Average shareholders' equity to average assets 11.82 13.58 12.59 15.38 6.91
Dividend payout (dividends declared per share divided
by basic earnings per share)(2) 55.48 38.18 51.49 28.48 N/A
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.17x 1.14x 1.12x 1.12x 1.08x
</TABLE>
- ---------------------------
(1) All per share amounts have been retroactively adjusted for the October of
1998 10% stock dividend.
(2) This item is not applicable for any of the periods presented before 1996;
prior to August 23, 1995, First Savings Bank was a mutual savings bank.
(3) Net interest income divided by average interest earning assets.
(4) Non-performing assets consist of non-accruing loans, accruing loans which
are past due 90 days or more and foreclosed assets.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Bank was formed as a state-chartered savings and loan association in 1886.
The Bank became a member of the FHLB of Indianapolis in 1933, obtained federal
deposit insurance in 1939, converted to a federal mutual savings bank in 1987,
and converted to stock form in August 1995 as the wholly-owned subsidiary of
Three Rivers Financial Corporation. At June 30, 1999, TRFC had approximately
$100.4 million in assets, $67.2 million in deposits and $10.8 million in
shareholders' equity.
The principal business of savings banks, including First Savings Bank, has
historically consisted of attracting deposits from the general public and making
loans secured by residential real estate. First Savings Bank's earnings are
primarily dependent on net interest income, the difference between interest
income and interest expense. Interest income is a function of the balances of
loans and investments outstanding during the period and the yield earned on such
assets. Interest expense is the function of the balances of deposits and
borrowings outstanding during the same period and the rates paid on such
deposits and borrowings. First Savings Bank's earnings are also affected by
provisions for loan losses, service charge and fee income, operating expenses
and income taxes. Operating expenses consist primarily of employee compensation
and benefits, occupancy and equipment expenses, advertising, federal deposit
insurance premiums and other general and administrative expenses.
The Company is significantly affected by prevailing economic conditions as well
as federal regulations concerning monetary and fiscal policies of financial
institutions. Deposit balances are influenced by a number of factors including
interest rates paid on competing personal investments and the level of personal
income and savings within the Company's market. In addition, growth of deposit
balances is influenced by the perceptions of customers regarding the stability
of the financial services industry. Lending activities are influenced by the
demand for housing as well as competition from other lending institutions.
Lending activities may also be impacted by liquidity levels and funds available
to originate loans. The primary sources of funds for lending activities include
deposits, borrowed funds, loan repayments, investment maturities and funds
provided from operations.
FINANCIAL CONDITION
JUNE 30, 1999 COMPARED TO JUNE 30, 1998
ASSETS. The Company's total assets remained relatively stable, increasing
slightly to $100.4 million at June 30, 1999 from $98.9 million at June 30, 1999.
The asset mix, however, has changed at June 30, 1999 as compared to June 30,
1998, as described more fully below.
Cash and cash equivalents decreased $4.3 million to $8.0 million at June 30,
1999 from $12.3 million at June 30, 1998, primarily due to a decrease in
interest-earning deposits in other financial institutions of $5.0 million, or
52%. This decrease was the result of management's intent to shift funds into
higher yielding loan assets.
Securities decreased $1.0 million from $15.0 at June 30, 1998 to $14.0 million
at June 30, 1999. Total securities held at June 30, 1999 were primarily
classified as held to maturity and consisted of mortgage-backed securities and
securities issued by states and political subdivisions. The mortgage-backed and
related securities portfolio consisted of issues from FHLMC, GNMA, FNMA and
other collateralized mortgage obligations with contractual maturities ranging
from one to 25 years. During the years ended June 30, 1999 and 1998, the Company
did not hold any securities that would be categorized as trading securities.
(Continued)
6
<PAGE>
Net loans increased $6.6 million from $62.1 million at June 30, 1998 to $68.7
million at June 30, 1999. The increase is partially attributable to the
Company's expansion into the northern Indiana market through the late 1998
addition of the Howe and Middlebury branch locations. The majority of the
increase occurred in mortgage loans secured by one-to-four family residences,
increasing $5.5 million, or 11%, to $48.8 million at June 30, 1999. The increase
is consistent with the Company's strategy, as the mortgage loan portfolio
continues to represent the Company's primary lending activity.
The loan portfolio mix remained relatively constant at June 30, 1999 as compared
to the prior year. Loans secured by real estate represents approximately 83% of
the net loan portfolio with a balance of $56.9 million at June 30, 1999. Of this
balance, mortgage loans secured by one-to-four family residences comprise the
majority of the balance at June 30, 1999. Management anticipates moderate growth
in each of its loan categories, as long as interest rates do not rise
significantly and the economy does not experience a marked downturn.
In addition to its principal activity of originating loans secured by
residential real estate, the Company offers a variety of consumer and other
loans including automobile, commercial, home equity, commercial real estate and
general purpose loans. Total consumer and other loans increased $1.8 million to
$13.9 million at June 30, 1999 as a result of lending programs designed to
attract this loan market. Commercial and other loans, such as home improvement
and general purpose loans, represent the majority of this overall increase,
increasing approximately $1.2 million to $7.8 million at June 30, 1999.
Automobile and home equity loans represent the remaining total of consumer and
other loans, with a balance of $6.2 million at June 30, 1999. Such loan
portfolios remained relatively stable as compared to the prior year. Although
the risks involved in consumer and other lending can be greater than those
associated with one-to-four family residential mortgage lending, management does
not believe that the additional risk is substantial, or that the overall quality
of the loan portfolio has been hindered, due to the standards for extending
credit in place at the Company.
LIABILITIES. The funding mix as of June 30, 1999 has shifted slightly when
compared to June 30, 1998. Total deposits increased to $67.2 million at June 30,
1999 from $61.5 million at June 30, 1998. The increase in total deposits was
attributable to a combination of increases in each of the different deposit
categories primarily a direct result of the addition of the Howe and Middlebury
branches in northern Indiana. Demand deposits increased $1.1 million, savings
and NOW deposits increased $2.5 million and time deposits increased $2.0
million. The timing and magnitude of deposit growth remains difficult to predict
and is affected by the local economy, interest rates paid on competing personal
investments and the confidence of customers in the financial services industry.
The increase in total deposits was offset by a slight decrease in other borrowed
funds of $2.0 million. The balance of borrowed funds of $20.7 million at June
30, 1999 consists solely of advances from the Federal Home Loan Bank ("FHLB")
with both fixed and variable interest rates and stated maturities ranging
through 2009. The FHLB has designed various borrowing programs to assist
financial institutions in managing liquidity needs and interest rate risk.
SHAREHOLDERS' EQUITY. Shareholders' equity amounted to $10.8 million or 10.8% of
total assets at June 30, 1999 compared to $12.7 million or 12.8% of total assets
at June 30, 1998. The decrease primarily resulted from the repurchase of stock,
totaling $2,362,000 during 1999. Management continues to utilize the stock
repurchase program to manage the Company's capital position in an effort
maximize shareholder value. In addition to the stock repurchases, shareholders'
equity increased by net income of $598,000 during 1999, offset by dividends paid
of $327,000.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED JUNE 30, 1999 AND 1998
GENERAL. Net income for the year ended June 30, 1999 was $598,000, a decrease of
$224,000 compared to net income for the year ended June 30, 1998 of $822,000.
This decrease was primarily the result of a decrease in the average interest
rate spread between interest-earning assets and interest-bearing liabilities, an
increase in overhead expenses related to the addition in late 1998 of the Howe
and Middlebury branch locations, and anticipated expenses related to the
necessary preparation for the Year 2000.
(Continued)
7
<PAGE>
INTEREST INCOME. Interest income remained relatively stable as compared to the
prior year, with a balance of $7.2 million for the year ended June 30, 1999.
Interest income on loans increased slightly, with a balance of $5.6 million for
1999, or 77.3% of total interest income. An increase in interest income on loans
related to volume increases was offset by a decrease in interest income on loans
related to an overall decrease in interest rates during the year.
In addition, a decrease in interest income on securities of $144,000 was offset
by an increase in interest income on other interest-earning assets of $78,000.
The change was largely attributable to a decrease in the average balance of
securities and an increase in the average balance of interest-earning assets
during the year.
INTEREST EXPENSE. Interest expense for the year ended June 30, 1999 was $3.93
million, an increase of $77,000 over the June 30, 1998 balance of $3.85 million.
This increase is related to an increase in interest expense on deposits
primarily the result of an increase in the average balance of money market and
savings deposits, and an increase in the average interest paid on time deposits
during 1999.
NET INTEREST INCOME. Net interest income decreased $111,000 for the year ended
June 30, 1999 as compared to June 30, 1998, primarily as a result of the
decreasing interest rate environment noted above. The net yield on average
interest-earning assets decreased to 3.55% for 1999 as compared to 3.78% for
1998. The impact on net interest income was partially offset by an increase in
the average outstanding balance of interest-earning assets of $2.5 million or
2.8%, from $90.0 million for 1998 to $92.5 million for 1999. Changes in interest
due to volume and rate variances is more fully described in the "Rate/Volume
Analysis" included in this report. Future improvement in the net yield depends
on various factors, including the Company's ability to continue to successfully
market higher-yielding consumer loan products and to obtain growth in low-cost
deposit accounts such as NOW and savings deposits.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the years ended
June 30, 1999 and 1998 was $60,000. The provision for loan losses, less net
charge-offs for 1999 of $30,000, increased the allowance for loan losses to
$520,000 at June 30, 1999 from $489,000 at June 30, 1998. Management continues
to increase the allowance based on, among other things, growth in the loan
portfolio, the composition of the Company's loan portfolio, including the higher
risk associated with commercial real estate and construction loans, home equity
lines of credit, and loans not secured by real estate, such as automobile loans.
In establishing the allowance, management also considers the level of classified
and non-performing loans and their estimated value, and the national economic
outlook, which may tend to inhibit economic activity and depress real estate and
other values in the Company's primary market area.
Management will continue to monitor the allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions and loan portfolio quality dictate. Although management
maintains the allowance for loan losses at a level which it considers to be
adequate to provide for losses, there can be no assurance that future losses
will not exceed estimated amounts or that additional provisions for loan losses
will not be required in future periods. In addition, management's determination
as to the amount of the allowance for loan losses is subject to review by the
OTS and the FDIC as part of their examination processes, which may result in the
establishment of additional allowances based upon their judgments of the
information available to them at the time of their examinations.
NONINTEREST INCOME. Noninterest income increased from $658,000 to $752,000 from
1998 to 1999. As a result of increased refinancing volume from lower prevailing
interest rates compared to the prior fiscal year, proceeds from the sale of
mortgage loans increased $3.2 million, from $5.8 million for the year ended June
30, 1998 to $9.0 million for the year ended June 30, 1999. As a result, gains on
sales of loans increased by $101,000, accounting for the majority of the
increase. In the near future, the income generated from sales of loans is
expected to decrease based upon the recent increase in general interest rates.
In addition, service charges on deposit accounts increased $57,000, contributing
to the overall increase.
(Continued)
8
<PAGE>
NONINTEREST EXPENSE. Noninterest expense increased from $2.9 million for the
year ended June 30, 1998 to $3.2 million for the year ended June 30, 1999. This
increase of $329,000 or 11.5%, was primarily the result of the additional
overhead expenses necessary for expansion into the Howe and Middlebury, Indiana
markets in late 1998. The majority of this increase relates to an increase in
compensation and benefits of $163,000, occupancy and equipment of $59,000, and
data processing expenses of $41,000. In addition, the Company incurred a $51,000
loss on the sale and disposal of fixed assets considered non-compliant with
respect to the Year 2000, as more fully discussed in the "Year 2000" section of
this report.
INCOME TAX EXPENSE. Income tax expense decreased from $320,000 for the year
ended June 30, 1998 to $198,000 for the year ended June 30, 1999 due primarily
to decreased income before federal income taxes in 1999 as compared to 1998.
On August 20, 1996, the Small Business Job Protection Act of 1996 was signed
into law by the President of the United States. This law repeals the percentage
of taxable income method which was previously used to determine the Bank's bad
debt deduction for tax purposes. As more fully disclosed in Note 9, the Company
must recapture approximately $52,700 of income taxes over a six-year period
beginning no later than 1999.
9
<PAGE>
COMPARISON OF YEARS ENDED JUNE 30, 1998 AND 1997
GENERAL. Net income for the year ended June 30, 1998 was $822,000, an increase
of $312,000 compared to net income for the year ended June 30, 1997 of $510,000.
This increase was primarily the result of the $271,000, net of tax impact,
government mandated special assessment to recapitalize the Savings Association
Insurance Fund ("SAIF"), administered by the Federal Deposit Insurance
Corporation ("FDIC") taken in 1997. This one-time, special assessment amounted
to $.657 for every $100 of SAIF insured deposits as of March 31, 1995.
INTEREST INCOME. Interest income increased $452,000, or 6.7%, from $6.8 million
for the year ended June 30, 1997 to $7.2 million for the year ended June 30,
1998. This was due primarily to changes in the average balances of the Company's
interest-earning assets during 1998 as compared to 1997. An increase in the
average loan portfolio of $4.0 million and other interest-earning assets of $3.2
million was offset by a decrease in the average securities portfolio of $3.0
million.
INTEREST EXPENSE. Interest expense for the year ended June 30, 1998 was $3.8
million, an increase of 12.0% over the June 30, 1997 balance of $3.4 million.
This increase in interest expense was primarily the result of an increase in
average borrowed funds of $6.3 million during 1998 as compared to 1997.
NET INTEREST INCOME. Net interest income increased $42,000 for the year ended
June 30, 1998 as compared to June 30, 1997, primarily as a result of the volume
variances in interest-earning assets and interest-bearing liabilities noted
above. The net yield on average interest-earning assets was down slightly at
3.78% for 1998 as compared to 3.95% for 1997. However, the average outstanding
balance of interest-earning assets increased 5.9% from $85.0 million for 1997 to
$90.0 million in 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the years ended
June 30, 1998 and 1997 was $60,000. The provision for loan losses, less net
charge-offs for the period of $58,000, increased the allowance for loan losses
slightly to $489,000 at June 30, 1998 from $487,000 at June 30, 1997.
