-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sfoi5Nhcm5KhCjUtKOGKvjbHstc/Asjapo/5DYlLeb9goRtwaPH+yhxzWmHLf5T5 qTPOi8yFRzyLRftDKpmDag== 0000869004-96-000007.txt : 19961231 0000869004-96-000007.hdr.sgml : 19961231 ACCESSION NUMBER: 0000869004-96-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961227 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES BANCORP CENTRAL INDEX KEY: 0000869004 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351811284 STATE OF INCORPORATION: IN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18991 FILM NUMBER: 96686930 BUSINESS ADDRESS: STREET 1: 212 WEST 7TH ST CITY: AUBURN STATE: IN ZIP: 46706 BUSINESS PHONE: 2199252500 MAIL ADDRESS: STREET 1: 212 WEST SEVENTH ST CITY: AUBURN STATE: IN ZIP: 46706 10-K 1 FORM 10-K FOR YEAR ENDED 9/30/96 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 10 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, 1996 [ ] 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(g)of the Act: Common Stock, par value $1.00 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [ ] Aggregate market value of voting stock held by non-affiliates of the registrant, as of December 23, 1996: $40,127,665. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of December 23, 1996: 2,307,973 shares of Common Stock, par value $1.00 per share Documents Incorporated by Reference: Portions of the definitive Proxy Statement for the 1997 Annual Meeting of Stockholders (Part III) and the Annual Report to Stockholders for the year ended September 30, 1996 (Parts II and IV). Exhibit Index Appears on Page 34 PART I ITEM 1. BUSINESS GENERAL Peoples Bancorp (the "Company") is an Indiana corporation organized in October, 1990 to become the thrift holding company for Peoples Federal Savings Bank (the "Bank" or "Peoples Federal"). The Company is the sole shareholder of Peoples Federal. The Bank conducts business from its main office in Auburn and in its five full-service offices located in Avilla, Columbia City, Garrett, Kendallville, and LaGrange, Indiana. Peoples Federal offers a full range of retail deposit services and lending services to northeastern Indiana. The Company has no other business activity other than being the holding company for Peoples Federal. The Bank was founded in 1925 and chartered by the Federal Home Loan Bank Board ("FHLBB"), now the Office of Thrift Supervision ("OTS"), in 1937. Since that time, the Bank has been a member of the Federal Home Loan Bank System ("FHLB System") and the Federal Home Loan Bank of Indianapolis ("FHLB of Indianapolis"), and its savings accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC"). The Company is classified as a unitary savings and loan holding company subject to regulation by the Securities and Exchange Commission of the United States (the "SEC"), and the OTS. In May, 1995, the Board authorized a stock repurchase program. Purchases of up to 100,000 shares may be made in open market or in privately negotiated transactions. As of September 30, 1996, the Company had repurchased 44,970 shares. On a yearly basis, Peoples Federal updates its long-term strategic plan. This plan includes, among other things, Peoples Federal's commitment to maintaining a strong capital base and continuing to improve the organization's return on assets through asset growth and controlling operating expenses. Continued careful monitoring of Peoples Federal's interest rate risk is also cited as an important goal. As a result, continued origination of short-term consumer and installment loans, prime plus equity loans, adjustable rate mortgage loans, and fixed-rate real estate loans with original terms of 15 years or less will be emphasized. The Bank offers a wide range of consumer and commercial financial services. These services include: consumer demand deposit accounts; NOW accounts; regular and term savings accounts and savings certificates; residential and commercial real estate loans; and secured and unsecured consumer loans. The Bank provides these services through a branch network comprised of six full-service banking offices. It also provides credit card services, as well as enhancements to its loan and deposit products designed to provide customers with added conveniences. The Bank has historically concentrated its business activities in northeastern Indiana. The Bank's current strategy is to maintain its branch office network as well as remain alert to new opportunities. Over the years, the Bank has broadened its product line and enhanced its operations in order to accommodate its growth and to meet the vigorous competition from various financial institutions and other companies or firms that engage in similar activities. THE THRIFT INDUSTRY Thrift institutions are financial intermediaries which historically have accepted savings deposits from the general public and, to a lesser extent, borrowed funds from outside sources and invested those deposits and funds primarily in loans secured by first mortgage liens on residential and other types of real estate. Such institutions may also invest their funds in various types of short- and long-term securities. The deposits of thrift institutions are insured by the FDIC through the Savings Association Insurance Fund ("SAIF"), and these institutions are subject to extensive regulations. These regulations govern, among other things, the lending and other investment powers of thrift institutions, including the terms of mortgage instruments these institutions are permitted to utilize, the types of deposits they are permitted to accept, and reserve requirements. The operations of thrift institutions, including those of the Bank, are significantly affected by general economic conditions and by related monetary and fiscal policies of the federal government and regulations and policies of financial institution regulatory authorities, including the Board of Governors of the Federal Reserve System and the OTS. Lending activities are influenced by a number of factors including the demand for housing, conditions in the construction industry, and availability of funds. Sources of funds for lending activities include savings deposits, loan principal payments, proceeds from sales of loans, and borrowings from the Federal Home Loan Banks and other sources. Savings flows at thrift institutions are influenced by a number of factors including interest rates on competing investments and levels of personal income. EARNINGS The Bank's earnings depend primarily on the spread between income from lending activities and, to a lesser extent, investment activities, and the cost of money, that is the difference between interest earned on loans and investments, and interest paid on 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 deposit accounts and borrowings to increase more rapidly than yields on mortgage loans, thereby adversely affecting the earnings of many thrift institutions. While the industry has received expanded lending and borrowing powers in recent years permitting different types of investments and mortgage loans, including those with floating or adjustable rates and those with shorter terms, earnings and operations are still highly influenced by levels of interest rates and financial market conditions and by substantial investments in long-term mortgage loans. COMPETITION The Bank experiences strong competition both in making real estate loans and in attracting savings deposits. In the past, thrift institutions generally competed for real estate loans with commercial banks, mortgage banking companies, insurance companies, and other institutional lenders. Recent legislative and regulatory actions have increased competition between thrift institutions and other financial institutions, such as commercial banks, by expanding the range of services that may be offered such as demand deposits, trust services, and consumer and commercial lending. The most direct competition for savings has historically come from other thrift institutions, mutual savings banks, commercial banks and credit unions. During periods of generally high interest rates, additional significant competition for savings accounts comes from corporate and government securities and, more recently, money market mutual funds. The principal methods generally used by thrift institutions to attract deposit accounts include: competitive interest rates, advertising, providing a variety of financial services, convenient office locations, flexible hours for the public, and promotions for opening or adding to deposit accounts. NET INTEREST INCOME Net interest income increases during periods when the spread is widened between the Bank's weighted average rate at which new loans are originated and the weighted average cost of interest-bearing liabilities. The Bank's ability to originate loans is affected by market factors such as interest rates, competition, consumer preferences, the supply of and demand for housing, and the availability of funds. The Bank has supplemented its interest income through purchases of investments when appropriate. This activity generates positive interest rate spreads on large principal balances with minimal administrative expense. INTEREST RATE AND VOLUME OF INTEREST-RELATED ASSETS AND LIABILITIES Both changes in rate and changes in the composition of the Bank's interest earning-assets and interest-bearing liabilities can have a significant effect on net interest income. For information regarding the total dollar amount of interest income from interest-earning assets, the average yields, the amount of interest expense from interest-bearing liabilities and the average rate, net interest income, interest rate spread, and the net yield on interest-earning assets, refer to page 8 of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1996 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, 1996, 1995, and 1994 refer to page 6 of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1996 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, 1996, 1995, and 1994 refer to page 9 of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1996 Annual Report incorporated herein by reference. MARKET AREA The Bank's market area in northeastern Indiana spans the counties of DeKalb, Whitley, Noble, and LaGrange. This market area has a population of approximately 130,000 and consists of a diversified industrial economic base with an emphasis on the production sector that includes major manufacturers of international scope. Moreover, the distribution sector, primarily in the wholesale and retail trades, constitutes a substantial portion of the area's economy, both in terms of product mix, sales receipts, and employment. The most rapid growth has occurred in the manufacturing sector, especially in the production of automotive and electronics products, and in the service sector with respect to packaging, warehousing, and distribution services. LENDING ACTIVITIES GENERAL The Bank, like most other thrift institutions, had traditionally concentrated its lending activities on the origination of long-term fixed-rate loans secured by mortgages on residential real estate. However, in response to a number of factors, including a changing economic and regulatory environment, the Bank since 1984 has attempted to emphasize investments in adjustable-rate residential mortgages and consumer loans in its market area. In order to lessen its risk from interest rate fluctuations, the Bank emphasizes the origination of interest rate sensitive loan products, such as one year adjustable-rate mortgage loans, and prime plus equity loans. RESIDENTIAL MORTGAGE LOANS A substantial portion of the Bank's lending activity involves the origination of loans secured by residential real estate, consisting of single-family dwelling