NONINTEREST INCOME. Noninterest income increased from $528,000 to $658,000 from
1997 to 1998. As a result of increased refinancing volume from lower prevailing
interest rates compared to the prior fiscal year, proceeds from the sale of
mortgage loans increased $3.2 million, from $2.5 million for the year ended June
30, 1997 to $5.7 million for the year ended June 30, 1998. As a result, gains on
sales of loans increased by $82,000, accounting for the majority of the
increase. In addition, service charges on deposit accounts increased $38,000,
contributing to the overall increase.
NONINTEREST EXPENSE. Noninterest expense decreased from $3.0 million for the
year ended June 30, 1997 to $2.8 million for the year ended June 30, 1998. This
decrease of $192,000 or 6.3%, was primarily the result of the $411,000 special
SAIF assessment in 1997 as discussed above. The Bank's annual deposit premiums
decreased approximately $62,000 in fiscal 1997. The decrease in the SAIF
assessment was offset by an increase in various other expense categories,
including compensation and benefits of $72,000, occupancy and equipment of
$77,000, advertising and promotion of $29,000, data processing of $29,000, and
printing and supplies of $25,000. The increase in such expense categories was
primarily the result of the addition of the two new branches in 1998.
INCOME TAX EXPENSE. Income tax expense increased from $269,000 for the year
ended June 30, 1997 to $320,000 for the year ended June 30, 1998 due primarily
to increased income before federal income taxes in 1998 as compared to 1997.
10
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
Generally accepted accounting principles require that measurement of operations
and financial position be made using historical dollars, with no consideration
to current values except in the cases of certain securities available for sale,
which are recorded at fair value, and loans held for sale, which are recorded at
the lower of cost or market value. The impact of inflation is reflected in the
increased cost of operations for the Company, as nearly all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rate fluctuations have a greater effect on the Company's performance
than changes in the general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same degree as the level of
inflation.
ASSET/LIABILITY MANAGEMENT
The matching of maturity or repricing of assets and liabilities may be analyzed
by examining the extent to which such assets and liabilities are "interest rate
sensitive", and by monitoring an institution's interest rate sensitivity "gap".
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated, based upon certain assumptions,
to mature or reprice within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that same time period.
A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income,
although the magnitude of repricing of individual items also will effect the
change in net interest income.
A primary objective of asset/liability management is to manage interest rate
risk. The Company monitors its asset/liability mix on an ongoing basis, and,
from time-to-time, may institute certain changes in its product mix and asset
and liability maturities.
At June 30, 1999, the Company's total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $26.6 million, representing a negative
cumulative one-year gap ratio of 28.2% of total interest-earning assets.
Therefore, management believes that the Company could be adversely affected
during a period of rising interest rates depending on the magnitude of repricing
of individual items, particularly adjustable rate loans, which are subject to
various limitations on interest rate changes, and the passbook and
transaction-type demand accounts for which interest rate changes will depend on
competitive and other factors.
11
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1999 which are scheduled to
reprice or mature in each of the time periods shown. Except as stated below, the
amounts of assets or liabilities shown which reprice or mature during a
particular period were determined in accordance with the contractual terms of
the asset or liability.
<TABLE>
<CAPTION>
----------------------------------Maturing or Repricing---------
---------------------
0-3 3-6 6 Months to 1-2 3-5
Months Months One Year Years Years
------ ------ -------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate mortgage loans $ 1,775 $ 180 $ 220 $ 1,909 $ 1,039
Adjustable rate mortgage loans 2,055 1,965 3,596 11,536 10,132
Consumer and other loans 4,760 1,469 958 2,445 3,828
Mortgage-backed securities - 7 - 3,416 974
Securities - - - - -
Interest-earning time deposits 1,093 792 1,388 882 -
Other interest-earning assets 4,526 - - - -
FHLB stock 1,162 - - - -
----------- ----------- ----------- ----------- -----------
Total interest-earning assets 15,371 4,413 6,162 20,188 15,973
Interest-bearing liabilities:
Time deposits 7,720 7,528 9,725 9,857 4,260
Passbook savings 8,522 - - - -
NOW deposits 6,244 - - - -
Money market demand accounts 9,279 - - - -
FHLB advances 75 - 3,500 4,082 7,000
----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 31,840 7,528 13,225 13,939 11,260
----------- ----------- ----------- ----------- -----------
Interest-earning assets less
interest-bearing liabilities $ (16,469) $ (3,115) $ (7,063) $ 6,249 $ 4,713
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Cumulative interest-rate sensitivity gap $ (16,469) $ (19,584) $ (26,647) $ (20,398) $ (15,685)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Cumulative interest-rate sensitivity gap as a
percentage of total interest-earning assets (17.59)% (20.69)% (28.15)% (21.55)% (16.57)%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
-----------------------
Over
5 Years Total
------- -----
<S> <C> <C>
Interest-earning assets:
Fixed-rate mortgage loans $ 7,614 $ 12,737
Adjustable rate mortgage loans 14,852 44,136
Consumer and other loans 478 13,938
Mortgage-backed securities 9,240 13,637
Securities 375 375
Interest-earning time deposits - 4,155
Other interest-earning assets - 4,562
FHLB stock - 1,162
----------- ---------
Total interest-earning assets 32,559 94,666
Interest-bearing liabilities:
Time deposits - 39,090
Passbook savings - 8,522
NOW deposits - 6,244
Money market demand accounts - 9,279
FHLB advances 6,000 20,657
----------- ---------
Total interest-bearing liabilities 6,000 83,792
----------- ---------
Interest-earning assets less
interest-bearing liabilities $ 26,559 $ 10,874
----------- ---------
----------- ---------
Cumulative interest-rate sensitivity gap $ 10,874
-----------
-----------
Cumulative interest-rate sensitivity gap as a
percentage of total interest-earning assets 11.49%
-----------
-----------
</TABLE>
12
<PAGE>
Certain assumptions affecting the interest-rate sensitivity as calculated above
are as follows:
1. All loan amounts are not reduced by the undisbursed portion of loans in
process, unearned and deferred income, and the allowance for loan
losses.
2. Other interest-earning assets includes interest-earning deposit
accounts.
3. Fixed-rate time deposit accounts will not be withdrawn prior to
maturity.
4. Passbook savings, commercial demand, NOW and money market accounts,
which totaled $24.0 million at June 30, 1999, are withdrawn or reprice
within three months due to the possibility that such deposits will
reprice in the event of significant changes in the overall level of
interest rates.
The effect of these assumptions is to quantify the dollar amount of items that
are interest-sensitive and which can be repriced within each of the periods
specified. Such repricing can occur in one of three ways: (1) the rate of
interest to be paid on an asset or liability may adjust periodically on the
basis of an interest rate index; (2) an asset or liability such as a mortgage
loan may amortize, permitting reinvestment of cash flows at the then prevailing
interest rates; or (3) an asset or liability may mature, at which time the
proceeds can be reinvested at the current market rates.
In recent years, management has measured interest rate sensitivity by computing
the "gap" between the assets and liabilities which were expected to mature or
reprice within certain periods, based on assumptions regarding loan prepayment
and deposit decay rates formerly provided by the OTS. However, the OTS now
requires the computation of amounts by which the net present value of an
institution's cash flows from assets, liabilities and off balance sheet items
(the institution's net portfolio value, or "NPV") would change in the event of a
range of assumed changes in market interest rates. The OTS also requires the
computation of estimated changes in net interest income over a four quarter
period. These computations estimate the effect of an institution's NPV and net
interest income of instantaneous and permanent 1% to 3% increases and decreases
in market interest rates. In the Company's interest rate sensitivity policy, the
Board of Directors has established a maximum permissible decrease in net
interest income and a maximum permissible decrease in NPV given a market
interest rate change. The policy incorporates maximum permissible changes,
rather than absolute targets, to allow flexibility while avoiding an over
reliance on specific interest rate forecasts.
13
<PAGE>
The following table sets forth the interest rate sensitivity of the Bank's net
portfolio value as of June 30, 1999 in the event of 1%, 2%, and 3% instantaneous
and permanent increases and decreases in market interest rates, respectively.
These changes are set forth below as basis points, where 100 basis points equals
one percentage point.
<TABLE>
<CAPTION>
NPV as % of Present
Net Portfolio Value Value of Assets
----------------------------------------------- ------------------------
Changes Basis Point
in Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+300 bp $ 9,848 $ (2,855) (22)% 10.00% (238) bp
+200 bp 11,022 (1,681) (13) 11.02 (136) bp
+100 bp 12,021 (682) (5) 11.84 (54) bp
0 bp 12,703 - - 12.38 -
-100 bp 13,071 368 3 12.64 26 bp
-200 bp 13,355 652 5 12.81 43 bp
-300 bp 13,671 968 8 13.02 64 bp
</TABLE>
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments, and deposit run-offs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions management may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in both
the computation of NPV and in the analysis presented in prior tables setting
forth the maturing and repricing of interest-earning assets and interest-bearing
liabilities. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in differing degrees
to changes in market interest rates. 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, which
represent the Company's primary loan product, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
In addition, the proportion of adjustable-rate loans in the Company's portfolios
could decrease in future periods if market interest rates remain at or decrease
below current levels due to refinance activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in the tables. Finally, the ability of
borrowers to service their adjustable-rate debt may decrease in the event of an
interest rate increase.
14
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Net interest income is affected by (i) the difference ("interest rate spread")
between rates of interest earned on interest-earning assets and rates of
interest paid on interest-bearing liabilities and (ii) the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income. Savings institutions have
traditionally used interest rate spreads as a measure of net interest income.
Another indication of an institution's net interest income is its "net yield on
interest-earning assets" which is net interest income divided by average
interest-earning assets.
The following table sets forth certain information relating to the Company's
average interest-earning assets and interest-bearing liabilities and reflects
the average yield on assets and average cost of liabilities for the period
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of assets or liabilities, respectively, for the
periods presented. During the periods indicated, nonaccruing loans are included
in the net loan category. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of
average daily balances has caused any material difference in the information
presented.
15
<PAGE>
<TABLE>
<CAPTION>
-----------------------------
At June 30, 1999 ------------------1999-------
----------------
Average Interest
Yield/ Outstanding Earned/
Balance Cost Balance Paid
------- ---- ------- ----
Interest-earning assets:
<S> <C> <C> <C> <C>
Loans receivable(1) $ 68,706 7.97% $ 65,409 5,577
Securities(2) 14,012 6.10 14,555 896
Interest-earning time
deposits 4,155 5.74 4,237 252
Other interest-earning
assets 4,526 5.28 7,176 396
FHLB stock 1,162 8.00 1,162 93
----------- -------- ----------- -----------
Total interest-
earning assets $ 92,561 7.46 92,539 7,214
----------- -------- ----------- -----------
Interest-bearing liabilities:
Money market $ 9,279 3.58 8,594 317
Savings deposits 8,522 2.25 8,160 184
NOW accounts 6,244 1.88 6,060 117
Certificates of deposit 39,090 5.44 35,744 2,155
FHLB advances 20,657 5.30 20,449 1,152
----------- -------- ----------- -----------
Total interest-bearing
liabilities $ 83,792 4.61 79,007 3,925
----------- -------- ----------- -----------
Net interest income $ 3,289
-----------
-----------
Net interest rate spread 2.85%
--------
--------
Net earning assets $ 13,532
-----------
-----------
Net yield on average interest-
earning assets
Average interest-earning assets
to average interest-bearing
liabilities $ 1.17X
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
-----------------------Years ended June 30,------------------------------------------------
--------- ------------------1998--------------- ----------------1997-----------------
Average Interest Average Interest
Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Rate Balance Paid Rate Balance Paid Rate
---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C>
Loans receivable(1) 8.53 $ 62,838 $ 5,545 8.82% $ 58,835 $ 5,163 8.78%
Securities(2) 6.16 16,086 1,040 6.47 19,083 1,194 6.26
Interest-earning time
deposits 5.95 3,866 234 6.05 3,394 204 6.01
Other interest-earning
assets 5.52 6,105 342 5.60 2,891 172 5.95
FHLB stock 8.00 1,085 87 8.02 767 62 8.08
------- ----------- ----------- ------- ----------- ----------- --------
Total interest-
earning assets 7.80 89,980 7,248 8.06 84,970 6,795 8.00
------- ----------- ----------- ------- ----------- ----------- --------
Interest-bearing liabilities:
Money market 3.69 7,518 290 3.86 6,017 184 3.06
Savings deposits 2.25 7,679 176 2.29 8,562 197 2.30
NOW accounts 1.93 6,010 113 1.88 8,522 110 1.29
Certificates of deposit 6.03 37,083 2,100 5.66 38,622 2,157 5.58
FHLB advances 5.63 20,331 1,169 5.75 14,049 789 5.62
------- ----------- ----------- ------- ----------- ----------- --------
Total interest-bearing
liabilities 4.97 78,621 3,848 4.89 75,772 3,437 4.54
------- ----------- ----------- ------- ----------- ----------- --------
Net interest income $ 3,400 $ 3,358
----------- -----------
----------- -----------
Net interest rate spread 2.83% 3.17% 3.46%
------- ------- --------
------- ------- --------
Net earning assets $ 11,359 $ 9,198
----------- -----------
----------- -----------
Net yield on average interest-
earning assets 3.55% 3.78% 3.95%
------- ------- --------
------- ------- --------
Average interest-earning assets
to average interest-bearing
liabilities 1.14X 1.12X
----------- -----------
----------- -----------
</TABLE>
- ----------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
(2) Yields reflected have not been computed on a tax equivalent basis.
16
<PAGE>
RATE/VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between changes related to higher
or lower outstanding balances and changes due to the levels and changes in
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided for changes attributable
to (i) changes in volume (i.e. changes in volume multiplied by old rate) and
(ii) changes in rate (i.e. changes in rate multiplied by old volume). For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
-------------------------------------------Years ended June 30,-----------------------------------------------
-------1999------vs.-----1998-------- --------1998------vs.----1997------- -------1997------vs.----1996---
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due to Total
----------------- Increase ------------------- Increase ----------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 223 (191) 32 $ 353 $ 29 $ 382 $ 359 $ (37) $ 322
Securities (97) (47) (144) (193) 39 (154) 334 (1) 333
Interest-earning
time deposits 22 (4) 18 29 1 30 (6) (9) (15)
Other interest-
earning assets 59 (5) 54 181 (11) 170 (153) (153)
FHLB stock 6 - 6 26 (1) 25 12 1 13
--------- -------- --------- --------- --------- --------- --------- -------- -------
Total interest-
earning
assets $ 213 $ (247) (34) $ 396 $ 57 453 $ 546 $ (46) 500
---------- -------- --------- --------- --------- --------- --------- -------- -------
---------- -------- --------- --------- --------- --------
Interest-bearing
liabilities:
Money market $ 40 (13) 27 $ 52 $ 54 106 $ (18) $ 9 (9)
Savings deposits 11 (3) 8 (20) (1) (21) (69) 4 (65)
NOW accounts 1 3 4 (38) 41 3 42 (48) (6)
Certificates of
deposit (78) 133 55 (87) 30 (57) (39) (85) (124)
FHLB advances 7 (24) (17) 361 19 380 437 (5) 432
--------- --------- ---------- --------- --------- --------- --------- -------- -------
Total interest-
bearing
liabilities $ (19) $ 96 77 $ 268 $ 143 411 $ 353 $ (125) 228
---------- -------- --------- --------- --------- --------- --------- -------- -------
---------- -------- --------- --------- --------- --------
Net interest income $ (111) $ 42 $ 272
--------- --------- -------
--------- --------- -------
</TABLE>
17
<PAGE>
ASSET QUALITY
Total non-performing assets decreased to $624,000 at June 30, 1999 as compared
to $682,000 at June 30, 1998. The ratio of non-performing assets to total assets
at June 30, 1999 was .62% compared to .69% at June 30, 1998. Included in
non-performing assets at June 30, 1999 were real estate secured loans totaling
$614,000, consumer loans totaling $7,000 and repossessed assets of $3,000. There
was no foreclosed real estate at June 30, 1999. The allowance for loan losses
was 83.69% and 74.89% of nonperforming loans at June 30, 1999 and June 30, 1998,
respectively. The majority of the non-performing mortgage loan balance at June
30, 1999 relates to a residential construction loan which has since been fully
paid off with no loss incurred.
OTS regulations require that management periodically review and classify assets
pursuant to the classification of assets policy set forth in its regulations.
Based on management's review of assets as of June 30, 1999, approximately
$67,000 of loans were classified as special mention and $456,000 as substandard.
The majority of the substandard loan balance relates to the one residential real
estate loan described above. As the balance of such loan classifications
represent smaller-balance homogeneous loan types, these loans are not considered
impaired at June 30, 1999. There were no other loans classified as impaired and
no assets classified as doubtful or loss at June 30, 1999. Management reviews
assets on a monthly basis, and at the end of each quarter prepares the asset
classification listing in conformity with the OTS regulations.
LIQUIDITY AND CAPITAL RESOURCES
First Savings Bank's primary sources of funds are deposits, borrowings from the
FHLB, principal and interest payments on loans, and maturities and paydowns on
securities. While scheduled repayments of loans and security maturities and
paydowns are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition. Management has controlled this fluctuation in its
sources of funds through borrowings from the FHLB. Management believes that the
Bank's sources of funds will be adequate to meet its currently foreseeable
liquidity needs.
A standard measure of liquidity for thrift institutions is the ratio of cash and
eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year. Currently, the OTS requires savings institutions
to maintain a liquidity ratio of 4%. As of June 30, 1999, First Savings Bank's
liquidity ratio was 22.21%.
During the year ended June 30, 1999, there was a net decrease in cash and cash
equivalents of $4.3 million. Major sources of cash during the period were net
cash from operations of $1.0 million, an increase in deposits of $5.6 million,
and $6.5 million in proceeds from calls, maturities and paydowns of securities
held to maturity. Major uses of cash during the period included a net increase
in loans of $6.6 million, the purchase of $4.5 million of securities held to
maturity, net repayments of $2 million in borrowings, and repurchases of common
stock of $2.4 million.
During the year ended June 30, 1998, there was a net increase in cash and cash
equivalents of $4.8 million. Major sources of cash during the period were net
cash from operations of $1.4 million, a net increase of $2.4 million in
borrowings from the FHLB, and $6.7 million in proceeds from the maturities and
paydowns of securities held to maturity. Major uses of cash during the period
included the purchase of $3.0 million of securities held to maturity, net
premises and equipment purchases of $1.4 million, and repurchases of common
stock totaling $824,000.
During the year ended June 30, 1997, there was a net increase in cash and cash
equivalents of $3.3 million. Major sources of cash during the period were net
cash from operations of $828 million, a net increase of $11.1 million in
borrowings from the FHLB, and $3.6 million in proceeds from maturities and
paydowns of securities held to maturity. Major uses of cash during the period
included the purchase of $2.2 million of securities held to maturity, a net
increase of $5.8 million in loans and a net reduction of $3.4 million in
deposits.
- --------------------------------------------------------------------------------
(Continued)
18
<PAGE>
The Company also has a need for liquid assets in order to fund its operating
expenses, as well as for the payment of any dividends to shareholders. The
Company currently has no significant liquidity commitments, as operating costs
are modest and the level of dividends to shareholders are discretionary. At June
30, 1999, the Company had $318,000 in liquid assets. The primary source of
liquidity on an ongoing basis is dividends from the Bank. For the year ended
June 30, 1999, the Bank paid $2.7 million in dividends to the Company. For the
same period, the Company paid dividends to shareholders of $327,000.
Federally insured savings institutions are required to maintain a minimum level
of regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The Bank is required to maintain regulatory capital sufficient to meet tangible,
core and risk-based capital ratios of 1.5%, 3.0%, and 8.0%. At June 30, 1999,
the Bank exceeded each of its capital requirements, with tangible, core and
risk-based capital ratios of 9.76%, 9.76%, and 19.06%, respectively.
YEAR 2000
Included in other noninterest expense for the year ended June 30, 1999 is
approximately $20,000 in charges incurred in connection with the training and
testing of the Company's computer and related systems to properly recognize
dates beyond December 31, 1999. The Company has completed its assessment of Year
2000 issues, developed a plan, and arranged for the required resources to
complete the necessary remediation and testing. As part of its efforts to ensure
compliance with the Year 2000, the Company converted to a new processing system
in May of 1999. At that time, computer hardware was also replaced, ultimately
resulting in a net loss on sales and disposals of fixed assets of $51,000.
The Company has and will utilize both internal and external resources to
reprogram or replace, and test hardware and software for Year 2000 compliance.
The Company has completed changes and testing of critical systems to ensure Year
2000 compliance. Testing of non-critical applications will continue throughout
1999 and will be completed prior to any impact on operating systems. The total
costs of the Year 2000 project are estimated at $350,000. The Company will incur
remediation and testing costs through the Year 2000, but does not anticipate
that material incremental costs will be incurred in any single period.
The Company has initiated formal communications with all of its critical vendors
and service providers to determine the extent to which the Company is vulnerable
to any failure of those third parties to remedy their own Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be remedied in a timely manner or that there
will be no adverse effect on the Company's systems. Critical companies include
power companies and phone systems. Therefore, the Company could possibly be
negatively impacted to the extent that other entities not affiliated with the
Company are unsuccessful in properly addressing this issue.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based upon management's best estimates. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
IMPACT OF NEW ACCOUNTING STANDARDS
Information pertaining to this topic appears in Note 18 to the consolidated
financial statements of Three Rivers Financial Corporation, which are included
as part of this report.
- --------------------------------------------------------------------------------
19
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Three Rivers Financial Corporation
Three Rivers, Michigan
We have audited the accompanying consolidated balance sheets of Three Rivers
Financial Corporation as of June 30, 1999 and 1998 and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity and
cash flows for each of the three years in the period ended June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Three Rivers
Financial Corporation as of June 30, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1999 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
August 5, 1999
- --------------------------------------------------------------------------------
20
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from other financial institutions $ 3,439,860 $ 2,768,730
Interest-earning deposits in other financial institutions 4,526,169 9,512,347
-------------- --------------
Cash and cash equivalents 7,966,029 12,281,077
Interest-earning time deposits in other financial institutions 4,154,960 4,064,980
Securities available for sale 1,771,920 725,036
Securities held to maturity (fair value: 1999 - $12,239,450
and 1998 - $14,388,034) 12,240,083 14,277,573
Loans receivable, net of allowance for loan losses
of $519,687 in 1999 and $489,361 in 1998 68,705,967 62,119,886
Federal Home Loan Bank stock 1,162,200 1,162,200
Accrued interest receivable 481,286 467,691
Premises and equipment, net 2,739,937 2,626,114
Investment in low-income housing partnership 373,754 423,742
Other assets 809,395 736,583
-------------- --------------
Total assets $ 100,405,531 $ 98,884,882
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Demand deposits $ 4,025,494 $ 2,879,180
Savings and NOW deposits 24,045,015 21,507,839
Time deposits 39,089,857 37,128,630
-------------- --------------
Total deposits 67,160,366 61,515,649
Federal Home Loan Bank advances 20,656,961 22,743,737
Advance payments by borrowers for taxes and insurance 463,129 531,757
Due to low-income housing partnership 253,058 323,622
Accrued expenses and other liabilities 1,082,957 1,082,265
-------------- --------------
Total liabilities 89,616,471 86,197,030
Shareholders' equity
Preferred stock, par value $.01; 500,000 shares authorized;
none outstanding
Common stock, par value $.01; 2,000,000 shares authorized; 702,734 and
790,698 shares issued and 702,734 and 783,313
outstanding at June 30, 1999 and 1998, respectively 7,027 7,907
Additional paid-in capital 5,563,848 6,861,182
Retained earnings 5,851,942 6,607,642
Accumulated other comprehensive income, net of tax
of ($443) at June 30, 1999 (860) -
-------------- --------------
11,421,957 13,476,731
Unearned Employee Stock Ownership Plan shares (421,538) (491,582)
Unearned Recognition and Retention Plan shares (211,359) (199,055)
Treasury stock, at cost (7,385 shares at
June 30, 1998) - (98,242)
-------------- --------------
Total shareholders' equity 10,789,060 12,687,852
-------------- --------------
Total liabilities and shareholders' equity $ 100,405,531 $ 98,884,882
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans receivable $ 5,577,294 $ 5,544,593 $ 5,163,206
Securities 896,437 1,040,216 1,194,087
Other interest and dividend income 740,511 662,703 437,754
-------------- ------------- -------------
7,214,242 7,247,512 6,795,047
Interest expense
Deposits 2,772,871 2,678,858 2,647,541
Borrowed funds 1,152,633 1,168,767 789,448
-------------- ------------- -------------
3,925,504 3,847,625 3,436,989
-------------- ------------- -------------
NET INTEREST INCOME 3,288,738 3,399,887 3,358,058
Provision for loan losses 60,000 60,000 60,000
-------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,228,738 3,339,887 3,298,058
Noninterest income
Loan servicing 118,721 101,719 103,845
Net gains on sales of loans 227,794 126,734 44,270
Net gains on foreclosed real estate 9,193 39,835 40,949
Service charges on deposit accounts 266,736 209,968 172,075
Other income 129,112 179,680 167,274
-------------- ------------- -------------
751,556 657,936 528,413
Noninterest expense
Compensation and benefits 1,530,171 1,366,870 1,294,928
Occupancy and equipment 574,355 515,130 438,542
Federal deposit insurance premium 37,811 37,914 496,715
Advertising and promotion 108,158 110,008 81,178
Data processing 263,611 222,824 193,987
Professional fees 101,997 122,185 103,923
Printing, postage, stationery, and supplies 128,590 137,239 112,073
Net losses on sales and disposals of fixed assets 50,576 - -
Other 389,405 343,335 326,189
-------------- ------------- -------------
3,184,674 2,855,505 3,047,535
-------------- ------------- -------------
INCOME BEFORE FEDERAL INCOME TAXES 795,620 1,142,318 778,936
Federal income tax expense 197,812 319,840 269,410
-------------- ------------- -------------
NET INCOME $ 597,808 $ 822,478 $ 509,526
-------------- ------------- -------------
-------------- ------------- -------------
Basic earnings per share $ .84 $ 1.00 $ .61
----- ------ -----
----- ------ -----
Diluted earnings per share $ .83 $ .97 $ .61
----- ------ -----
----- ------ -----
</TABLE>
22
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended June 30,1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET INCOME
Other comprehensive income $ 597,808 $ 822,478 $ 509,526
Net change in unrealized gains on securities
available for sale arising during the year (1,303) - -
Tax effects 443 - -
-------------- ------------- -------------
Total other comprehensive income (860) - -
-------------- ------------- -------------
COMPREHENSIVE INCOME $ 596,948 $ 822,478 $ 509,526
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income,
Stock Capital Earnings Net of Tax
----- ------- -------- ----------
<S> <C> <C> <C>
BALANCE AT JULY 1, 1996 $ 8,596 $ 7,979,421 $ 5,870,983
Net income for the year ended June 30, 1997 509,526
Cash dividends declared on common stock,
$.314 per share (269,752)
Shares committed to be released under the ESOP 26,959
Amortization of RRP shares
Retirement of common stock (277) (387,260)
----------- ------------- ------------ ------------
BALANCE AT JUNE 30, 1997 8,319 7,619,120 6,110,757
Net income for the year ended June 30, 1998 822,478
Cash dividends declared on common stock,
$.38 per share (325,593)
Shares committed to be released under the ESOP 65,823
Amortization of RRP shares
Shares issued to RRP
Retirement of common stock (412) (823,761)
----------- ------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Unearned Unearned
Employee Recognition
Stock and
Ownership Retention Total
Plan Plan Treasury Shareholders'
Shares Shares Stock Equity
------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1996 $ (630,396) $ (331,461) $ (111,545) $ 12,785,598
Net income for the year ended June 30, 1997 509,526
Cash dividends declared on common stock,
$.314 per share (269,752)
Shares committed to be released under the ESOP 68,770 95,729
Amortization of RRP shares 69,180 69,180
Retirement of common stock (387,537)
------------ ----------- ----------- --------------
BALANCE AT JUNE 30, 1997 (561,626) (262,281) (111,545) 12,802,744
Net income for the year ended June 30, 1998 822,478
Cash dividends declared on common stock,
$.38 per share (325,593)
Shares committed to be released under the ESOP 70,044 135,867
Amortization of RRP shares 76,529 76,529
Shares issued to RRP (13,303) 13,303
Retirement of common stock (824,173)
------------ ----------- ----------- --------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
24
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income,
Stock Capital Earnings Net of Tax
----- ------- -------- ----------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1998 $ 7,907 $ 6,861,182 $ 6,607,642 $ 0
Net income for the year ended June 30, 1999 597,808
Cash dividends declared on common stock,