units. The Bank also lends on the security of mid-size multifamily dwelling units. The residential mortgage loans included in the Bank's portfolio are primarily conventional loans. In 1984, the Bank began offering adjustable-rate mortgage loans. Currently, these loans generally have interest rates which adjust (up or down) every year. Currently in effect is a maximum adjustment of 6% over the life of these loans with a maximum adjustment of 2% during any given year. Adjustments are based upon an index established at the time the commitment is issued by the Bank. The index used for most loans is tied to the applicable United States Treasury security index. While the addition of adjustable-rate mortgage loans will better enable the Bank to maintain a positive spread during periods of high interest rates, it is not expected that adjustments in interest rates on adjustable-rate mortgages will match precisely changes in the Bank's cost of funds. The majority of the adjustable rate mortgages originated by the Bank have limitations on the amount (generally 6%) and frequency of interest rate changes. During the fiscal year ended September 30, 1996, the Bank originated $58,508,000 of residential loans of which $51,312,000 were five- to 30-year fixed-rate mortgages and $7,196,000 were adjustable-rate loans. The rates offered on the Bank's adjustable-rate residential mortgage loans are generally competitive with the rates offered by other thrift institutions in the Bank's market area and are based upon the Bank's cost of funds and the rate of return the Bank can receive on comparable investments. Fixed-rate loans are originated only under terms and conditions and using documentation which would permit their sale in the secondary market and at rates which are generally competitive with rates offered by other financial institutions in the Bank's market area. Set forth below are the amounts and percentages of fixed-rate and adjustable-rate loans (which include consumer loans and mortgage-backed securities) in the Bank's portfolio at September 30, 1996, 1995, and 1994 (in thousands). September 30, - -------------------------------------------------------------------------------- 1996 1995 1994 - ------------------------- --------------------------- ------------------------ Fixed Adjustable Fixed Adjustable Fixed Adjustable - --------- ------------ ---------- ------------- ----------- ------------ $155,046 $73,159 $134,302 $89,221 $127,870 $86,414 67.9% 32.1% 60.1% 39.9% 59.7% 40.3% 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, 1996, the average contractual maturity of the Bank's portfolio of fixed-rate loans was 11 years and 4 months, and 19 years and 1 months with respect to its portfolio of adjustable-rate loans. Substantially all of the Bank's residential mortgages include so-called "due on sale" clauses, which are provisions giving the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage, and the loan is not repaid. Generally, the Bank will not lend more than 80% of the appraised value of a residential property which is owner occupied unless the borrower obtains private mortgage insurance reducing the uninsured portion of the loan to 72% of the appraised value. If private mortgage insurance is obtained, the Bank's policy is to lend up to 90% of the appraised value of the property securing the loan. The Bank applies the same standards to residential loans purchased in the secondary market. COMMERCIAL REAL ESTATE LOANS Federal laws and regulations permit a federally-chartered savings institution to make commercial real estate loans. From September 30, 1995, to September 30, 1996, commercial real estate loans increased from $6,271,832 to $7,476,884, increasing the percentage of commercial real estate loans to total loans from 2.82 to 3.30%. These loans consisted of construction and permanent loans secured by mortgages on mid-size commercial real estate. The terms of commercial real estate loans vary from loan to loan but are usually five-year adjustable-rate loans with terms of 20 to 25 years. The loan to value ratio of commercial real estate loans is generally 75% or less. Generally, commercial real estate loans involve greater risk to the Bank than do residential loans but usually provide for a higher rate of interest and increased fee income than do residential loans. Commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of the related project and thus may be subject to a great extent to adverse conditions in the real estate market or in the economy generally. CONSTRUCTION LOANS The Bank offers residential construction loans both to owner-occupants and to persons building residential property. Construction loans are usually offered with fixed rates of interest during construction. Generally, construction loans have terms ranging from six to 12 months at fixed rates over the construction period. Practically all residential construction loans are written so as to become permanent loans at the end of the construction period. Construction loans involve greater underwriting and default risks to the Bank than do loans secured by mortgages on existing properties. Loan funds are advanced upon the security of the project under construction, which is more difficult to value prior to the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is relatively difficult to evaluate accurately the total loan funds required to complete a project and the related loan-to-value ratios. Should a default occur which results in foreclosure, the Bank could be negatively impacted in that it would have to take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project. The Bank's underwriting criteria are designed to evaluate and minimize the risks of each construction loan. The Bank carefully considers a wide variety of factors before originating a construction loan, including the availability of permanent financing or a takeout commitment to the borrower (which may be provided by the Bank at market rates); the reputation of the borrower and the contractor; independent valuations and reviews of cost estimates; pre-construction sale information; and cash flow projections of the borrower. Inspections of construction sites are made by the Bank on a timely basis to verify progress made to date as a further reinforcement of its conservative lending policy. To reduce the risks inherent in construction lending, the Bank limits the number of properties which can be constructed on a "speculative" or unsold basis by a developer at any one time and generally requires the borrower or its principals to guarantee personally repayment of the loan. CONSUMER AND OTHER LOANS Federal laws and regulations permit a federally-chartered savings institution to make secured and unsecured consumer loans including home equity loans (loans secured by the equity in the borrower's residence, but not necessarily for the purpose of improvement), home improvement loans (loans secured by a residential second mortgage), loans secured by deposit accounts, educational loans (insured by the State Student Loan Commission of Indiana), and credit card loans (unsecured). The Bank offers all of these types of loans and is currently emphasizing home equity loans to take advantage of the recent changes in the tax laws. These loans are often at adjustable interest rates that generally are higher than the rates offered on mortgage loans. LOAN PORTFOLIO CASH FLOWS The following table sets forth the estimated cash flows (in thousands) of the Bank's loan portfolio by type of loan at September 30, 1996 The estimated cash flows reflect contractual terms at September 30, 1996 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. Cash Flows of Loans Years Ended September 30 ------------------------------------------- 1998- 2002 and 1997 2001 thereafter Total -------- -------- ---------- --------- Type of Loan: Construction loans -- residential real estate $ 5,197 $ - $ - $ 5,197 Real estate loans: Mortgage-residential 69,747 42,171 91,849 203,767 Commercial 3,324 2,601 850 6,775 Installment loans -- consumer 8,363 2,240 1,233 11,836 --------- -------- --------- ---------- Total $86,631 $47,012 $93,932 $227,575 ========= ======== ========= ========== The following table sets forth the estimated cash flows of the Bank's loan portfolio (in thousands) after one year from September 30, 1996, in the categories of fixed rate and adjustable rate. Cash Flows of Loans October 1, 1997 and thereafter - ---------------------------------- Fixed Adjustable Total at September 30, 1996 - ----------- ----------------- ------------------------------ $99,930 $41,014 $140,944 LOAN PORTFOLIO COMPOSITION The following table, sets forth the composition of the Bank's loan portfolio by type of security at the dates indicated. The table includes a reconciliation of total net loans receivable, after consideration of undisbursed portion of loans, deferred loan fees and discounts, and allowance for losses on loans (dollars in thousands). 1996 1995 1994 1993 1992 ---------------- ---------------- ----------------- ----------------- ----------------- TYPE OF SECURITY AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % --------- ------ --------- ------ --------- ------- --------- ------- ---------/ ------ Residential: Single family units $207,028 91.0% $203,211 91.2% $195,525 91.7% $188,135 91.9% $186,317 92.3% 2-4 family units 1,234 0.5% 1,008 0.5% 1,006 0.5% 654 0.3% 568 0.3% Over 4 family units 2,769 1.2% 1,738 0.8% 1,835 0.9% 1,751 0.9% 1,507 0.7% Commercial real estate 4,006 1.8% 3,696 1.7% 2,729 1.3% 2,344 1.1% 2,108 1.0% Land acquisition and development 702 0.3% 838 0.4% 438 0.2% 560 0.3% 366 0.2% Consumer and other loans 10,959 4.8% 11,337 5.1% 10,931 5.1% 10,441 5.1% 10,121 5.0% Loans on deposits 877 0.4% 901 0.4% 860 0.4% 888 0.4% 883 0.4% --------- ------ --------- ------ --------- ------ -------- ------- ---------- ------ 227,575 100.0% 222,729 100.0% 213,324 100.0% 204,773 100.0% 201,870 100.0% --------- ------ --------- ------ --------- ------ -------- ------- ---------- ------ Less: Undisbursed portion of loans 2,717 2,237 1,971 1,763 1,390 Deferred loan fees and discounts 959 916 988 893 779 --------- --------- --------- --------- --------- 3,676 3,153 2,959 2,656 2,169 --------- --------- --------- --------- --------- Total loans receivable 223,899 219,576 210,365 202,117 199,701 Allowance for losses on loans 888 912 1,035 1,025 896 --------- --------- --------- --------- --------- Net loans $223,011 $218,664 $209,330 $201,092 $198,805 ========= ========= ========= ========= =========