$.466 per share (326,502)
Shares committed to be released under the ESOP 37,499
Amortization of RRP shares
Shares issued to RRP
72,036 shares issued for 10% stock dividend 720 1,025,793 (1,027,006)
Retirement of common stock (1,600) (2,360,626)
Net change in unrealized loss on securities
available for sale, net of tax (860)
----------- ------------- ------------ ------------
BALANCE AT JUNE 30, 1999 $ 7,027 $ 5,563,848 $ 5,851,942 $ (860)
----------- ------------- ------------ ------------
----------- ------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Unearned Unearned
Employee Recognition
Stock and
Ownership Retention Total
Plan Plan Treasury Shareholders'
Shares Shares Stock Equity
------ ------ ----- ------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1998 $ (491,582) $ (199,055) $ (98,242) $ 12,687,852
Net income for the year ended June 30, 1999 597,808
Cash dividends declared on common stock,
$.466 per share (326,502)
Shares committed to be released under the ESOP 70,044 107,543
Amortization of RRP shares 85,938 85,938
Shares issued to RRP (98,242) 98,242 -
72,036 shares issued for 10% stock dividend (493)
Retirement of common stock (2,362,226)
Net change in unrealized loss on securities
available for sale, net of tax (860)
------------ ----------- ----------- --------------
BALANCE AT JUNE 30, 1999 $ (421,538) $ (211,359) $ 0 $ 10,789,060
------------ ----------- ----------- --------------
------------ ----------- ----------- --------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 597,808 $ 822,478 $ 509,526
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation of premises and equipment 293,999 254,238 202,057
Net amortization (accretion) of securities (38,186) (71,756) (35,293)
Provision for loan losses 60,000 60,000 60,000
RRP expense 85,938 76,529 69,180
ESOP expense 107,543 135,867 95,729
Loans originated for sale (8,836,790) (5,684,330) (2,528,149)
Proceeds from sales of loans held for sale 8,985,098 5,811,064 2,572,419
Net realized gains on sales of loans (227,794) (126,734) (44,270)
Net loss on sales and disposals of fixed assets 50,576 - -
Change in
Accrued interest receivable and other assets (45,078) (97,424) (352,906)
Accrued expenses and other liabilities 692 256,702 279,425
-------------- ------------- -------------
Net cash provided by operating activities 1,033,806 1,436,634 827,718
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-earning time
deposits with other financial institutions (89,980) (594,000) 397,000
Net change in loans (6,646,081) (396,663) (5,751,541)
Net purchases of premises and equipment (458,398) (1,444,749) (152,855)
Securities available for sale:
Purchases (1,360,249) (725,036) -
Paydowns 306,308 - -
Securities held to maturity:
Purchases (4,455,899) (2,969,515) (2,245,992)
Calls and maturities 1,500,000 2,500,000 1,000,000
Paydowns 5,037,329 4,188,648 2,624,167
Purchase of Federal Home Loan Bank stock - (119,900) (423,600)
Proceeds from sale of other real estate owned 38,600 454,893 -
Net investment in low-income housing partnership (20,576) (40,195) (21,785)
-------------- ------------- -------------
Net cash provided by (used in) investing activities (6,148,946) 853,483 (4,574,606)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
26
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ 5,644,717 $ 1,170,857 $ (3,379,628)
Net change in advances from borrowers for taxes
and insurance (68,628) 132,426 (23,501)
Proceeds from FHLB advances 7,500,000 13,750,000 18,750,000
Repayments of FHLB advances (9,586,776) (11,350,550) (7,616,322)
Cash dividends paid (326,995) (325,593) (269,752)
Purchase of common stock (2,362,226) (824,173) (387,537)
-------------- ------------- -------------
Net cash provided by financing activities 800,092 2,552,967 7,073,260
-------------- ------------- -------------
Net change in cash and cash equivalents (4,315,048) 4,843,084 3,326,372
Cash and cash equivalents at beginning of period 12,281,077 7,437,993 4,111,621
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,966,029 $ 12,281,077 $ 7,437,993
-------------- ------------- -------------
-------------- ------------- -------------
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 3,923,236 $ 3,838,742 $ 3,444,830
Income taxes 370,225 139,950 392,000
Transfers from loans to real estate acquired
through foreclosure - 29,408 78,481
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION, NATURE OF OPERATIONS AND INDUSTRY SEGMENT
INFORMATION: The consolidated financial statements include the accounts of Three
Rivers Financial Corporation ("the Company"), First Savings Bank ("the Bank")
and Alpha Financial, Inc. ("Alpha"). All significant intercompany balances and
transactions have been eliminated in consolidation. The Company is a savings and
loan holding company located in Three Rivers, Michigan and owns all of the
outstanding stock of the Bank. Alpha is a wholly-owned subsidiary of the Bank.
The Company and the Bank provide a broad range of banking and financial services
in the banking industry. Substantially all revenues and services are derived
from banking products and services. The Bank grants residential and commercial
real estate and consumer loans, accepts deposits and engages in mortgage banking
activities. Substantially all loans are secured by specific items of collateral
including residences, business assets and consumer assets. The Bank services its
customers, which are primarily located in southwestern Michigan and the central
portion of northern Indiana, through its main office in Three Rivers and five
other offices located in its market area. The primary business of Alpha is to
own and receive the dividend income from stock holdings in MMLIC Life Insurance
Company. While the Company's chief decision makers monitor the revenue streams
of the various Company products and services, operations are managed and
financial performance is evaluated on a Company-wide basis. Accordingly, all of
the Company's banking operations are considered by management to be aggregated
in one reportable operating segment.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: 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, 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, as well as the disclosures
provided. Areas involving the use of significant estimates and assumptions in
the accompanying financial statements include the allowance for loan losses,
fair values of securities and other financial instruments, determination and
carrying value of impaired loans, and the determination of depreciation of
premises and equipment recognized in the Company's financial statements. Actual
results could differ from those estimates. Estimates associated with the
allowance for loan losses, the fair value of stock options and the fair values
of securities and other financial instruments are particularly susceptible to
material change in the near term.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents are defined to include the
Company's cash on hand, amounts due from financial institutions and short-term
interest-earning deposits in other financial institutions with original
maturities of 90 days or less. The Company reports net cash flows for customer
loan and deposit transactions, advance payments by borrowers for taxes and
insurance, and interest-earning time deposits in other financial institutions.
SECURITIES: The Company classifies securities into held-to-maturity,
available-for-sale and trading categories. Held-to-maturity securities are those
which the Company has the positive intent and ability to hold to maturity, and
are reported at amortized cost. Available-for-sale securities are those the
Company may decide to sell if needed for liquidity, asset-liability management
or other reasons. Available-for-sale securities are reported at fair value, with
unrealized gains and losses included as a separate component of shareholders'
equity, net of tax, until realized. Trading securities are bought principally
for sale in the near term, and are reported at fair value with unrealized gains
and losses included in earnings. Securities are written down to fair value when
a decline in fair value is not temporary.
- --------------------------------------------------------------------------------
(Continued)
28
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Realized gains and losses resulting from the sale of securities are computed by
the specific identification method. Interest and dividend income, adjusted by
amortization of purchase premium or discount, is included in earnings. Premiums
and discounts are recognized in interest income using the interest method over
the period of maturity.
MORTGAGE BANKING ACTIVITIES: Mortgage loans originated and intended for sale in
the secondary market are reported on the consolidated balance sheets as loans
held for sale and are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized in a valuation allowance by
charges to income.
Loan servicing fees are recognized when received and the related costs are
recognized when incurred. The Bank sells mortgages into the secondary market at
market prices, which includes consideration for normal servicing fees.
SERVICING RIGHTS: Servicing rights represent the allocated value of servicing
rights retained on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights, using groupings of the
underlying loans as to interest rates and then, secondarily, as to geographic
and prepayment characteristics. Any impairment of a grouping is reported as a
valuation allowance.
LOANS RECEIVABLE, NET: Loans receivable are reported at the unpaid principal
balance, less the allowance for loan losses, deferred fees or costs on
originated loans, and unamortized premiums or discounts on purchased loans.
Discounts on mortgage loans are amortized to income using the level-yield method
over the remaining period to contractual maturity, adjusted for anticipated
prepayments.
Interest income is reported on the interest method and includes amortization of
net deferred fees and costs over the loan term. The accrual of interest on loans
is discontinued when full loan repayment is in doubt, typically when the loan is
deemed impaired or when payments become past due 90 days, unless the loan is
well-secured and in the process of collection. Payments received on such loans
are reported as principal reductions. Interest income previously accrued on such
loans is reversed.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of the collateral if the loan is collateral dependent. Loans are evaluated
for impairment when payments are delayed, typically 90 days or more, or when it
is probable that all principal and interest amounts will not be collected
according to the original terms of the loan.
The allowance for loan losses is a valuation allowance for probable credit
losses, increased by charges to income and decreased by charge-offs (net of
recoveries). Estimating the risk of loss and the amount of loss on any loan is
necessarily subjective. Accordingly, the allowance is maintained by management
at a level considered adequate to cover losses that are currently anticipated.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current economic
conditions. A loan is charged off against the allowance by management when
deemed uncollectible, typically when payments are past due 90 days for consumer
loans and 180 days for residential mortgage loans, although collection efforts
continue and future recoveries may occur.
- --------------------------------------------------------------------------------
(Continued)
29
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated depreciation.
These assets are reviewed for impairment when events indicate the carrying
amount may not be recoverable. Depreciation expense is calculated on the
straight-line method over asset useful lives. The cost of leasehold improvements
is being amortized using the straight-line method over the terms of the related
leases, or over the useful lives of the assets, if less.
FORECLOSED REAL ESTATE: Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at fair value at the
date of acquisition, establishing a new cost basis. Any reduction to fair value
from the carrying value of the related loan at the time of acquisition is
accounted for as a loan loss and charged against the allowance for loan losses.
After acquisition, the property is carried at the lower of cost or fair value,
less estimated costs to sell. A valuation allowance is recorded through a charge
to income for the amount of selling costs. Valuations are periodically performed
by management and valuation allowances are adjusted through a charge to income
for changes in fair value or estimated selling costs. Costs relating to
improvement of property are capitalized, whereas costs and revenues relating to
the holding of property are recognized when incurred.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP): The Company accounts for its ESOP in
accordance with AICPA Statement of Position 93-6. The cost of shares issued to
the ESOP, but not yet allocated to participants, are presented as a reduction of
shareholders' equity. Compensation expense is recorded based on the market price
of the shares as they are committed to be released for allocation to participant
accounts. The difference between the market price and the cost of shares
committed to be released is recorded as an adjustment to additional paid-in
capital. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unearned ESOP shares are reflected as a
reduction of debt and accrued interest.
RECOGNITION AND RETENTION PLAN (RRP): The RRP is a stock award plan for which
the measurement of total compensation cost is based upon the fair value of the
shares on the date of grant. RRP awards vest in five equal annual installments
from the date of grant, subject to the continuous employment of the recipients
as defined under such plans. Compensation expense for the RRPs is recognized on
a prorata basis over the vesting period of the awards. The unearned compensation
value of the RRPs is shown as a reduction of shareholders' equity.
STOCK OPTION PLAN (SOP): Expense for employee compensation under SOPs is
recognized only if options are granted below the market price at the grant date.
As shown in a separate note, pro forma disclosures of net income and earnings
per share are provided as if the fair value method were used for stock-based
compensation.
FEDERAL HOME LOAN BANK SYSTEM: The Bank is a member of the Federal Home Loan
Bank System and is required to invest in capital stock of the Federal Home Loan
Bank ("FHLB"). The amount of the required investment is based upon the balance
of the Bank's outstanding home mortgage loans or advances from the FHLB and is
carried at cost plus the value assigned to stock dividends.
PREFERRED STOCK: The Board of Directors of the Company is authorized to issue
preferred stock from time to time in one or more series subject to applicable
provisions of law, and is authorized to fix the designations, powers,
preferences and relative participating, optional and other special rights of
such shares, including voting rights (which could be multiple or as a separate
class) and conversion rights, and the qualifications, limitations and
restrictions thereof. In the event of a proposed merger, tender offer or other
attempt to gain control of the Company that the Board of Directors does not
approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. The Board of Directors has no
present plans or understandings for the issuance of any preferred stock.
- --------------------------------------------------------------------------------
(Continued)
30
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES: The entities included in these consolidated financial statements
file a consolidated federal income tax return. The Company records income tax
expense based on the amount of taxes due on its tax return plus the change in
deferred tax assets and liabilities computed based on the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities, using enacted tax rates.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company, in the normal
course of business, enters into commitments to make loans which are not
reflected in the financial statements. A summary of these commitments is
disclosed in a separate note.
EARNINGS AND DIVIDENDS PER SHARE: Basic earnings per share is based on net
income dividend by the weighted average common shares outstanding. ESOP shares
are considered outstanding as they are committed to be released; unearned shares
are not considered outstanding. Recognition and Retention Plan ("RRP") shares
are considered outstanding as they vest. Diluted earnings per share further
assumes issue of dilutive potential common shares relating to outstanding stock
options and unvested RRP shares. All share and per share amounts have been
retroactively adjusted for the October of 1998 10% stock dividend.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, net of tax, which are also recognized
as a separate component of shareholders' equity. The accounting standard that
requires reporting comprehensive income first applies for fiscal 1999, with
prior information restated to be comparable.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on- and
off-balance-sheet financial instruments does not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
RECLASSIFICATIONS: Certain items in the 1998 and 1997 financial statements have
been reclassified to conform with the 1999 presentation.