ORIGINATION, PURCHASE AND SALE OF LOANS AND LOAN CONCENTRATIONS The Bank originates residential loans in conformity with standard underwriting criteria to assure maximum eligibility for possible resale in the secondary market. Although the Bank has authority to lend anywhere in the United States, it has confined its loan origination activities primarily in the Bank's service area. Loan originations are developed from a number of sources, primarily from referrals from real estate brokers, builders, and existing and walk-in customers. The Bank also utilizes the services of a loan broker located in Fort Wayne, Indiana, who is paid on a commission basis (generally 1% of the loan amount) to originate loans for the Bank. The Bank's mortgage loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan, and the adequacy of the value of the property that will secure the loan. Residential and commercial loans ranging up to $200,000 can be approved by the loan committee of the Bank. Loans exceeding $200,000 must be approved by the Bank's Board of Directors. The Bank utilizes independent qualified appraisers approved by the Board of Directors to appraise the properties securing its loans and requires title insurance or title opinions so as to insure that the Bank has a valid lien on the mortgaged real estate. The Bank requires borrowers to maintain fire and casualty insurance on its secured properties. The procedure for approval of construction loans is the same as for residential mortgage loans, except that the appraiser evaluates the building plans, construction specifications, and estimates of construction costs. The Bank also evaluates the feasibility of the proposed construction project and the experience and track record of the developer. In addition, all construction loans generally require a commitment from a third-party lender or from the Bank for a permanent long-term loan to replace the construction loan upon completion of construction. Consumer loans are underwritten on the basis of the borrower's credit history and an analysis of the borrower's income and expenses, ability to repay the loan, and the value of the collateral, if any. Consumer loans must be approved by a consumer loan officer. Consumer loan originations currently are being generated primarily through advertising. Currently, it is the Bank's policy to originate both fixed-rate and adjustable-rate loans, providing all such loans are eligible for sale in the secondary market. It is the Bank's intention to hold all originated and purchased loans in its portfolio and not for sale. Generally, the Bank is not active in the secondary market. The following table shows mortgage and other loan origination, purchase, and repayment activity for the Bank during the periods indicated: Years Ended September 30 ------------------------------------------- 1996 1995 1994 ------------- -------------- -------------- Mortgage loans originated for the purpose of: Construction-commercial $ 995,000 $ - $ - Construction-residential 6,582,000 7,069,000 3,120,000 Purchase/refinance-commercial 1,905,000 1,910,000 1,078,000 Purchase/refinance-residential 51,926,000 41,376,000 52,074,124 Consumer and other loans originated 6,837,000 9,160,000 7,803,000 ------------ ------------- ------------- Total loans originated 68,245,000 59,515,000 64,075,124 ------------ ------------- ------------- Loans purchased - - - ------------ ------------- ------------- 68,245,000 59,515,000 64,075,124 ------------ ------------- ------------- Loan credits: Principal repayments 64,146,215 50,315,657 56,189,605 ------------ ------------- ------------- Other: Provision for losses on loans 8,824 50,058 23,746 Amortization of loan fees (368,362) (412,144) (525,064) Loan foreclosures, net 111,000 228,000 149,000 ------------ ------------- ------------- (248,538) (134,086) (352,318) ------------ ------------- ------------- Total credits, net 63,897,677 50,181,571 55,837,287 ------------ ------------- ------------- Net increases in mortgage and other loans receivable, net $ 4,347,323 $ 9,333,429 $ 8,237,837 ============ ============= ============= INTEREST RATES, POINTS AND FEES The Bank realizes interest, point, and fee income from its lending activities. The Bank also realizes income from commitment fees for making commitments to originate loans, from prepayment and late charges, loan fees, application fees, and fees for other miscellaneous services. The Bank accounts for loan origination fees in accordance with the Statement of Financial Accounting Standards on Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans ("SFAS No. 91") issued by the Financial Accounting Standards Board (the "FASB"). SFAS No. 91 prohibits the immediate recognition of loan origination fees as revenues and requires that such income (net of certain direct loan origination costs) for each loan be amortized, generally by the interest method, over the estimated life of the loan as an adjustment of yield. NONPERFORMING ASSETS Loans are reviewed on a regular basis and are placed on nonaccrual status when the loans become past due 90 days or more, or when, in the judgment of management, the probability of collection is deemed to be insufficient to warrant further accrual. When a loan is placed on a nonaccrual status, previously accrued but unpaid interest is deducted from interest income. When the Bank is unable to resolve a delinquency satisfactorily within 45 days after the loan is past due, it will undertake foreclosure or other proceedings, as necessary, to minimize any potential loss. Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as "real estate owned" until it is sold. When property is so acquired, it is recorded at the lower of loan balance or fair market value at the date of acquisition. Periodically, real estate owned is reviewed to ensure that net realizable value is not less than carrying value and any allowance resulting therefrom is charged to operations as a provision for loss on real estate owned. All costs incurred in maintaining the property from the date of acquisition are expensed. The following table reflects the amount of loans in delinquent status as of the dates indicated (dollars in thousands):: 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: One to four 29 $ 861 0.41% 10 $293 0.14% 27 $801 0.33% family Consumer 22 193 1.69% 10 39 0.34% 25 101 0.89% ------ ------ -------- ------ ------ -------- ------ ------ -------- Total 51 $1,054 0.46% 20 $332 0.15% 52 $902 0.35% ====== ====== ======== ====== ====== ======== ====== ===== ======== The following table sets forth the Bank's nonperforming assets at the dates indicated (in thousands):: At September 30, ----------------------------------------------------- 1996 1995 1994 1993 1992 ---------- -------- ---------- ---------- ----------- Nonaccrual loans $ 814,000 $765,000 $1,020,000 $ 866,000 $1,748,000 Loans past due 90 days and still accruing 88,000 99,000 49,000 87,000 48,000 ---------- ------- ---------- ---------- ---------- 902,000 864,000 1,069,000 953,000 1,796,000 Real estate owned, net of allowance 110,297 46,596 25,316 105,825 277,844 ---------- ------- ---------- --------- ----------- Total nonperforming assets $1,012,297 $910,596 $1,094,316 $1,058,825 $2,073,844 ========== ======== ========== ========== ========== Consumer loans are placed on nonaccrual generally when the loan exceeds 90 days delinquent or if in the opinion of management the possibility of collecting the loan becomes questionable. Mortgage loans are placed on nonaccrual generally when the loan exceeds 90 days delinquent, however, if the loan is below a 25% loan to value management may at their option decide to accrue interest on the loan since collection of the loan appears highly likely. Interest income that would have been recognized for the year ended September 1996, if nonaccrual loans had been current in accordance with their original terms approximated $40,000. Interest income recognized on such loans for the year ended September 30, 1996, approximated $99,000. The federal regulations require savings associations to review their assets on a regular basis and to classify them as: special mention; substandard; doubtful and loss. Loans classified as special mention are loans which currently do not expose the Bank to an unusual risk of loss but based on information available require the attention of management. This classification usually includes loans secured by unusual collateral, loans with documentary items which are being addressed by counsel, and relatively large loans where the borrower has had a history of delinquent payments and the collateral has a cashflow shortfall however the borrower has continued to service the debt. Loans classified as substandard or doubtful generally represent balances where the borrower has made several late payments and is unable to bring the loan current. Substandard loans generally represent situations where the borrower is attempting to resolve the delinquency in the normal course of business (i.e., sale of the property or infusion of additional capital). Loans classified as doubtful represent situations where the borrower has been unsuccessful in attempts to resolve the delinquency in the normal course of business. Doubtful loans involve a greater degree of uncertainty regarding estimate of loss. Loans classified as loss represent situations where the loan is severely delinquent. These loans typically involve extensive bankruptcy proceedings or other unusual circumstances where the debtor contests foreclosure. Loans classified as special mention, substandard or doubtful do not necessarily require specific reserves. Individual loan balances may be classified in one or more categories based on management's analysis and estimate of the risk underlying each individual situation. In accordance with the federal regulations, Management continually reviews the mix and delinquency status of its loan portfolio and classifies those loans which it deems appropriate. As of September 30, 1996 loan balances were classified by the Bank as follows. Loss $ 19,273 Doubtful -0- Substandard 773,562 Special Mention 266,348 ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE OWNED The allowances for loan and real estate owned losses represent amounts available to absorb future losses. 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, 1996, the allowances for losses on loans and real estate owned were $887,478 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 future losses in the portfolio. 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 (dollars in thousands). September 30, --------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------ ------------ ---------------- ------------- Amount % Amount % Amount % Amount % Amount % ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Balance at end of period applicable to: Residential Mortgage Loans $ 19 91.8% $ 42 92.2% $ 20 92.6% $ 177 92.4% $284 92.3% Commercial Real Estate Loans - 3.0% - 2.0% 140 1.3% 140 1.1% 149 1.0% Consumer Loans - 5.2% 30 5.8% 42 6.1% 15 6.5% 39 6.7% Unallocated 868 840 832 693 423 ----- ------ ---- ------ ------ ------ ------ ------ ----- ------- Total $887 100.0% $912 100.0% $1,034 100.0% $1,025 100.0% $895 100.0% ----- ------ ---- ------ ------ ------ ------ ------ ----- -------
The following table is a summary of activity in the Bank's allowance for loan losses for the periods indicated. Summary of Loan Loss Experience Years ended September 30, --------------------------------------- (Dollars in Thousands) 1996 1995 1994 1993 1992 ------ ------ ------- ------- ------- Balance of loan loss allowance at beginning of year $912 $1,034 $1,025 $ 895 $708 Charge-offs Residential - 153 5 1 1 Commercial real estate - - - - - Commercial - - - - - Consumer 55 47 30 45 46 ------- ------- ------- ------- ------ Total Charge-offs 55 200 35 46 47 ------- ------- ------- ------- ------ Recoveries Residential - - - - - Consumer 21 28 21 22 22 ------ ------- ------- ------- ------ Total Recoveries 21 28 21 22 22 ------ ------- ------- ------- ------ Net Charge-offs (Recoveries) 34 172 14 24 25 Provision for loan losses 9 50 23 154 212 ------ ------- ------- ------- ------ Balance of loan loss allowance at end of year $887 $ 912 $1,034 $1,025 $895 ====== ======= ======= ======= ====== Ratio of net charge-offs to average loans outstanding 0.02% 0.08% 0.01% 0.02% 0.01% 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, 1996, the Bank's ratio of liquid assets to total assets was 15.7%, which exceeds the regulatory requirement. The carrying values of the Bank's investment securities, including its liquid assets, as of the dates indicated are presented on the following table. At September 30, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Interest-bearing deposits and certificates of deposit (1) $ 7,823,900 $ 8,190,942 $ - U.S. government and federal agency securities Held to maturity 13,175,118 26,987,247 27,983,373 Available for sale 20,590,450 6,966,562 10,802,600 Mortgage backed securities Held to Maturity 630,503 794,328 959,619 Stock in FHLB of Indianapolis 2,004,400 1,941,100 1,871,200 Other Held to maturity 455,414 1,158,980 1,012,514 Available for sale 5,295,565 4,103,300 3,953,220 ------------ ------------ ------------ Total investments $49,975,350 $50,142,459 $46,582,526 ============ ============ ============ - ---------------------------------- (1) In FHLB of Indianapolis at September 30, 1996; In FHLB of Indianapolis ($7,800,686) and insured certificates of deposit ($390,256) at September 30, 1995. The following table sets forth information regarding the maturity distribution of investment securities at September 30, 1996 and the weighted average yield on those securities. 1996 ---------------------------------------------------------------- Available for Sale Held to Maturity ------------------------------ --------------------------------- Approximate Approximate Amortized Fair Amortized Fair Maturity Distribution at September 30: Cost Yield Value Cost Yield Value ------------ ------ ----------- ------------- ----- ------------ Due in one year or less $ 2,932,475 5.09% $ 2,931,213 $ 5,209,172 4.79% $ 5,203,994 Due after one through five years 18,455,266 6.17% 18,295,759 8,130,946 5.42% 7,979,686 Due after five through ten years 4,328,731 7.17% 4,320,827 290,414 6.96% 302,624 Due after ten years 340,752 7.79% 338,216 - - ------------ ------------ ------------- ------------ 26,057,224 25,886,015 13,630,532 13,486,304 Mortgage-backed securities - - 630,503 8.07% 662,833 $26,057,224 $25,886,015 $14,261,035 $14,149,137 ============ ============= ============ ============
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 ("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 reflects the make-up of the Bank's deposit portfolio by type and weighted average rate paid: Weighted Average Balance Rate Paid ------------- ----------- Transaction accounts $ 24,506,429 1.99% Savings and money market accounts 43,805,904 3.17% Certificates of deposit less than $100,000 16,664,414 5.37% Certificates of deposit over $100,000 149,828,480 5.64% ------------- 234,805,227 Interest payable 276,213 ------------- $235,081,440 ============= 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, 1996 maturing during the next five years and thereafter see the Notes to Consolidated Financial Statements in the Company's 1996 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. 1996 1995 1994 ------------ ------------ ------------ 3 months or less $ 4,717,331 $ 2,199,413 $ 2,197,628 3-6 months 2,116,471 1,677,336 2,234,938 6-12 months 2,904,430 4,336,291 2,628,356 over 12 months 6,926,182 5,795,043 5,421,300 ------------ ------------ ------------ Total $16,664,414 $14,008,083 $12,482,222 ============ ============ ============ The following table sets forth certain information as to the Bank's deposit flows at the dates and for the periods indicated: Years Ended September 30, -------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- Beginning balance $232,747,018 $226,851,009 $213,590,085 ------------- ------------- ------------- New accounts and additional deposits, net of withdrawals, (8,854,488) (4,706,433) 4,439,931 Interest credited 11,188,910 10,602,442 8,820,993 ------------- ------------- ------------- Net increase 2,334,422 5,896,009 13,260,924 ------------- ------------- ------------- Ending balance $235,081,440 $232,747,018 $226,851,009 ============= ============= ============= BORROWINGS As a member of the FHLB System and the FHLB of Indianapolis, the Bank is eligible to arrange borrowings or advances for various purposes and on various terms. The Bank had no advances at September 30, 1996. As of September 30, 1994, and 1995 the Bank had outstanding advances to the FHLB of Indianapolis of $-0- and $1,000,000 respectively. Reverse repurchase agreements, another source of borrowing for the Bank, are retail obligations of the Bank with a maturity of 90 days or less, and are generally secured with specific investment securities owned by the Bank. The following tables set forth certain information as to the Bank's borrowings consisting of FHLB of Indianapolis advances and reverse repurchase agreements for the periods and at the dates indicated. Average balances and average interest rates are based on month-end balances. Years Ended September 30 ------------------------------ 1996 1995 1994 ---------- ---------- -------- Average balance of total borrowings $ 723,000 $ 279,000 $176,787 Highest month-end balance of total borrowings 1,000,000 1,000,000 546,960 Weighted average interest rate of total borrowings 5.83% 5.83% 3.95% At September 30 ------------------------------ 1996 1995 1994 ---------- ---------- -------- Advances from FHLB of Indianapolis $ - $1,000,000 $ - Reverse Repurchase agreements - - - ---------- ---------- -------- Total borrowings $ $ - $1,000,000 $ - ========== ========== ======== Weighted average interest rate - 5.83% - TRUST DEPARTMENT AND DISCOUNT BROKERAGE SERVICES In October 1984, the FHLB of Indianapolis granted full trust powers to the Bank, one of the first savings institutions in Indiana to be granted such powers. As of September 30, 1996, the Bank's trust department assets totaled approximately $39,700,000 including self-directed IRA accounts, and it was offering a variety of trust services including estate planning. As of that date, the trust department was administering approximately 750 trust accounts, including estates, guardianships, revocable and irrevocable trusts, testamentary trusts, and self-directed IRA accounts. The trust department also offers and administers self-directed Individual Retirement Accounts ("IRA's") and Simplified Employee Pension IRA's for small businesses. 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, 1996 and 1995 PFSI recorded total income of $36,851 and $32,809, respectively, with net income for such periods amounting to $22,411 and $18,190, respectively. Since 1985, the Bank also has offered discount brokerage services to its customers. In 1996, this service was moved to the service corporation and was offered through U.S. Clearing Corp. Prior to 1996, another vendor was used. This service also reduces the expenses of securities transactions for the various trust accounts administered by the trust department and provides customers with a convenient and inexpensive means of conducting brokerage transactions. EMPLOYEES As of September 30, 1996 the Bank employed 75 persons on a full time basis and 10 persons on a part time basis. A comprehensive employee benefits program is maintained which provides hospitalization and major medical insurance, retirement income, life insurance and disability insurance which is provided under the Bank's pension program. The Bank also maintains an Employee Stock Ownership Plan for the benefit of its employees which provides for distributions of an employee's vested portions upon retirement, disability, death or termination of employment. The Bank's employees are not represented by any collective bargaining group, and management considers its relations with its employees to be excellent. REGULATION GENERAL The Company, as a savings and loan holding company, and the Bank, as a federally chartered savings association, are subject to extensive regulation by the OTS. The lending activities and other investments of the Bank must comply with various federal regulatory requirements, and the OTS periodically examines the Bank for compliance with various regulatory requirements and for safe and sound operations. The FDIC also has the authority to conduct examinations. The Bank must file reports with the OTS describing its activities and financial condition and is also subject to certain reserve requirements promulgated by the Federal Reserve Board. This supervision and regulation is intended primarily for the protection of depositors and the deposit insurance funds. Certain of these regulatory requirements are referred to below or appear elsewhere herein. 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, 1996 of $2,004,400. 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, 1996, the Bank had no advances outstanding. See "Business of the Company--Deposit Activity and Other Sources of Funds" and "--Borrowings." LIQUIDITY REQUIREMENTS The Bank is required to maintain average daily balances of liquid assets (cash, certain time deposits, bankers' acceptances, highly rated corporate debt and commercial paper, securities of certain mutual funds, and specified United States government, state or federal agency obligations) equal to the monthly average of not less than 5% of its net withdrawable savings deposits plus short-term borrowings. Savings institutions are also required to maintain average daily balances of short-term liquid assets of 1% of the total of their net withdrawable savings accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet liquidity requirements. QUALIFIED THRIFT LENDER TEST The Home Owners' Loan Act (the "HOLA") and OTS regulations require savings institutions to meet a qualified thrift lender ("QTL") test or the definition of a domestic building and loan association in the Internal Revenue Service Code of 1986, as amended. A savings institution that does not meet this requirement must either convert to a bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; (iii) the institution shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the institution ceases to meet these requirements, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations). To meet the QTL test, an institution's "Qualified Thrift Investments" must total at least 65% of "portfolio assets." Under OTS regulations, portfolio assets are defined as total assets less intangibles, property used by a savings institution in its business and liquidity investments in an amount not exceeding 20% of assets. Qualified Thrift Investments consist of, among other things, (i) loans, equity positions or securities related to domestic, residential real estate or manufactured housing, (ii) 50% of the dollar amount of residential mortgage loans subject to sale under certain conditions, and (iii) stock in an FHLB or the FHLMC or FNMA. In addition, savings institutions are able to treat as Qualified Thrift Investments 200% of their investments in loans to finance "starter homes" and loans for construction, development or improvement of housing and community service facilities or for financing small businesses in "credit-needy" areas. In order to maintain QTL status, the savings institution must maintain a weekly average percentage of Qualified Thrift Investments to portfolio assets equal to 65% on a monthly average basis in nine out of 12 months. A savings institution that fails to maintain QTL status will be permitted to requalify once, and if it fails the QTL test a second time, it will become immediately subject to all penalties as if all time limits on such penalties had expired. At September 30, 1996, approximately 81.8% of the Bank's portfolio assets were invested in Qualified Thrift Investments, which was in excess of the percentage required to qualify the Company under the QTL test. UNIFORM LENDING STANDARDS Under OTS regulations, savings institutions must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards, including loan-to-value limits, that are clear and measurable, loan administration procedures and documentation and approval and reporting requirements. The real estate lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the "Interagency Guidelines") that have been adopted by the federal bank regulators. The Interagency Guidelines, among other things, call upon depository institutions to establish internal loan-to-value limits for real estate loans