NOTE 2 - SECURITIES
Securities available for sale were as follows at June 30:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
1999
Mortgage-backed securities $ 1,773,223 $ 5,787 $ (7,090) $ 1,771,920
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
1998
Mortgage-backed securities $ 725,036 $ 725,036
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Securities held to maturity were as follows at June 30:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1999
Mortgage-backed securities $ 11,865,083 $ 45,582 $ (60,565) $ 11,850,100
Obligations of states and political
subdivisions 375,000 14,350 - 389,350
------------- -------------- ------------- -------------
$ 12,240,083 $ 59,932 $ (60,565) $ 12,239,450
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
1998
U.S. government and federal agencies $ 1,500,000 $ 1,563 $ 1,501,563
Mortgage-backed securities 12,299,329 113,429 $ (27,779) 12,384,979
Obligations of states and political
subdivisions 375,000 22,979 - 397,979
Corporates 103,244 269 - 103,513
------------- -------------- ------------- -------------
$ 14,277,573 $ 138,240 $ (27,779) $ 14,388,034
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
Contractual maturities of debt securities at June 30, 1999 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
------Available for Sale----------------Held to Maturity------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due from five years to ten years $ 375,000 $ 389,350
Mortgage-backed securities $ 1,773,223 $ 1,771,920 11,865,083 11,850,100
------------- -------------- ------------- -------------
$ 1,773,223 $ 1,771,920 $ 12,240,083 $ 12,239,450
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
</TABLE>
There were no sales of securities available for sale during the years ended June
30, 1999, 1998 and 1997. No securities classified as held to maturity were sold
or transferred to available for sale during 1999, 1998 or 1997.
Securities, with carrying values of approximately $13,638,000 and $14,523,000 at
June 30, 1999 and 1998, were pledged as collateral for purposes required or
permitted by law.
- --------------------------------------------------------------------------------
(Continued)
32
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE, NET
Loans were as follows at June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Real estate loans
One-to-four family $ 48,771,218 $ 43,295,874
Commercial 6,067,713 5,959,640
Construction or development 2,033,796 2,479,732
-------------- --------------
Total real estate loans 56,872,727 51,735,246
Consumer and other loans
Automobile 3,421,143 2,799,876
Home equity 2,752,021 2,799,489
Commercial 3,059,698 2,194,983
Other 4,705,341 4,328,252
-------------- --------------
Total consumer and other loans 13,938,203 12,122,600
-------------- --------------
Total loans 70,810,930 63,857,846
Less
Undisbursed portion of construction loans (1,058,371) (800,834)
Unearned discounts (375) (2,027)
Deferred loan fees (526,530) (445,738)
Allowance for loan losses (519,687) (489,361)
-------------- --------------
$ 68,705,967 $ 62,119,886
-------------- --------------
-------------- --------------
</TABLE>
Mortgage loans serviced for others are not included in the accompanying balance
sheets. The unpaid principal balances of these loans were $19,687,000,
$15,522,000 and $12,581,000 at June 30, 1999, 1998 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $125,895, $102,486 and $100,453 at June 30, 1999, 1998 and 1997
respectively.
Activity in the allowance for loan losses was as follows for the years ended
June 30:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 489,361 $ 487,184 $ 440,835
Provision charged to operating expense 60,000 60,000 60,000
Loans charged-off (37,301) (67,801) (14,392)
Recoveries 7,627 9,978 741
-------------- -------------- --------------
Balance at end of year $ 519,687 $ 489,361 $ 487,184
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
33
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE, NET (Continued)
Impaired loans were as follows for the year ended June 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Average investment in impaired loans $ 509,500 $ 87,000
Interest income recognized during impairment 61,700 8,400
Cash-basis interest income recognized 61,700 -
Information regarding impaired loans at June 30 is as follows:
Impaired loans with no allowance for loan losses allocated $ - $ -
Impaired loans with allowance for loan losses allocated - 522,000
Amount of allowance for loan losses allocated to impaired
loans - 60,000
</TABLE>
The above information reflects one commercial loan the Company had deemed
impaired during 1998 and 1997. The Company did not have any impaired loans as of
and during the year ended June 30, 1999.
NOTE 4 - PREMISES AND EQUIPMENT, NET
Premises and equipment were as follows at June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and land improvements $ 438,281 $ 438,281
Buildings and improvements 3,173,992 3,162,263
Furniture and equipment 1,767,600 1,577,280
-------------- -------------
Total cost 5,379,873 5,177,824
Less accumulated depreciation (2,639,936) (2,551,710)
-------------- -------------
$ 2,739,937 $ 2,626,114
-------------- -------------
-------------- -------------
</TABLE>
NOTE 5 - DEPOSITS
The aggregate amount of time deposit accounts with balances greater than or
equal to $100,000 was $5,957,819 and $4,887,584 at June 30, 1999 and 1998.
At June 30, 1999, scheduled maturities of time deposits were as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 24,973,024
2001 6,791,020
2002 3,065,861
2003 2,527,697
2004 1,732,255
--------------
$ 39,089,857
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
34
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 6 - FEDERAL HOME LOAN BANK (FHLB) ADVANCES
FHLB advances as of June 30 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Single-maturity fixed rate advances maturing September of 1998 through December
of 2001, with rates ranging from 5.09% to 6.14%, averaging 5.09% and 5.79%
at June 30, 1999 and 1998 $ 2,000,000 $ 7,000,000
Amortizable fixed rate advance maturing July of 2000 at a
rate of 5.46% 406,961 493,737
Variable rate advances maturing October of 1998 through June of 2000, with rates
of 5.13% and 5.66% at June 30, 1999
and 1998 3,500,000 1,000,000
Putable advances maturing July of 1998 through February of 2009, with rates
ranging from 4.53% to 5.71% at June 30, 1999, averaging 5.36% and 5.48% at
June 30, 1999 and 1998
14,750,000 14,250,000
------------- -------------
$ 20,656,961 $ 22,743,737
------------- -------------
------------- -------------
</TABLE>
The variable rate advances carry the three-month LIBOR rate plus three basis
points and are adjusted quarterly. For the putable advances, the FHLB has the
option to convert to an adjustable rate of three-month LIBOR flat, adjusted
quarterly. Depending on the advance, this option can be initially exercised one,
two, three or five years after the purchase date and quarterly thereafter.
Pursuant to collateral agreements with the FHLB, advances are secured under a
blanket collateral arrangement by securities and mortgage loans with a carrying
value of approximately $59,821,000 at June 30, 1999.
The aggregate annual maturities of the advances are as follows for the years
ended June 30:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 3,574,756
2001 2,082,205
2002 2,000,000
2003 6,000,000
2004 1,000,000
Thereafter 6,000,000
-------------
$ 20,656,961
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
35
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 7 - EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory multi-employer defined-benefit pension
plan covering substantially all employees. The plan is administered by the
trustees of the Financial Institutions Retirement Fund. There is no separate
valuation of plan benefits nor segregation of plan assets specifically for the
Company because the plan is a multi-employer plan and separate actuarial
valuations are not made with respect to each employer nor are the plan assets so
segregated. Under the multi-employer plan, the Company made contributions and
recognized pension expense of approximately $15,000 and $75,000 for the years
ended June 30, 1999 and 1997. No contribution was required for the year ended
June 30, 1998.
The Company also maintains a 401(k) profit sharing plan covering substantially
all employees. The annual expense of the plan is based on 50% matching of
voluntary employee contributions, up to 6% of individual compensation. Employee
contributions vest immediately and the Company's matching contributions vest
after six years. Contributions and related expenses attributable to the plan
were approximately $21,000 for the year ended June 30, 1999 and $19,000 for the
years ended June 30, 1998 and 1997.
NOTE 8 - STOCK BASED COMPENSATION PLANS
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP"): An ESOP was established for the benefit
of substantially all employees. Contributions to the ESOP are made by the
Company and may be made in the form of cash or the Company's common stock.
To fund the plan, the ESOP borrowed $687,700 from the Company for the purpose of
purchasing 75,647 shares of stock at $9.09 per share. The original loan
agreement was modified in May 1996 to provide for principal and interest
payments on the loan to be paid in equal annual installments over a nine-year
period ending June 30, 2005. The loan is collateralized by the unallocated
shares of the Company's common stock purchased with the loan proceeds and will
be repaid by the ESOP with funds from the Company's contributions to the ESOP
and earnings on ESOP assets. For the years ended June 30, 1999 and 1998,
approximately $70,000 in principal payments were made on the loan.
Shares are allocated among participants each June 30 on the basis of principal
payments made by the ESOP on the loan from the Company, according to each
participant's relative compensation. ESOP participants are entitled to receive
distributions from their ESOP accounts only upon termination of service.
During 1999, 7,704 shares with an average fair value of $13.96 per share were
committed to be released, resulting in ESOP compensation expense of $107,543.
During 1998, 7,704 shares with an average fair value of $17.64 per share were
committed to be released, resulting in ESOP compensation expense of $135,867.
During 1997, 7,565 shares with an average fair value of $12.65 per share were
committed to be released, resulting in ESOP compensation expense of $95,729.
Shares held by the ESOP at June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Allocated to participants 29,275 21,572
Unearned 46,372 54,075
---------- -----------
Total ESOP shares 75,647 75,647
---------- -----------
---------- -----------
Fair value of unearned shares $ 604,227 $ 952,456
---------- -----------
---------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - STOCK BASED COMPENSATION PLANS (Continued)
All share and per share amounts have been retroactively adjusted for the October
of 1998 10% stock dividend.
RECOGNITION AND RETENTION PLAN ("RRP") AND STOCK OPTION AND INCENTIVE PLAN
("SOP"): An RRP and SOP were established to reward directors and certain
officers of the Company for their contributions, and to encourage them to remain
with the Company and continue to promote the Company's growth and profitability.
The RRP is a restricted stock award plan. RRP awards vest in five annual
installments subject to the continuous employment of the recipients.
Compensation expense for the RRP is recognized on a pro-rata basis over the
vesting period of the awards. During the years ended June 30, 1999, 1998 and
1997, $85,938, $76,529 and $69,180 was charged to compensation expense for the
RRP. The unearned balance of the RRP is shown as a reduction to shareholders'
equity. SOP options are granted at the market price of the Company's stock on
the date of grant and vest in five equal annual installments and expire 10 years
from the date of grant. The RRP and SOP are administered by a committee of
Directors of the Company. This committee selects recipients and terms of awards
pursuant to the plans. The total shares made available under the RRP and SOP
plans were 37,824 and 94,558, respectively.
The following proforma information presents net income and earnings per share
had the fair value method been used to measure compensation cost for stock
options granted during fiscal 1999, 1998, and 1997. No compensation cost was
actually recognized for stock options for the years ended June 30, 1999, 1998
and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income as reported $ 597,808 $ 822,478 $ 509,526
Proforma net income 567,504 792,175 479,223
Basic earnings per share as reported .84 1.00 .61
Proforma basic earnings per share .80 .96 .57
Diluted earnings per share as reported .83 .97 .61
Proforma diluted earnings per share .79 .94 .57
Weighted-average fair value of options granted
during year 2.22 2.56
- -
</TABLE>
In future years, the proforma effect of not applying the fair value method is
expected to increase as additional options are granted.
The fair value of options granted during the years ended June 30, 1999 and 1998,
respectively, is estimated using the following weighted-average information:
risk-free interest rate of 5.00% and 5.25%, expected life of 7 years, expected
monthly volatility of stock price of 5.48% and 4.82%, and expected dividends of
2.20% and 2.11% per year.
- --------------------------------------------------------------------------------
(Continued)
37
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - STOCK BASED COMPENSATION PLANS (Continued)
At June 30, 1999, stock options outstanding were as follows:
<TABLE>
<CAPTION>
<S> <C>
Number of options 86,955
Range of exercise price $12.05-$14.89
Weighted-average exercise price $12.70
Weighted-average remaining option life 2.85 years
For options now exercisable:
Number 37,345
Weighted-average exercise price $12.12
</TABLE>
A summary of activity in the SOP and RRP Plans is as follows:
<TABLE>
<CAPTION>
SOP RRP
--- ---
Weighted Weighted
Average Average
Exercise Grant Date
Options Price Shares Fair Value
------- ----- ------ ----------
<S> <C> <C> <C> <C>
Total options/shares available 94,558 37,824
Balance outstanding
July 1, 1996 64,350 $ 12.05 28,600 $ 12.09
------------ -------------
Balance outstanding
June 30, 1997 64,350 12.05 28,600 12.09
Granted October 1, 1997 4,400 14.89 1,100 12.09
------------ -------------
Balance outstanding
June 30, 1998 68,750 12.23 29,700 12.09
Granted October 28, 1998 21,780 14.09 8,124 12.09
Forfeited (3,575) 12.05
------------ -------------
Balance outstanding
June 30, 1999 86,955 12.70 37,824 12.09
------------ -------------
------------ -------------
Options/shares exercisable
(vested) 37,345 18,583
------------ -------------
------------ -------------
Options/shares available for
future grant 7,603 -
------------ -------------
------------ -------------
</TABLE>
All share and per share amounts have been retroactively adjusted for the October
of 1998 10% stock dividend.
- --------------------------------------------------------------------------------
(Continued)
38
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
The Company and the Bank file a consolidated federal income tax return on a
fiscal year basis. Prior to fiscal 1997, the Bank was allowed a bad debt
deduction based on a percentage of taxable income. Tax legislation passed in
August 1996 now requires the Bank to deduct a provision for bad debts for tax
purposes based on actual loss experience and recapture the excess bad debt
reserve accumulated in tax years after 1987. The related amount of deferred tax
liability which must be recaptured is approximately $52,700 and is payable over
a six-year period beginning no later than the tax year ended June 30, 1999. For
the tax year ended June 30, 1999, one-sixth or $8,800 of the deferred tax
liability is currently payable. The remaining deferred tax liability of $43,900
will be recaptured over the five year period beginning June 30, 2000 through
June 30, 2004.
The consolidated provision for federal income taxes consisted of the following
for the years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current expense $ 231,910 $ 345,501 $ 304,410
Deferred expense (benefit) (34,098) (25,661) (35,000)
----------- ----------- -----------
$ 197,812 $ 319,840 $ 269,410
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The consolidated federal income tax expense differs from that computed by
applying the statutory corporate federal income tax rate of 34% as follows for
the years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at statutory federal rate $ 270,511 $ 388,388 $ 264,838
Increase (decrease) in taxes resulting from
Low income housing tax credit (61,343) (59,127) (28,025)
ESOP expense (market value in excess of
cost on released shares) 12,750 22,385 9,166
Other (24,106) (31,806) 23,431
----------- ----------- -----------
$ 197,812 $ 319,840 $ 269,410
----------- ----------- -----------
----------- ----------- -----------
Effective tax rate 24.9% 28.0% 34.6%
---- ---- ----
---- ---- ----
</TABLE>
Deferred tax assets and liabilities consist of the following at June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets
Bad debts $ 132,748 $ 113,634
Deferred loan fees 26,581 22,486
Pension costs 13,656 8,500
Deferred compensation 22,532 14,214
RRP expense 15,670 9,727
Non-accrual loan interest 24,375 9,821
Unrealized loss on securities available for sale 443 -
----------- -----------
Total deferred tax assets 236,005 178,382
Deferred tax liabilities
Depreciation (143,131) (143,743)
Mortgage servicing rights (22,765) -
Other (15,704) (14,775)
----------- -----------
Total deferred tax liabilities (181,600) (158,518)
----------- -----------
Net deferred tax asset (liability) $ 54,405 $ 19,864
----------- -----------
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
39
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits related to such
assets will not be realized. Management has determined that no such allowance is
required at June 30, 1999 and 1998.
Retained earnings at June 30, 1999 and 1998 includes approximately $1,314,000
for which no deferred federal income tax liability has been recognized. This
amount represents an allocation of income to bad debt deductions 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 would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $447,000 at June 30, 1999 and 1998.
NOTE 10 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders $ 597,808 $ 822,478 $ 509,526
----------- ----------- -----------
Weighted average common shares outstanding 712,469 825,163 833,511
----------- ----------- -----------
Basic earnings per share $ .84 $ 1.00 $ .61
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings per share
Net income available to common shareholders $ 597,808 $ 822,478 $ 509,526
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding 712,469 825,163 833,511
Add: dilutive effects of assumed exercise of stock
options and unvested RRP shares
Stock options 8,711 20,230 1,326
RRP shares - 166 -
----------- ----------- -----------
Weighted average common and dilutive potential
common shares outstanding 721,180 845,559 834,837
----------- ----------- -----------
Diluted earnings per share $ .83 $ .97 $ .61
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Stock options for 4,400 and 21,450 shares of common stock were not considered in
the computation of diluted earnings per share for the years ended June 30, 1999
and 1997, respectively, as they were antidilutive. In addition, unvested RRP
shares were not considered in the computation of diluted earnings per share for
the years ended June 30, 1999 and 1997 as they were antidilutive. All share and
per share amounts have been retroactively adjusted for the October of 1998 10%
stock dividend.
- --------------------------------------------------------------------------------
(Continued)
40
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY CAPITAL
Savings institutions insured by the FDIC must meet various regulatory capital
requirements. If a requirement is not met, regulatory authorities may take legal
or administrative action, including restrictions on growth or operations or, in
extreme cases, seizure.
At June 30, the Bank's actual and required capital amounts and ratios (in
thousands) were:
<TABLE>
<CAPTION>
To be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1999
Total Capital (to risk weighted
assets) $ 10,304 19.06% $ 4,326 8.00% $ 5,407 10.00%
Tier 1 (Core) Capital (to risk
weighted assets) 9,786 18.10 2,163 4.00 3,244 6.00
Tier 1 (Core) Capital (to adjusted
total assets) 9,786 9.76 3,007 3.00 5,012 5.00
Tangible Capital (to adjusted
total assets) 9,786 9.76 1,503 1.50 N/A
1998
Total Capital (to risk weighted
assets) $ 12,060 23.29% $ 4,142 8.00% $ 5,177 10.00%
Tier 1 (Core) Capital (to risk
weighted assets) 11,573 22.35 2,071 4.00 3,106 6.00
Tier 1 (Core) Capital (to adjusted
total assets) 11,573 11.74 2,958 3.00 4,930 5.00
Tangible Capital (to adjusted
total assets) 11,573 11.74 1,479 1.50 N/A
</TABLE>
At June 30, 1999, the Bank was categorized as well capitalized.
The Qualified Thrift Lender ("QTL") test requires that approximately 65% of
assets be maintained in housing-related finance and other specified areas. If
the QTL test is not met, limits are placed on growth, branching, new
investments, FHLB advances and dividends, or the Bank must convert to a
commercial bank charter. Management believes that the QTL test has been met.
Regulations of the Office of Thrift Supervision ("OTS") limit the amount of
dividends and other capital distributions that may be paid by a savings
institution without prior approval of the OTS. The regulatory restriction is
based on a three-tiered system with the greatest flexibility being afforded to
well-capitalized (Tier 1) institutions. The Bank is currently a Tier 1
institution. Accordingly, the Bank can make, without prior regulatory approval,
distributions during a calendar year up to 100% of its net income to date during
the calendar year plus an amount that would reduce by up to one-half the amount
of its capital which exceeds its most stringent capital requirement as of the
beginning of the calendar year.
- --------------------------------------------------------------------------------
(Continued)
41
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY CAPITAL (Continued)
At the time of conversion to a stock savings bank, the Bank established a
liquidation account of $5,507,290 which was equal to its total net worth as of
the date of the latest balance sheet appearing in the final conversion
prospectus. The liquidation account is maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Bank after the
conversion. The liquidation account is reduced annually to the extent that
eligible depositors have reduced their qualifying deposits. Subsequent increases
in a deposit account will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The Bank may not pay dividends that would reduce
shareholders' equity below the required liquidation account balance.
Under the most restrictive of the dividend limitations described above, at June
30, 1999, approximately $3,288,000 was available to the Bank for the payment of
dividends to the holding company.
NOTE 12 - STOCK REPURCHASE PROGRAMS
During fiscal 1999 and 1998, the Company repurchased and subsequently retired
167,000 and 45,350 shares of its common stock at an average price of $14.15 and
$18.17 per share after receiving regulatory approval. All share and per share
amounts have been retroactively adjusted for the October of 1998 10% stock
dividend.
NOTE 13 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK
Some financial instruments are used in the normal course of business to meet the
financing needs of customers. These financial instruments include commitments to
make loans and loans-in-process. The contractual amount of these financial
instruments are as follows at June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Fixed rate $ 1,065,050 $ 2,185,648
Variable rate 1,251,242 850,500
------------- -------------
$ 2,316,292 $ 3,036,148
------------- -------------
------------- -------------
</TABLE>
Loan commitments generally have terms of 30 days and contractual interest rates
ranging from 7.125% to 9.75%. Fees received in connection with these commitments
have not been recognized in income.
Additionally, at June 30, 1999 and 1998, the Company had outstanding unused
lines of credit and letters of credit aggregating approximately $3,247,000 and
$2,693,000.
Commitments to make loans are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Since certain
commitments to make loans and lines of credit expire without being used, the
amount does not necessarily represent future cash commitments. The Company's
exposure to credit loss in the event of nonperformance by the other party to
these financial instruments is represented by the contractual amount of these
instruments. The Company follows the same credit policy to make such commitments
as is followed for those loans recorded in the consolidated balance sheets. No
losses are anticipated as a result of these transactions.
- --------------------------------------------------------------------------------
(Continued)
42
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
The Company has entered into an employment agreement and severance agreements
with certain officers of the Company. The employment agreement provides for a
term of three years and a salary and performance review by the Board of
Directors not less often than annually, as well as inclusion of the employee in
any formally established employee benefit, bonus, pension and profit-sharing
plans for which senior management personnel are eligible. The agreement may be
extended for one-year periods as determined by the Board of Directors. Under the
terms of the agreement, certain events leading to termination from the Company
could result in a cash payment of approximately three times the affected
employee's compensation. The severance agreements are for a period of two years
and may be extended for one-year periods as determined by the Board of
Directors. They provide for benefits of up to two times base compensation to the
employees upon a change in control of the Bank or the Company.
In addition, the Company is a party to certain claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the Company's consolidated financial
position or results of operations.
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company has granted loans to related parties, which include executive
officers, directors and their affiliates. A summary of activity of related party
loans aggregating $60,000 or more to any one related party at June 30 is as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Beginning balance $ 892,078 $ 594,463
New loans 543,000 437,515
Repayments and renewals (581,711) (193,747)
Other changes 74,081 53,847
----------- -----------
Ending balance $ 927,448 $ 892,078
----------- -----------
----------- -----------
</TABLE>
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period and disbursements on equity
lines of credit.
Related party deposits totaled approximately $738,000 and $480,000 at June 30,
1999 and 1998.
- --------------------------------------------------------------------------------
(Continued)
43
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Presented below is condensed financial information for Three Rivers Financial
Corporation:
CONDENSED BALANCE SHEETS
June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 318,228 $ 253,384
Investment in subsidiary 9,815,556 11,611,769
Securities held to maturity 250,000 250,000
Loan receivable from subsidiary bank 100,000 200,000
Loan receivable from ESOP 421,538 491,582
Other assets 5,512 5,488
-------------- ---------------
Total assets $ 10,910,834 $ 12,812,223
-------------- ---------------
-------------- ---------------
LIABILITIES $ 121,774 $ 124,371
SHAREHOLDERS' EQUITY 10,789,060 12,687,852
-------------- ---------------
Total liabilities and shareholders' equity $ 10,910,834 $ 12,812,223
-------------- ---------------
-------------- ---------------
</TABLE>
CONDENSED STATEMENTS OF INCOME
For the years ended
June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating income
Interest $ 39,512 $ 47,738 $ 52,535
Dividends from subsidiary bank 2,700,000 400,000 300,000
Other 13,500 13,563 13,500
--------------- -------------- ---------------
2,753,012 461,301 366,035
Operating expense 141,729 139,878 153,704
--------------- -------------- ---------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 2,611,283 321,423 212,331
Equity in undistributed (excess distributed)
income of subsidiary (2,013,475) 501,055 297,195
--------------- -------------- ---------------
NET INCOME $ 597,808 $ 822,478 $ 509,526
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
Other comprehensive income and comprehensive income are equal to the amounts
reported for the consolidated Company for 1999, 1998 and 1997 as disclosed in
the Consolidated Statements of Comprehensive Income.
- --------------------------------------------------------------------------------
(Continued)
44
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended
June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 597,808 $ 822,478 $ 509,526
Adjustments to reconcile net income to net cash
from operating activities
Equity in (undistributed) excess distributed
income of subsidiary 2,013,475 (501,055) (297,195)
Decrease (increase) in other assets (24) 24 (501)
Increase (decrease) in other liabilities (2,597) 25,856 (29,138)
--------------- -------------- ---------------
Net cash from operating activities 2,608,662 347,303 182,692
CASH FLOWS FROM INVESTING ACTIVITIES
Repayments on loan from subsidiary bank 100,000 750,000 550,000
Repayments on loan from ESOP 45,403 46,229 46,936
--------------- -------------- ---------------
Net cash from investing activities 145,403 796,229 596,936
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of common stock (2,362,226) (824,173) (387,537)
Cash dividends paid (326,995) (325,593) (269,752)
--------------- -------------- ---------------
Net cash from financing activities (2,689,221) (1,149,766) (657,289)
--------------- -------------- ---------------
Net change in cash and cash equivalents 64,844 (6,234) 122,339
Cash and cash equivalents at beginning of period 253,384 259,618 137,279
--------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 318,228 $ 253,384 $ 259,618
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
45
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values of the Company's financial
instruments and the related carrying values at June 30, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------ ------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 7,966,029 $ 7,966,000 $ 12,281,077 $ 12,281,000
Interest-earning time deposits in
other financial institutions 4,154,960 4,156,000 4,064,980 4,072,000
Securities available for sale 1,771,920 1,772,000 725,036 725,000
Securities held to maturity 12,240,083 12,239,000 14,277,573 14,388,000
Loans receivable, net of allowance
for loan losses 68,705,967 68,974,000 62,119,886 62,824,000
Federal Home Loan Bank stock 1,162,200 1,162,000 1,162,200 1,162,000
Accrued interest receivable 481,286 481,000 467,691 468,000
FINANCIAL LIABILITIES
Demand and savings deposits (28,070,509) (28,071,000) (24,387,019) (24,387,000)
Time deposits (39,089,857) (38,885,000) (37,128,630) (37,191,000)
Borrowed funds (20,656,961) (20,343,000) (22,743,737) (22,590,000)
Advance payments by borrowers
for taxes and insurance (463,129) (463,000) (531,757) (532,000)
Accrued interest payable (93,500) (94,000) (95,768) (96,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of June 30, 1999 and 1998. The estimated fair value for
cash and cash equivalents, the allowance for loan losses, Federal Home Loan Bank
stock, accrued interest receivable, demand and savings deposits, advances from
borrowers for taxes and insurance, and accrued interest payable is considered to
approximate cost. The estimated fair value of interest-earning time deposits is
based on offering rates for such instruments, applied for the time period until
maturity. The estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. The estimated
fair value for loans is based on estimates of the rate the Bank would charge for
similar such loans, applied for the time period until estimated repayment. The
estimated fair value for time deposits and borrowed funds is based on estimates
of the rate the Bank would pay on such deposits or borrowings, applied for the
time period until maturity. The estimated fair value of other financial
instruments and off-balance-sheet loan commitments approximate cost and are not
considered significant to this presentation.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items, the estimated fair values would necessarily have been
achieved at that date, since market values may differ depending on various
circumstances. The estimated fair values should not be considered to apply at
subsequent dates.
In addition, other assets and other liabilities of the Company that are not
defined as financial instruments are not included in the above disclosures, such
as property and equipment. Also, non-financial instruments typically not
recognized in financial statements may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the trained work force, customer goodwill and
similar items.