that are not in excess of the following supervisory limits: (i) for loans secured by raw land, the supervisory loan-to-value limit is 65% of the value of the collateral; (ii) for land development loans (i.e., loans for the purpose of improving unimproved property prior to the erection of structures), the supervisory limit is 75%, (iii) for loans for the construction of commercial, multifamily or other nonresidential property, the supervisory limit is 80%; (iv) for loans for the construction of one- to-four family properties, the supervisory limit is 85%; and (v) for loans secured by other improved property (e.g., farmland, completed commercial property and other income-producing property including nonowner-occupied, one- to-four family property), the limit is 85%. Although no supervisory loan-to-value limit has been established for owner occupied, one- to-four family and home equity loans, the Interagency Guidelines state that for any such loan with a loan-to-value ratio that equals or exceeds 90% at origination, an institution should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral. The Interagency Guidelines state that it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits, based on the support provided by other credit factors. The aggregate amount of loans in excess of the supervisory loan-to-value limits, however, should not exceed 100% of total capital and the total of such loans secured by commercial, agricultural, multifamily and other non-one- to-four family residential properties should not exceed 30% of total capital. The supervisory loan-to-value limits do not apply to certain categories of loans including loans insured or guaranteed by the U.S. government and its agencies or by financially capable state, local or municipal governments or agencies, loans backed by the full faith and credit of a state government, loans that are to be sold promptly after origination without recourse to a financially responsible party, loans that are renewed, refinanced or restructured without the advancement of new funds, loans that are renewed, refinanced or restructured in connection with a workout, loans to facilitate sales of real estate acquired by the institution in the ordinary course of collecting a debt previously contracted and loans where the real estate is not the primary collateral. Management believes that the Bank's current lending policies conform to the Interagency Guidelines and that the Interagency Guidelines will have no material effect on its lending activities. REGULATORY CAPITAL REQUIREMENTS Under OTS capital regulations, savings institutions must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core" capital equal to 3% of adjusted total assets and "total" capital (a combination of core and "supplementary" capital) equal to 8% of risk-weighted assets. In addition, the OTS has recently adopted 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). For purposes of these regulations, Tier 1 capital has the same definition as core capital. See "Prompt Corrective Regulatory Action." The OTS capital regulations define core capital as common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits and "qualifying supervisory goodwill," less intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights. Tangible capital is the same as core capital, except that it does not include qualifying supervisory goodwill and is reduced by the amount of all the savings institution's intangible assets other than certain purchased mortgage servicing rights. The OTS capital rule requires that core and tangible capital be reduced by an amount equal to a savings institution's debt and equity investments in subsidiaries engaged in activities not permissible for national banks, other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies ("non-includable subsidiaries"). As of September 30, 1996, the Bank had no material investments in or extensions of credit to non-includable subsidiaries. Adjusted total assets for purposes of the core and tangible capital requirements are a savings institution's total assets as determined under generally accepted accounting principles, increased by certain goodwill amounts and by a prorated portion of the assets of subsidiaries in which the savings institution holds a minority interest and which are not engaged in activities for which the capital rules require the savings institution to net its debt and equity investments in such subsidiaries against capital, as well as a prorated portion of the assets of other subsidiaries for which netting is not fully required under phase-in rules. Adjusted total assets are reduced by the amount of assets that have been deducted from capital, the portion of a savings institution's investments in subsidiaries that must be netted against capital under the capital rules and, for purposes of the core capital requirement, qualifying supervisory goodwill. At September 30, 1996, the Bank's adjusted total assets for purposes of the core and tangible capital requirements were $275 million. In determining compliance with the risk-based capital requirement, a savings institution is allowed to include both core capital and supplementary capital in its total capital, provided the amount of supplementary capital included does not exceed the savings institution's core capital. Supplementary capital is defined to include certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments and a portion of the savings institution's general loan and lease loss allowances. The risk-based capital requirement is measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk weight. Under the OTS risk-weighting system, cash and securities backed by the full faith and credit of the U.S. government are given a 0% risk weight. Mortgage-backed securities that qualify under the Secondary Mortgage Market Enhancement Act, including those issued, or fully guaranteed as to principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight. Single-family first mortgages not more than 90 days past due with loan-to-value ratios under 80%, multi-family mortgages (maximum 36 dwelling units) with loan-to-value ratios under 80% and average annual occupancy rates over 80%, and certain qualifying loans for the construction of one- to four-family residences presold to home purchasers are assigned a risk weight of 50%. Consumer loans, non-qualifying residential construction loans and commercial real estate loans, repossessed assets and assets more than 90 days past due, as well as all other assets not specifically categorized, are assigned a risk weight of 100%. The portion of equity investments not deducted from core or supplementary capital is assigned a 100% risk-weight. OTS capital regulations require savings institutions to maintain minimum total capital, consisting of core capital plus supplemental capital, equal to 8.0% of risk-weighted assets. The OTS has recently 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 April 1991, the OTS proposed to amend its core capital requirement to establish a 3% core capital ratio for savings institutions in the strongest financial and managerial condition. For all other savings institutions, the minimum core capital ratio would be 3% plus at least an additional 1 to 2%, determined on a case-by-case basis by the OTS after assessing both the quality of risk management systems and the level of overall risk in each individual savings institution. [The Company does not expect that it will be materially affected by this regulation if adopted in its current form.] In addition to the proposed rule, the OTS has adopted a prompt corrective action rule under which a savings institution that has a core capital ratio of less than 4% would be deemed to be "undercapitalized" and may be subject to certain sanctions. See "--Prompt Corrective Regulatory Action." 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, 1996, the Bank exceeded all regulatory minimum capital requirements as indicated in the table below. Dollars in Thousands Actual Required Excess Amount % Amount % Amount % Tangible capital $33,186 12.09% $4,118 1.5% $29,068 10.59% Core capital 33,186 12.09 8,236 3.0 24,950 9.09 Risk-based capital 34,054 25.63 10,630 8.0 23,424 17.63 Insurance of Deposit Accounts and Special Assessment. The Bank's deposit accounts are insured by the Savings Association Insurance Fund ("SAIF") to a maximum of $100,000 for each insured member (as defined by law and regulation). If an institution has no tangible capital, the FDIC has the authority, should it initiate proceedings to terminate an institution's deposit insurance, to suspend the insurance of any such institution. However, if a savings association has positive capital when it includes qualifying intangible assets, the FDIC cannot suspend deposit insurance unless capital declines materially, the institution fails to enter into and remain in compliance with an approved capital plan, or the institution is operating in an unsafe or unsound manner. Regardless of an institution's capital level, 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 may also prohibit an insured depository institution from engaging in any activity the FDIC determines to pose a serious threat to the SAIF. The management of the Bank is unaware of any practice, condition, or violation that might lead to termination of its deposit insurance. 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, a savings association pays premiums, depending upon the institution's risk classification. This risk classification is based on an institution's capital group and supervisory subgroup assignment. In addition, the FDIC is authorized to increase such deposit insurance rates on a semi-annual basis if it determines that such action is necessary to cause the balance in the SAIF to reach or maintain the designated reserve ratio of 1.25% of SAIF-insured deposits. The SAIF was substantially underfunded at June 30, 1996. In addition, the FDIC may impose special assessments on SAIF members to repay amounts borrowed from the U.S. Treasury or for any other reason deemed necessary by the FDIC. The Bank's federal deposit insurance premium expense for the year ended September 30, 1996 amounted to approximately $2,000,000, of which $1,500,000 was the special assessment on savings institutions to recapitalize the SAIF, discussed below. By comparison, at September 30, 1996, members of the Bank Insurance Fund ("BIF") were required to pay substantially lower, or virtually no, federal deposit insurance premiums. Effective September 30, 1996, federal law was revised to mandate a one-time special assessment on SAIF members such as the Bank of approximately 65.7 basis points per $100 of deposits held on March 31, 1995. The Bank recorded a $1,500,871 pre-tax expense for this assessment at September 30, 1996, and such assessment was payable on November 27, 1996. Beginning January 1, 1997, deposit insurance assessments for SAIF members are expected to be reduced to approximately 6.4 basis points per $100 of deposits on an annual basis through the end of 1999. During this same period, BIF members are expected to be assessed approximately 1.3 basis points per $100 of deposits. Thereafter, assessments for BIF and SAIF members should be the same and the SAIF and BIF may be merged. It is expected that these continuing assessments for both SAIF and BIF members will be used to repay outstanding Financing Corporation bond obligations. As a result of these changes, beginning January 1, 1997, the rate of deposit insurance assessed the Bank will decline by approximately 72%. 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, 1996, 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. 