- --------------------------------------------------------------------------------
(Continued)
46
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 17 - FEDERAL DEPOSIT INSURANCE PREMIUM
The deposits of savings associations such as the Bank are insured by the Savings
Association Insurance Fund ("SAIF"). A recapitalization plan signed into law on
September 30, 1996 provided for a one-time assessment of 65.7 basis points per
$100 of SAIF-insured deposits as of March 31, 1995. Based on the Bank's deposits
as of that date, a one-time assessment of approximately $411,000 was paid and
recorded as federal deposit insurance premium expense for the year ended June
30, 1997.
NOTE 18 - IMPACT OF NEW ACCOUNTING STANDARDS
Beginning July 1, 2000, a new accounting standard will require all derivatives
to be recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. This is not expected to have a material effect but the
effect will depend on derivative holdings when this standard applies.
NOTE 19 - MERGER AGREEMENT (EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT)
On September 21, 1999, the Company announced that it had agreed to merge with
Peoples Bancorp of Auburn, Indiana. The transaction will be a tax-free exchange,
accounted for as a purchase. It is subject to shareholder and regulatory
approval, and is anticipated to be effective in the first quarter of 2000. The
exchange ratio is planned to be 1.08 shares of Peoples for one share of Three
Rivers.
- --------------------------------------------------------------------------------
47
<PAGE>
BOARD OF DIRECTORS OF
THREE RIVERS FINANCIAL CORPORATION AND
FIRST SAVINGS BANK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Stephen R. Olson
CHAIRMAN OF THE BOARD OF DIRECTORS
MANAGER, MORTON BUILDINGS, INC.
G. Richard Gatton
PRESIDENT, CHIEF EXECUTIVE OFFICER, AND
DIRECTOR
Larry A. Clark
DIRECTOR
RETIRED GTE EXECUTIVE
G. Verglea Gotfryd
DIRECTOR
RETIRED LIFE INSURANCE AGENT
Philip Halverson
DIRECTOR
RETIRED FUNERAL DIRECTOR
Thomas O. Monroe, Sr.
DIRECTOR
CHAIRMAN EMERITUS, JOHNSON CORPORATION
John A. Mathews
DIRECTOR EMERITUS
RETIRED OPTOMETRIST
OFFICERS OF THREE RIVERS FINANCIAL
CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
G. Richard Gatton
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Martha Romig
SENIOR VICE-PRESIDENT,
SECRETARY, TREASURER AND
CHIEF FINANCIAL OFFICER
OFFICERS OF FIRST SAVINGS BANK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
G. Richard Gatton
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Martha Romig
SENIOR VICE-PRESIDENT,
SECRETARY, TREASURER AND
CHIEF FINANCIAL OFFICER
William F. Cody
VICE-PRESIDENT
Jeffery H. Gatton
VICE-PRESIDENT, MANAGER-
INDIANA DIVISION
R. Orville Poling
VICE-PRESIDENT
Susan Lowry
ASSISTANT VICE-PRESIDENT AND
ASSISTANT TREASURER
Joyce Shidaker
ASSISTANT VICE-PRESIDENT AND
SECRETARY OF THE BOARD
Christy Linn
BANKING SERVICES OFFICE AND
BRANCH MANAGER
Rhonda Skinner
LOAN OFFICER AND SUPERVISOR OF
LENDING OPERATIONS
Betty Kipker
SAVINGS OFFICER
48
<PAGE>
STOCK LISTING
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The common stock of Three Rivers Financial Corporation is listed on the American
Stock Exchange under the symbol "THR".
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Registrar and Transfer Company serves as transfer agent and dividend
distributing agent for TRFC's shares. Communications regarding change of
address, transfer of shares, lost certificates, and dividends should be sent to:
REGISTRAR AND TRANSFER COMPANY
10 COMMERCE DRIVE
CRANFORD, NJ 07016-3572
(800) 346-6084
ANNUAL MEETING
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Annual Meeting of Shareholders of Three Rivers Financial Corporation will be
held on _______ __, ____, at ____ _.m., local time, at the Carnegie Center for
the Arts, Three Rivers, Michigan. Shareholders are cordially invited to attend.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Manatt, Phelps & Phillips, LLP
1501 M Street, N.W.
Suite 700
Washington, D.C. 20005
ANNUAL REPORT ON FORM 10-KSB
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A copy of TRFC's Annual Report on Form 10-KSB, as filed with the Securities and
Exchange Commission, will be available at no charge to shareholders upon request
to:
THREE RIVERS FINANCIAL CORPORATION
123 PORTAGE AVENUE
THREE RIVERS, MI 49093
ATTENTION: PRESIDENT
49
<PAGE>
CORPORATE OFFICE
123 Portage Avenue
Three Rivers, Michigan 49093
(616) 279-5117
<TABLE>
<S> <C> <C>
SCHOOLCRAFT BRANCH UNION BRANCH THREE RIVERS BRANCH
500 NORTH GRAND 15534 U.S. 12 1213 WEST MICHIGAN AVENUE
SCHOOLCRAFT, MICHIGAN 49087 UNION, MICHIGAN 49130 THREE RIVERS, MICHIGAN 49093
(616) 679-5271 (616) 641-7979 (616) 273-8681
HOWE BRANCH MIDDLEBURY BRANCH
303 DEFIANCE STREET 420 NORTH MAIN
HOWE, INDIANA 46746 MIDDLEBURY, INDIANA 46540
(219) 562-3300 (219) 825-2255
</TABLE>
<PAGE>
ANNEX H
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from to
------- ----------
Commission File No. 1-13826
THREE RIVERS FINANCIAL CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-3235452
-------- ----------
(State or other jurisdiction of (IRS Employer ID No)
Incorporation or organization)
123 Portage Avenue, Three Rivers, Michigan 49093
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(616) 279-5117
--------------
Registrant's telephone number, including area code
N/A
---
Former name, address, and fiscal year, if changed since last report
Check 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
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirement for the
past 90 days. YES X NO
---- ----
Indicate the number of shares outstanding of each of the registrant's
classes of common equity as of the latest practicable date:
702,734 shares of Common Stock, Par Value $.01 per share as of November
5, 1999
Transitional Small Business Disclosure Format (check one): Yes ; No X
-- ---
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
THREE RIVERS, MICHIGAN
FORM 10-QSB
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
September 30, 1999 and June 30, 1999 1
Consolidated Statements of Income (Unaudited)
Three months ended September 30, 1999 and 1998 2
Condensed Consolidated Statement of Changes in Shareholders'
Equity (Unaudited)
Three months ended September 30, 1999 4
Consolidated Statements of Cash Flows (Unaudited)
Three months ended September 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II. OTHER INFORMATION
Items 1-6 16
Signatures 17
</TABLE>
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and June 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from other financial institutions $ 3,386,049 $ 3,439,860
Interest-earning deposits with other financial institutions 2,168,679 4,526,169
------------- -------------
Cash and cash equivalents 5,554,728 7,966,029
Interest-earning time deposits in other financial institutions 4,254,960 4,154,960
Securities available for sale 2,005,943 1,771,920
Securities held to maturity (fair value: $12,775,512 at
September 30, 1999 and $12,239,450 at June 30, 1999) 12,757,389 12,240,083
Loans receivable, net of allowance for loan losses of
$535,090 at September 30, 1999 and $519,687 at June 30, 1999 69,490,220 68,705,967
Federal Home Loan Bank Stock 1,162,200 1,162,200
Accrued interest receivable 430,236 481,286
Premises and equipment, net 2,663,275 2,739,937
Investment in low-income housing partnership 361,257 373,754
Other assets 819,206 809,395
------------- -------------
Total assets $ 99,499,414 $ 100,405,531
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Demand deposits $ 3,024,116 $ 4,025,494
Savings and NOW deposits 23,732,154 24,045,015
Time deposits 37,920,661 39,089,857
------------- -------------
Total deposits 64,676,931 67,160,366
Federal Home Loan Bank advances 22,582,205 20,656,961
Advance payments by borrowers for taxes and insurance 396,200 463,129
Due to low-income housing partnership 253,058 253,058
Accrued expenses and other liabilities 693,335 1,082,957
------------- -------------
Total liabilities 88,601,729 89,616,471
Shareholders' equity
Preferred stock, par value $0.01; 500,000 shares authorized;
none outstanding
Common stock, par value $0.01; 2,000,000 shares authorized; 702,734
shares issued and outstanding at September 30, 1999 and
June 30, 1999 respectively 7,027 7,027
Additional paid-in-capital 5,569,461 5,563,848
Retained earnings 5,930,002 5,851,942
Accumulated other comprehensive income, net of tax of $1,074 at
September 30, 1999 and ($433) at June 30, 1999 2,086 (860)
------------- -------------
11,508,576 11,421,957
Unearned Employee Stock Ownership Plan shares (421,538) (421,538)
Unearned Recognition and Retention Plan shares (189,353) (211,359)
------------- -------------
Total shareholders' equity 10,897,685 10,789,060
------------- -------------
Total liabilities and shareholders' equity $ 99,499,414 $ 100,405,531
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
1.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months ended September 30, 1999 and 1998
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Interest income
Loans Receivable $1,497,958 $1,368,685
Securities 216,730 232,440
Other interest and dividend income 139,571 222,842
---------- ----------
Total interest income 1,854,259 1,823,967
Interest expense
Deposits 677,326 696,669
Borrowed funds 302,277 312,972
---------- ----------
Total interest expense 979,603 1,009,641
---------- ----------
NET INTEREST INCOME 874,656 814,326
Provision for loan losses 15,000 15,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 859,656 799,326
Noninterest income
Loan servicing 36,065 28,081
Net gains on sales of loans 13,590 35,712
Service charges on deposit accounts 72,542 65,382
Other income 37,492 44,621
---------- ----------
159,689 173,796
---------- ----------
Noninterest expense
Compensation and benefits 414,563 394,019
Occupancy and equipment 162,604 148,253
SAIF deposit insurance premium 9,458 9,325
Advertising and promotion 30,348 33,286
Data processing 58,581 61,376
Professional fees 49,925 25,233
Printing, postage, stationery, and supplies 23,905 27,880
Other 81,773 97,516
---------- ----------
831,157 796,888
INCOME BEFORE INCOME TAXES 188,188 176,234
Federal income tax expense 36,609 32,700
---------- ----------
NET INCOME $ 151,579 $ 143,534
---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
2.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
Three months ended September 30, 1999 and 1998
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Other comprehensive income
Net change in unrealized gains on securities
available for sale 4,463 4,255
Tax effects (1,517) (1,447)
--------- ---------
Total other comprehensive income 2,946 2,808
--------- ---------
Comprehensive income $ 154,525 $ 146,342
--------- ---------
--------- ---------
Basis earnings per share $ 0.24 $ 0.18
--------- ---------
--------- ---------
Diluted earnings per share $ 0.24 $ 0.18
--------- ---------
--------- ---------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
3.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended September 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Balance at June 30, 1999 $10,789,060
Net income 151,579
Effect of shares committed to be released by ESOP, 5,612
at market value
Cash dividends declared on common stock @ $0.115 per share (73,518)
Amortization of 1,633 RRP shares 22,006
Net change in unrealized gains on securities
available for sale, net of taxes 2,946
-----------
Balance at September 30, 1999 $10,897,685
-----------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
4.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended September 30, 1999 and 1998
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 151,579 $ 143,534
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation of premises and equipment 84,449 75,777
Net accretion of securities (4,034) (14,838)
Provision for loan losses 15,000 15,000
RRP expense 22,006 21,393
ESOP expense 5,612 12,568
Loans originated for sale (780,138) (2,095,115)
Proceeds from sale of loans held for sale 793,728 2,130,827
Net realized gains on sales of loans (13,590) (35,712)
Change in
Accrued interest receivable and other assets 41,239 89,650
Accrued expenses and other liabilities (391,139) (224,212)
----------- -----------
Net cash provided by (used in) operating activities (75,288) 118,872
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-earning time
deposits with other financial institutions (100,000) (188,980)
Net increase in loans (799,253) (704,188)
Net purchases of premises and equipment (7,787) (64,194)
Securities available for sale:
Purchases (492,345) --
Paydowns 256,430 8,219
Securities held to maturity
Purchases (1,412,699) (1,316,243)
Calls and maturities -- 1,500,000
Paydowns 905,782 988,157
Net investment in low-income housing partnership 12,497 12,497
----------- -----------
Net cash provided by (used in) investing activities (1,637,375) 235,268
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
5.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended September 30, 1999 and 1998
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ (2,483,435) $ 2,762,813
Net change in advances from borrowers for taxes
and insurance (66,929) (127,848)
Proceeds from FHLB advances 2,000,000 --
Repayments of FHLB advances (74,756) (1,586,776)
Cash dividends paid (73,518) (83,830)
Purchase of common stock -- (82,800)
------------ ------------
Net cash provided by (used in) financing activities (698,638) 881,559
------------ ------------
Net change in cash and cash equivalents (2,411,301) 1,235,699
Cash and cash equivalents at beginning of period 7,966,029 12,281,077
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,554,728 $ 13,516,776
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 957,146 $ 993,152
Income taxes 0 79,375
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended September 30, 1999
NOTE 1 - BASIS OF PRESENTATION
NATURE OF OPERATIONS: The consolidated financial statements include the accounts
of Three Rivers Financial Corporation ("the Company"), First Savings Bank ("the
Bank") and Alpha Financial, Inc ("Alpha"). The Company is a savings and loan
holding company located in Three Rivers, Michigan and owns all of the
outstanding stock of the Bank. Alpha is a wholly-owned subsidiary of the Bank.
The Company was organized in April 1995 for the purpose of owning all of the
outstanding stock of the Bank.
The Bank grants residential and commercial real estate and consumer loans,
accepts deposits and engages in mortgage banking activities. Substantially all
loans are secured by specific items of collateral including residences, business
assets and consumer assets. The Bank services its customers, which are primarily
located in southwestern Michigan and the central portion of northern Indiana,
through its main office in Three Rivers and five other offices located in its
market area. The primary business of Alpha is to own and receive the dividend
income from stock holdings in MMLIC Life Insurance Company.