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. In December 1994, the OTS issued a proposal to amend the capital distribution limits. Under that proposal, an institution not owned by a holding company with one of the two highest examination ratings could make a capital distribution without notice to the OTS, if it remains adequately capitalized, as described above, after the distribution is made. Any other institution seeking to make a capital distribution that would not cause the institution to fall below the capital levels to qualify as adequately capitalized, would have to provide notice to the OTS. Except under limited circumstances and with OTS approval, no capital distributions would be permitted if they would cause the institution to become undercapitalized. As of September 30, 1996, 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: (1) 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." ENFORCEMENT Under the Federal Deposit Insurance Act (the "FDI Act"), the OTS has primary enforcement responsibility over savings institutions and has the authority to bring enforcement action against all "institution-related parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a savings institution. Civil penalties cover a wide range of violations and actions and range up to $25,000 per day unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. Criminal penalties for most financial institution crimes include fines of up to $1.0 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to the capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership or conservatorship. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. The FDIC may also take action to terminate deposit insurance. TRANSACTIONS WITH RELATED PARTIES Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of a savings institution (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions. In addition to the restrictions imposed by Sections 23A and 23B, no savings institution may (i) loan or otherwise extend credit to an affiliate, except for any affiliate which engages only in activities which are permissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution. Further, savings institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder on loans to executive officers and principal stockholders. Under Section 22(h), loans to a director, executive officer and a greater than 10% stockholder of a savings institution and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution's lending limit. Section 22(h) also prohibits the making of loans above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and greater than 10% stockholders of a savings institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any "interested" director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors. Savings institutions are also subject to the requirements and restrictions of Section 22(g) of the Federal Reserve Act and Regulation O on loans to executive officers and the restrictions of 12 U.S.C. ss. 1972 on certain tying arrangements and extensions of credit by correspondent banks. Section 22(g) of the Federal Reserve Act requires approval by the board of directors of a depository institution for extension of credit to executive officers of the institution, and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. Section 1972 (i) prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain exceptions, and (ii) prohibits extensions of credit to executive officers, directors and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. PROMPT CORRECTIVE REGULATORY ACTION The federal banking regulators are required to take prompt corrective action if an institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement, and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to become undercapitalized. An institution that fails to meet the minimum level for any relevant capital measure (an "undercapitalized institution") generally is: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution's holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution's total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A significantly undercapitalized institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution. The senior executive officers of such an institution may not receive bonuses or increases in compensation without prior regulatory approval and the institution is prohibited from making payments of principal or interest on its subordinated debt, with certain exceptions. If an institution's ratio of tangible capital to total assets falls below the "critical capital level" established by the appropriate federal banking regulator, the institution is subject to conservatorship or receivership within 90 days unless periodic determinations are made that forbearance from such action would better protect the deposit insurance fund. Unless appropriate findings and certifications are made by the appropriate federal bank regulatory agencies, a critically undercapitalized institution must be placed in receivership if it remains critically undercapitalized on average during the calendar quarter beginning 270 days after the date it became critically undercapitalized. The OTS has adopted regulations implementing the prompt corrective action requirements. Under those regulations, the OTS measures a saving institution's capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). A savings institution that is not subject to an order or written directive to meet or maintain a specific capital level is deemed "well-capitalized" if it also has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized" savings institution is a savings institution that does not meet the definition of well-capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 risk-based capital ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a composite 1 MACRO rating). An "undercapitalized institution" is a savings institution that has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the institution is rated a Composite 1 under the OTS examination rating system). A "significantly undercapitalized" institution is defined as a savings institution that has: (i) a total risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A "critically undercapitalized" savings institution is defined as a savings institution that has a ratio of core capital to total assets of less than 2.0%. The OTS may reclassify a well-capitalized savings institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category if the OTS determines, after notice and an opportunity for a hearing, that the savings institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any examination rating category. The Bank is classified as "well-capitalized" under the OTS regulations. STANDARDS FOR SAFETY AND SOUNDNESS In July 1995, the federal banking agencies adopted final guidelines establishing standards for safety and soundness. The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In August 1996, guidelines for asset quality and earnings standards were issued. The guidelines establish the safety and soundness standards that the agencies will use to identify and address problems at insured depository institutions before capital becomes impaired. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. INTERSTATE BANKING AND BRANCHING In September 1994, the Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate Act, beginning one year after the date of enactment, a bank holding company that is adequately capitalized and managed may obtain approval to acquire an existing bank located in another state without regard to state law. A bank holding company would not be permitted to make such an acquisition if, upon consummation, it would control (a) more than 10% of the total amount of deposits of insured depository institutions in the United States or (b) 30% or more of the deposits in the state in which the bank is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks. An out-of-state bank holding company may not acquire a state bank in existence for less than a minimum length of time that may be prescribed by state law except that a state may not impose more than a five year existence requirement. The Interstate Act also permits, beginning June 1, 1997, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state may permit such combinations earlier than June 1, 1997, and may adopt legislation to prohibit interstate mergers after that date in that state or in other states by that state's banks. The same concentration limits discussed in the preceding paragraph apply. The Interstate Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirements and conditions as for a merger transaction. The Interstate Act is likely to increase competition in the Bank's market areas especially from larger financial institutions and their holding companies. It is difficult to assess the impact such likely increased competition will have on the Bank's operations. 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 their local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. The OTS has rated the Bank "satisfactory" in complying with its CRA obligations. In May 1995, the federal banking agencies issued final regulations which change the manner in which they measure a bank's compliance with its CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. In March 1994, the federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment and evidence of disparate impact. 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." Savings and loan holding companies are the only financial institution holding companies which may engage in any commercial securities and insurance activities. However, congressional legislative proposals that have been introduced or are under consideration would either limit unitary savings and loan holding companies to the same activities as other financial institution holding companies or would permit certain bank holding companies to engage in commercial activities and expanded securities and insurance activities. The Company cannot predict if and in what form these proposals might become law. If the Company were to acquire control of another savings institution, other than through merger or other business combination with the Bank, the Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings institution meets the QTL test, the activities of the Company and any of its subsidiaries (other than the Bank or other subsidiary savings institutions) would thereafter be subject to further restrictions. Among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings institution shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity, upon prior notice to, and no objection by, the OTS, other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency or escrow business; (iii) holding, managing or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. Those activities described in (vii) above must also be approved by the OTS prior to being engaged in by a multiple holding company. RESTRICTIONS ON ACQUISITIONS Savings and loan holding companies are prohibited from acquiring, without prior approval of the OTS, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Under certain circumstances, a registered savings and loan holding company is permitted to acquire, with the approval of the OTS, up to 15% of the voting shares of an undercapitalized savings institution pursuant to a "qualified stock issuance" without that savings institution being deemed controlled by the holding company. In order for the shares acquired to constitute a "qualified stock issuance," the shares must consist of previously unissued stock or treasury shares, the shares must be acquired for cash, the saving and loan holding company's other subsidiaries must have tangible capital of at least 6-1/2% of total assets, there must not be more than one