BASIS OF PRESENTATION: The accompanying unaudited consolidated financial
statements were prepared in accordance with instructions for Form 10-QSB and,
therefore, do not include all disclosures required by generally accepted
accounting principles for complete presentation of financial statements. In the
opinion of management, the consolidated financial statements contain all
adjustments necessary to present fairly the consolidated balance sheets of Three
Rivers Financial Corporation and its subsidiary First Savings Bank as of
September 30, 1999 and June 30, 1999, and the consolidated statements of income
for the three months ended September 30, 1999 and 1998 and the consolidated
statements of cash flows for the three months ended September, 30, 1999 and
1998. All significant intercompany transactions and balances are eliminated in
consolidation. The income reported for the three months ended September 30, 1999
is not necessarily indicative of the results that may be expected for the full
year.
(Continued)
7.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended September 30, 1999
NOTE 2 - BORROWINGS
Borrowings at September 30, 1999 consisted of advances from the Federal Home
Loan Bank (FHLB) of Indianapolis, bearing rates from 4.53% to 5.71% at September
30, 1999. The borrowings are collateralized by the Company's single family whole
loans, U. S. Government, federal agency and mortgage-backed securities under a
blanket collateral agreement with the FHLB. Fixed rate advances include $2.3
million with maturities ranging from seven months to three years. Adjustable
rate advances consist of $6.5 million with maturities ranging from nine months
to four years. The adjustable rate advances are based on a rate indexed to the 3
month LIBOR rate which adjusts quarterly. The remaining $13.8 million of putable
advances consist of maturities ranging from ten months to 9.5 years. For the
putable advances, the FHLB has the option to convert to an adjustable rate of
three-month LIBOR flat, adjusted quarterly.
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per common share is computed under the provisions of Statement of
Financial Accounts Standards (SFAS) No. 128, EARNINGS PER SHARE. Unallocated
ESOP shares and unearned recognition and retention plan shares are excluded from
the weighted average number of shares outstanding used in the computation of
earnings per share. Basic earnings per share is based on net income divided by
the weighted average number of shares outstanding during the period. Diluted
earnings per share shows the dilutive effect of additional common stock
equivalents.
A reconciliation of the numerators and denominators of basic and dilutive
earnings per common share for the periods ended September 30, 1999 and 1998 is
presented below. All share and per share amounts have been retroactively
adjusted for the October 28, 1998 stock dividend.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Net income available to common shareholders $151,579 $143,534
-------- --------
Weighted average common shares outstanding 639,788 792,888
-------- --------
Basic earnings per share $ 0.24 $ 0.18
-------- --------
</TABLE>
(Continued)
8.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended September 30, 1999
NOTE 3 - EARNINGS PER COMMON SHARE (Continued)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
---------- ----------
<S> <C> <C>
DILUTED EARNINGS PER SHARE
Net income available to common shareholders $151,579 $143,534
-------- --------
Weighted average common shares outstanding 639,788 792,888
Add: Dilutive effects of assumed exercises
Stock options 14 14,212
Weighted average common and dilutive potential
common shares outstanding 639,802 807,100
-------- --------
Diluted earnings per share $ 0.24 $ 0.18
-------- --------
</TABLE>
Unvested recognition and retention plan shares were antidilutive for the three
months ended September 30, 1999 and 1998.
NOTE 4 - STOCK OPTIONS
The Company's Board of Directors has adopted a stock option plan. Under the
terms of this plan, options for up to 94,558 shares of the Company's common
stock may be granted to key management employees and directors of the Company
and its subsidiaries. The exercise price of the options is determined at the
time of grant by an administrative committee appointed by the Board of
Directors.
SFAS No.123, which became effective for 1997, requires disclosures for companies
that do not adopt its fair value accounting method for stock-based employee
compensation. Accordingly, the following proforma information presents net
income and earnings per common share had the fair value been used to measure
compensation cost for stock option plans. No compensation cost has been
recognized for the stock options. No stock options were granted during the three
months ended September 30, 1999 and 1998.
(Continued)
9.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended September 30, 1999
<TABLE>
<CAPTION>
NOTE 4 - STOCK OPTIONS (Continued) Three Months Ended
September 30,
1999 1998
----------- -----------
<S> <C> <C>
Net income as reported $ 151,579 $ 143,534
Proforma net income 141,023 135,394
Basic earnings per common share as reported $ 0.24 $ 0.18
Diluted earnings per share as reported 0.24 0.18
Proforma basic earnings per common share 0.22 0.17
Proforma dilutive earnings per common share 0.22 0.17
</TABLE>
In future years, the proforma effect of not applying this standard is expected
to increase as additional options are granted.
The stock option plan is used to retain and reward directors and key employees
and provide them with an additional equity interest. Options are issued for ten
year periods with a five year vesting period. Information about option grants
follows:
<TABLE>
<CAPTION>
Weighted Weighted
Number of Average Average
Outstanding Exercise Exercise Fair Value
Options Price Price of Grants
------- ----- ----- ---------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 64,350 $ 12.05 $ 12.05
Granted 4,400 14.89 14.89 $ 2.56
------
Balance at June 30, 1998 68,750 12.05-14.89 12.23
Granted 21,780 14.09 14.09 2.22
Forfeited (3,575) 12.05 12.05
------
Balance at June 30, 1999 and
September 30, 1999 86,955 12.05-14.89 12.70
------
</TABLE>
The weighted average remaining contractual life of options outstanding at
September 30, 1999 was approximately 7.28 years. Stock options exercisable at
September 30, 1999 and 1998 totaled 37,345 and 24,310 at a weighted average
exercise price of $12.12 and $12.05. All share and per share amounts have been
retroactively adjusted for the October 28, 1998 stock dividend.
(Continued)
10.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended September 30, 1999
NOTE 5 - REGULATORY CAPITAL REQUIREMENTS
Savings institutions must meet three separate minimum capital-to-asset
requirements. The following table summarizes, as of September 30, 1999, the
capital requirements for the Bank and the Bank's actual capital ratios. As of
September 30, 1999, the Bank substantially exceeded all current regulatory
capital requirements.
<TABLE>
<CAPTION>
Regulatory
Capital requirement Actual Capital
------------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Risk-based capital $ 4,256 8.00% $10,545 19.82%
Core capital $ 2,981 3.00% $10,012 10.08%
Tangible capital $ 1,490 1.50% $10,012 10.08%
</TABLE>
11.
<PAGE>
THREE RIVERS FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Three Rivers Financial Corporation (the "Company") was incorporated under the
laws of the State of Delaware for the purpose of becoming the savings and loan
holding company of First Savings Bank, a Federal Savings Bank (the "Bank") in
connection with the Bank's conversion from a federally chartered mutual savings
bank to a federally chartered stock savings bank (the "Conversion"). On August
23, 1995, the Conversion was completed and the Bank became a wholly-owned
subsidiary of the Company. The following discussion compares the financial
condition of the Company at September 30, 1999 to June 30, 1999 and the results
of operations for the three-month period ended September 30, 1999 with the same
period ended September 30, 1998. This discussion should be read in conjunction
with the financial statements and footnotes included herein.
FINANCIAL CONDITION
September 30, 1999 compared to June 30, 1999
The Company's total assets decreased $900,000 from $100.4 million at June 30,
1999 to $99.5 million at September 30, 1999. The overall decrease was due
primarily to decreases in cash and cash equivalents, accrued interest
receivable, premises and equipment and in investment in low-income housing
partnership. These decreases were offset by increases in interest-earning
deposits with other financial institutions, investment securities and loans
receivable.
Cash and cash equivalents decreased $2.4 million or 30.00% from $8.0 million at
June 30, 1999 to $5.6 million at September 30, 1999. This was due primarily to
an increase in loan demand and the purchase of investment securities.
Interest-earning time deposits with other financial institutions increased
$100,000 or 2.38% from $4.2 million at June 30, 1999 to $4.3 million at
September 30, 1999.
Loans receivable increased $800,000 or 1.15% from $68.7 million at June 30, 1999
to $69.5 million at September 30, 1999 due to the higher level of demand for
loans in the Company's market area. These increases were funded by excess cash.
Securities increased $800,000 or 5.71% from $14.0 million at June 30, 1999 to
$14.8 million at September 30, 1999. Securities consist of U.S. Government and
federal agency securities, mortgage-backed and related securities and other
collateralized obligations.
Total liabilities decreased $1.0 million from $89.6 million at June 30, 1999 to
$88.6 million at September 30, 1999 due primarily to decreases in deposits,
accrued interest and other liabilities, which were partially offset by increases
in FHLB advances.
(Continued)
12.
<PAGE>
Total borrowed funds increased $1.9 million or 9.18% from $20.7 million at June
30, 1999 to $22.6 million at September 30, 1999. This increase was the result of
increased loan demand along with decreases in total deposits. Borrowed funds
consist of FHLB advances with both fixed and variable interest rates and stated
maturities ranging through 2009.
Total deposits decreased $2.5 million to $64.7 million for the three-month
period ended September 30, 1999. This decrease was in all deposit categories.
Management believes the balances have decreased as customers seek higher
yielding investment alternatives due to the low interest rate environment.
Shareholders' equity increased $100,000 to $10.9 million for the three-month
period ended September 30, 1999 from $10.8 million for the period ended June 30,
1999. This is due primarily to the net income for the quarter partially offset
by dividends paid.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 1999 was $152,000 compared
to $144,000 for the three months ended September 30, 1998, an increase of $8,000
or 5.56%. Interest income increased $30,000 or 1.64% for the period ended
September 30, 1999 compared to the three-month period ended September 30, 1998
primarily due to increases in mortgage balances. Other interest and dividend
income decreased $83,000 due to the decrease in cash and cash equivalents for
the three-month period ended September 30, 1999 as compared to the same period
ended September 30, 1998. Interest expense decreased $30,000 to $980,000 for the
three months period ended September 30, 1999 as compared to the same period
ended September 30, 1998 primarily due to decreases in deposit balances.
Non-interest income decreased $14,000 from $174,000 to $160,000 for the
three-month period ended September 30, 1999. Increases in loan servicing and
service charges on deposit accounts were offset by decreases in gains on sales
of loans and other income.
Non-interest expense increased $34,000 or 4.27% from $797,000 to $831,000 for
the three months period ended September 30, 1999. Increases in compensation and
benefits, occupancy and equipment, and professional fees were offset by
decreases in advertising, data processing, printing, and other expenses. The
substantial increase in professional fees was due to expenses incurred in the
pending merger with Peoples Federal of Auburn, Indiana. See Item #5, Other
Information.
(Continued)
13.
<PAGE>
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOANS
The allowance for loan losses is established through a provision for loan losses
based on management's quarterly asset classification review, and evaluation of
the risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation considers, among other matters, the estimated
value of the underlying collateral, economic conditions, cash flow analysis,
historical loan loss experience, discussions held with delinquent borrowers and
other factors that warrant recognition in providing for an adequate allowance
for loan losses. As a result of this review process, management recorded a
provision for loan losses in the amount of $15,000 for the three-month period
ended September 30, 1999. While management believes the current allowance for
loan losses is adequate, management anticipates growth in the loan portfolio and
will therefore continue to make additional provisions to the allowance for loan
losses. No assurance can be given that the amounts allocated to the allowance
for loan losses will be adequate to cover actual losses that may occur.
Total non-performing assets decreased $208,000 at September 30, 1999 to $416,000
compared to $624,000 at June 30, 1999. The ratio of non-performing assets to
total assets at September 30, 1999 was 0.42% compared to 0.62% at June 30, 1999.
Included in non-performing assets at September 30, 1999 were consumer loans in
the amount of $38,000 and non-performing mortgages of $378,000.
OTS regulations require that the Bank periodically review and classify assets
pursuant to the classification of assets policy set forth in its regulations.
Based on management's review of its assets as of September 30, 1999, $295,000 of
assets were classified as substandard, $-0- as doubtful, $-0- as loss, and
$61,000 as special mention. At the time of the quarterly review, an asset
classification listing is prepared, in conformity with the OTS regulations, and
a detailed report is presented to the Board.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, borrowings from the FHLB and
interest payments on loans. While scheduled repayments of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Bank has managed this fluctuation in its source of funds through borrowings from
the FHLB.
(Continued)
14.
<PAGE>
Under OTS regulations, a savings association is required to maintain an average
daily balance of liquid assets (including cash, certain time deposits and
savings accounts, bankers's acceptances, certain government obligations, and
certain other investments) in each calendar quarter of not less than 4% of
either (1) its liquidity base (consisting of certain net withdrawable accounts
plus short-term borrowings) as of the end of the preceding calendar quarter, or
(2) the average daily balance of its liquidity base during the preceding
quarter. This liquidity requirement may be changed from time to time by the OTS
to any amount between 4.0% and 10.0% depending upon certain factors, including
economic conditions and savings flows of all savings associations. For the
quarter ended September 30, 1999, the Bank maintained a liquidity ratio of
21.31%. The Bank anticipates that it will have sufficient funds available to
meet current commitments.
YEAR 2000
The Company has completed its assessment of Year 2000 issues, developed a plan,
and arranged for the resources to complete the necessary remediation and
testing. As part of its efforts to ensure compliance with the Year 2000, the
Company converted to a new processing system in May of 1999. At that time
certain computer hardware was also replaced.
The Company has and will continue to utilize both internal and external
resources to test hardware and software for Year 2000 compliance. The Company
has completed changes and testing of critical systems to ensure Year 2000
compliance. Testing of non-critical applications will continue throughout 1999
and will be completed prior to any impact on operating systems. The total costs
of the Year 2000 project are estimated at $350,000. The Company will incur
remediation and testing costs through the year 2000, but does not anticipate
that material incremental costs will be incurred in any single period.
The Company has initiated formal communications with all of its critical vendors
and service providers to determine the extent to which the Company is vulnerable
to any failure of those third parties to remedy their own Year 2000 issues.
However, there can be no guarantee that systems of other companies on which the
Company's systems rely will be remedied in a timely manner or that there will be
no adverse effect on the Company's systems. Critical companies include power
companies and telephone systems. Therefore, the Company could possibly be
negatively impacted to the extent that other entities not affiliated with the
Company are unsuccessful in properly addressing this issue.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based upon management's best estimates. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
15.