common director or officer between the savings and loan holding company and the issuing savings institution, and transactions between the savings institution and the savings and loan holding company and any of its affiliates must conform to Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval of the OTS, no director or officer of a savings and loan holding company or person owning by proxy or otherwise more than 25% of such company's stock, may also acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company. The OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if: (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office in the state of the institution to be acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the FDI Act; or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). Under the Bank Holding Company Act of 1956, bank holding companies are specifically authorized to acquire control of any savings association. Pursuant to rules promulgated by the Federal Reserve Board, owning, controlling or operating a savings institution is a permissible activity for bank holding companies, if the savings institution engages only in deposit-taking activities and lending and other activities that are permissible for bank holding companies. A bank holding company that controls a savings institution may merge or consolidate the assets and liabilities of the savings institution with, or transfer assets and liabilities to, any subsidiary bank which is a member of the BIF with the approval of the appropriate federal banking agency and the Federal Reserve Board. The resulting bank will be required to continue to pay assessments to the SAIF at the rates prescribed for SAIF members on the deposits attributable to the merged savings institution plus an annual growth increment. In addition, the transaction must comply with the restrictions on interstate acquisitions of commercial banks under the Bank Holding Company Act of 1956. FEDERAL AND STATE TAXATION FEDERAL TAXATION For federal income tax purposes, the Company reports its income and expenses using the accrual method of accounting and files its federal income tax returns on the basis of a fiscal year ending September 30. The Company and Bank file consolidated federal income tax returns. The Company is subject to those rules of federal income taxation generally applicable to corporations. Under present provisions of the Internal Revenue Code ("Code"), however, mutual and stock savings institutions which meet certain definitional tests primarily relating to their assets and the nature of their businesses are permitted to establish a reserve for bad debts and to make annual additions thereto. Such institutions may deduct such additions, within specified formula limits, in arriving at their taxable income. A thrift institution must meet an asset test in order to qualify for the bad debt reserve tax rules described below. At least 60% of the amount of the total assets of the institution (at the close of the taxable year in question) must consist of certain assets specified in Section 7701(a)(19) of Code. A thrift institution that ceases to meet the 60% test in a tax year may not deduct any addition to a bad debt reserve under the special rules applicable to thrifts and, if the institution is a "large bank" as defined in Section 585(c)(2) of the Code, generally must include existing reserves in income over a four-year period. At September 30, 1996, in excess of 97% of the Bank's assets qualified under Section 7701(a)(19). Therefore, the Bank was allowed an addition to its tax bad debt reserve. The Bank also is not a "large bank" under Section 585(c)(2) of the Code. For purposes of computing the deductible addition to its bad debt reserve, the Bank's loans are separated into "qualifying real property loans" (generally those loans secured by interests in real property) and "nonqualifying loans" (all other loans). The deduction with respect to nonqualifying loans must be computed under the experience method, which allows a deduction for the Bank's actual charge-offs. The Bank has generally computed its annual bad debt deductions with respect to qualifying real property loans under the percentage of taxable income method, except for years where the Bank incurred operating losses at which time the experience method was utilized. Under the percentage of taxable income method ("percentage method"), the bad debt deduction for qualifying loans is computed as a percentage of the Bank's taxable income before such deduction, as adjusted for certain items. Thrift institutions are allowed a percentage of taxable income bad debt deduction of 8% of such taxable income. To the extent the 8% deduction exceeds an amount computed on the basis of actual loss experience, such amount will constitute a preference item for purposes of the corporate minimum tax discussed elsewhere herein. Under the Code which affects the 1996 fiscal year, the bad debt deduction for qualifying real property loans computed under the percentage method may not exceed the amount necessary to increase the balance in the bad debt reserve accumulated for such loans to an amount equal to 6% of such loans outstanding at the end of the taxable year. On September 30, 1996, the balance of such reserves at the Bank as a percentage of such loans was approximately 4.5%. In addition, the total bad debt deduction for any taxable year with respect to both qualifying real property and nonqualifying loans may not exceed the greater of (a) the deduction that would be permitted under the experience method, or (b) the amount by which 12% of total deposits at year end exceed the sum of the Bank's surplus, undivided profits, and reserves, as defined for federal income tax purposes, at the beginning of the year. On September 30, 1996, this limitation did not restrict the bad debt reserve deduction of the Bank. The Bank's total bad debt reserve for tax purposes was approximately $9.6 million at September 30, 1996. Based upon 1996 tax law changes, the above criteria will not be of concern in future years. To the extent earnings appropriated to a thrift institution's bad debt reserves for qualifying real property loans and deducted for federal income tax purposes exceed the allowable amount of such reserves computed under the experience method ("Excess"), and to the extent of the institution's supplemental reserves for losses on loans, such Excess and the supplemental reserve may not, without adverse tax consequences, be utilized for payment of dividends or certain other distributions to a shareholder (including distributions in redemption, dissolution, or liquidation) or for any other purpose (except to absorb bad debt losses). Distribution of a dividend by a thrift institution to a shareholder is treated as made: first out of the institution's current and post-1951 accumulated earnings and profits; second out of the Excess; third out of the supplemental reserve for losses on loans to the extent thereof; and fourth out of such other accounts as may be proper. In the case of distributions in redemption, dissolution or liquidation, the distribution is deemed to be first out of the Excess, second out of the supplemental reserve for losses on loans, to the extent thereof, then out of earnings and profits, and finally out of other proper accounts. To the extent a distribution by the Bank is deemed paid out of its Excess or supplemental reserve, under these rules, the Excess or supplemental reserve would be reduced and the Bank's gross income for tax purposes would be increased by the amount which, when reduced by the income tax, if any, attributable to the inclusion of such amount in its gross income, equals the amount deemed paid out of the Excess or supplemental reserve. As of September 30, 1996, the Bank's Excess for tax purposes totaled approximately $9,600,000. The Company is subject to an alternative minimum tax. This tax is imposed at a rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments), plus tax preference items, less any available exemption. For alternative minimum tax purposes, special adjustments apply to the NOL deduction, and such NOLs can offset no more than 90% of alternative minimum taxable income. The alternative minimum tax is imposed to the extent it exceeds a corporation's regular income tax. The Company has been paying the regular income tax in recent years instead of the alternative minimum tax. For taxable years beginning after 1986, corporations, including the Company, are also subject to an environmental tax equal to 0.12% of the excess of alternative minimum taxable income for the taxable year (determined without regard to alternative tax NOLs or the deduction for the environmental tax) over $2 million. The Company incurred approximately $5,000 of this tax for its taxable year ended September 30, 1996. Thrifts have generally not established a liability for deferred taxes on the bad debt reserves on their balance sheet. Therefore, if a thrift has to recapture its bad debt reserves because of failure to qualify as a bank, the effect on financial statements, apart from the cash outflow, could be material. The Company has recorded a liability for increases in its tax bad debt reserves from a base year of 1987. Due to changes made by the 1996 tax law, the Bank must recapture into taxable income the amount of the tax bad debt reserve in excess of the base year reserve. This additional tax is to be paid over a six year period, with up to a two year deferral if certain tests are met. The Bank has the expected liability currently recorded in its financial statements. STATE TAXATION Effective for fiscal year 1991, the State of Indiana imposed an 8.5% franchise tax on the net income of financial (including thrift) institutions, exempting them from the prior gross income, supplemental net income, and intangibles taxes. Net income for franchise tax purposes constitutes federal taxable income before net operating loss deductions and special deductions, adjusted for certain items, including bad debts. Prior to 1991, the State of Indiana imposed a 1.2% gross income tax on thrift institutions. The state also imposed an intangibles tax on thrift institutions located in Indiana. The intangibles tax was based upon the Bank's capital and deposits. The rate was .14%; however, the intangibles tax liability for federally chartered savings institutions was reduced by the gross income and personal property taxes paid. Other applicable state taxes include sales tax, use tax, property tax, and a supplemental net income tax of 4.5% on the difference, generally, between taxable income as defined in the Code and the amount of gross income tax paid. The Company's tax returns have not been audited by federal or state authorities in the past ten years. ITEM 2. PROPERTIES The Bank owns six full-service banking offices located in Avilla, Auburn, Columbia City, Garrett, Kendallville and LaGrange, Indiana. The following table provides certain information with respect to the Bank's full-service offices at September 30, 1996. Full Service Net Book Offices Date Opened Value(1) ------------------- ----------- -------- Main Office, Auburn 1973 $208,012 Avilla 1980 143,066 Garrett 1972 64,873 Columbia City 1971 144,087 Kendallville 1941 512,579 LaGrange 1972 191,638 (1) Of real estate at September 30, 1996. The Bank owns data processing equipment including computers, terminals and communications equipment for record keeping purposes. The total net book value of the Bank's premises and equipment at September 30, 1996, was $1,467,764. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company, the Bank or any subsidiary is a party or to which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Reference is made to page 2 of the Company's Annual Report to Stockholders, for the year ended September 30, 1996, for the information required by this Item, which is hereby incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA Reference is made to page 13 of the Company's Annual Report to Stockholders for the year ended September 30, 1996, for the information required by this Item which is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to pages 6 to 12 of the Company's Annual Report to Stockholders for the year ended September 30, 1996, for the information required by this Item which is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to pages 14 to 27 of the Company's Annual Report to Stockholders for the year ended September 30, 1996, for the information required by this Item which is hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to pages 2 - 4 of the Company's definitive Proxy Statement for the 1996 Annual Meeting of Stockholders for the information required by this Item which is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to pages 6 - 10 of the Company's definitive Proxy Statement for the 1996 Annual Meeting of Stockholders for the information required by this Item which is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to pages 2 and 5 of the Company's definitive Proxy Statement for the 1996 Annual Meeting of Stockholders for the information required by this Item which is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to pages 5 and 6 of the Company's definitive Proxy Statement for the 1996 Annual Meeting of Stockholders 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, 1996, are filed as part of this report: 1. Financial Statements o REPORT OF GEO. S. OLIVE & CO. LLC, INDEPENDENT AUDITORS. o CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - AS OF SEPTEMBER 30, 1996 AND 1995. o CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994. o CONSOLIDATED STATEMENT OF CHANGE IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994. o CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994. o NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2. Financial Statement Schedules All schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements and notes. 3. Exhibits Exhibit No. Description of Exhibit - ----------- ---------------------- 3.1 Articles of Incorporation of Peoples Bancorp (1) 3.2 Bylaws of Peoples Bancorp (1) 10.2 Employment Agreement of Roger J. Wertenberger (1) 10.2(a) Amendment No.1 to Employment Agreement of Roger J. Wertenberger(1) 10.4 Amended and Restated Stock Option and Stock Grant Plan (2) 10.5 Employee Stock Ownership Plan (1) 10.5(a) First Amendment to Employee Stock Ownership Plan (3) 10.5(b) Second Amendment to Employee Stock Ownership Plan (3) 10.5(c) Third Amendment to Employee Stock Ownership Plan (3) Exhibit No. Description of Exhibit - ----------- ---------------------- 10.6 Expense and Tax Sharing Agreement between Peoples Bancorp, Peoples Federal Savings Bank of DeKalb County and Peoples Financial Services, Inc., dated May 28, 1992 (3) 13 Annual Report to Stockholders 22 Subsidiaries of the Registrant 28 Definitive Proxy Statement for 1996 Annual Meeting (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. 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 24, 1996 Roger J. Wertenberger Chairman of the Board, Principal Executive Officer, and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. December 24, 1996 Roger J. Wertenberger, Chairman of the Board, Principal Executive Officer, and Director December 24, 1996 Maurice F. Winkler III, President, and Director December 24, 1996 Robert D. Ball, Director December 24, 1996 Jack L. Buttermore, Director December 24, 1996 John C. Harvey, Director December 24, 1996 Douglas D. Marsh, Director December 24, 1996 Lawrence R. Bowmar, Director December 24, 1996 John C. Thrapp, Director EXHIBIT INDEX Exhibit No. Description of Exhibit - ----------- ---------------------- 3.1 Articles of Incorporation of Peoples Bancorp (1) 3.2 Bylaws of Peoples Bancorp (1) 10.2 Employment Agreement of Roger J. Wertenberger (1) 10.2(a) Amendment No. 1 to Employment Agreement of Roger J. Wertenberger(1) 10.4 Amended and Restated Stock Option and Stock Grant Plan (2) 10.5 Employee Stock Ownership Plan (1) 10.5(a) First Amendment to Employee Stock Ownership Plan (3) 10.5(b) Second Amendment to Employee Stock Ownership Plan (3) 10.5(c) Third Amendment to Employee Stock Ownership Plan (3) 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) 11 Statement Concerning Computation of Per Share Net Income 13 Annual Report to Stockholders 22 Subsidiaries of the Registrant (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. EXHIBIT 22 SUBSIDIARIES OF THE REGISTRANT Name of Subsidiary State of Incorporation - ------------------------------- ------------------------- Peoples Federal Savings Bank of DeKalb County United States of America and its subsidiary Peoples Financial Services Inc. Indiana EX-99 2 ANNUAL REPORT TO STOCKHOLDERS 9/30/96 CONTENTS Letter to Stockholders ........................................................1 Peoples Federal Philosophy.....................................................2 Highlights and Stock Information...............................................3 Board of Directors and Executive Officers......................................4 Branch Managers and Employees..................................................5 Management Discussion and Analysis.............................................6 Selected Consolidated Financial Data..........................................13 Consolidated Financial Statements.............................................14 Independent Auditor's Report..................................................27 Statement of Management's Responsibility.....................................28 Corporate Profile...................................................Inside Cover Executive Officers of Bancorp Roger J. Wertenberger, Chairman of the Board and Chief Executive Officer Maurice F. Winkler, III, President and Chief Operating Officer Carole J. Leins Corporate Secretary Independent Auditors Geo. S. Olive & Co. LLC Certified Public Accountants 201 North Illinois Street Indianapolis, IN 46204 Legal Counsel Manatt, Phelps & Phillips 1200 New Hampshire Avenue N.W. Suite 200 Washington, D.C. 20036 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 ("the Bank"). The Bank was formed in 1925 and has grown to assets of more than $280 million. The Bank's main office is located in Auburn, Indiana, with full service offices in Avilla, Columbia City, Garrett, Kendallville and LaGrange. The Bank's financial services include mortgages, trusts, consumer banking, and individual retirement accounts. The Bank is a member of the Federal Home Loan Bank System, and its deposits are insured by the Federal Deposit Insurance Corp. CORPORATE INFORMATION Form 10-K Report A copy of the Company's 10-K, including financial statements as filed with the Securities and Exchange Commission, will be furnished without charge to stockholders of the Company upon written request to the Secretary, Peoples Bancorp, 212 West 7th Street, P.O. Box 231, Auburn, Indiana 47606. As of the close of business on September 30, 1996, the Company had approximately 1,500 stockholders. ANNUAL MEETING The annual meeting of stockholders of Peoples Bancorp will be held Wednesday, January 8, 1997, at 2:00 p.m. at Greenhurst Country Club, 1740 North Main Street, Auburn, Indiana 46706. ABOUT THE COVER On the cover, Melissa Kennedy makes her first savings deposit at Peoples with the help of her grandfather, Dorsey Fields, and the teller, Mary Ann Ketzenberger. TO OUR STOCKHOLDERS: On September 30, 1996, the last day of our fiscal year, President Clinton signed the long-awaited legislation which calls for the re-capitalization of the Savings Association Insurance Fund portion of the Federal Deposit Insurance Corporation. The immediate impact of this legislation is an assessment of $0.657 for each $100 of insured deposits as of March 31, 1995. The assessment to the Bank totaled $1,500,870, which had an after-tax effect on earnings of $893,018. Without the SAIF assessment, net income for fiscal 1996 would have been $4,105,476, or $1.75 per share, compared to $3,899,430, or $1.65 per share last year. Starting January 1, 1997, the Bank's annual insurance premium will be reduced from the $0.23 per $100 assessment base to approximately $0.065 per $100. Based on September 30, 1996, total deposits, the Bank will see its annual FDIC expense reduced from $540,000 to approximately $153,000. Since the new rates do not go into effect until January 1, 1997, the savings will effect only three quarters in fiscal 1997. In fiscal 1996, Peoples Bancorp repurchased 40,804 of its outstanding shares. The total number of shares outstanding at year end was 2,325,494. The Board of Directors intends to continue the repurchase program providing the market continues to undervalue the stock. We currently feel this repurchase program is in the best interest of the long-term stockholder. Effective October 1, 1996, Maurice F. Winkler, III was elected president and chief operating officer of Peoples Bancorp and the Bank. Mr. Winkler has been with the Bank in various capacities since 1979 and has served as a director since 1993. Roger J. Wertenberger will remain as chairman and chief executive officer of both Peoples Bancorp and the Bank. We enter our new fiscal year after what would have been a record earnings year if not for the special assessment. We are pleased that this assessment is behind the industry, and we can move forward with plans to improve and expand our services. The continued success of this organization is due to our dedicated and motivated employees, our knowledgeable and dedicated directors, and our loyal clientele and stockholders. Please note that our annual stockholders' meeting will be held at the new clubhouse at Greenhurst Country Club on January 8, 1997, at 2:00 P.M. We look forward to seeing you there as we anticipate the new year and its challenges. Roger J. Wertenberger Maurice F. Winkler, III Chairman and C.E.O. President and C.O.O. FINANCIAL HIGHLIGHTS 1996 1995 ----------- ---------- (dollars in thousands except per share data) Operating Results: Net Interest Income $10,506 $9,958 Provision for Loan Losses 9 50 Dividends Per Share 0.56 0.46 At Year End: Assets 280,012 276,608 Loans 223,899 219,576 Allowance for Loan Losses 887 912 Deposits 235,081 232,747 Stockholders' Equity 42,677 41,624 Book Value Per Share 18.35 17.62 Average Equity to Average Assets 15.37% 14.84% Common Stock Information Market Price Dividends ---------------------------- Low High Per Share --------------- ----------- ---------- Fiscal 1996 1st QTR $20.25 $22.25 $0.13 2nd QTR 18.75 20.88 0.14 3rd QTR 18.75 21.00 0.14 4th QTR 19.25 20.25 0.15 Fiscal 1995 1st QTR $19.50 $21.75 $0.11 2nd QTR 18.50 20.75 0.11 3rd QTR 17.75 20.00 0.11 4th QTR 19.50 22.50 0.13 The price of PFDC stock traded on NASDAQ on November 25, 1996 was $20.25. This page of the annual report includes four graphs showing 5 year information for total assets, net loans, stockholder's equity, and dividends per share. 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. Board of Directors Photograph of board of directors Seated left to right: Douglas D. Marsh, Lloyd M. Cline, Roger J. Wertenberger, Jesse A. (Jack) Sanders, Lawrence R. Bowmar. Standing left to right: Maurice F. Winkler III, Russell A. Spice, Jack L. Buttermore, Robert D. Ball, John C. Harvey, John C. Thrapp. Roger J. Wertenberger Jack L. Buttermore John C. Thrapp Chairman of the Board Owner of Buttermore Farms Attorney, and Chief Executive Auburn, Indiana Thrapp & Thrapp Officer of the Bank, Director since 1980 Kendallville,Indiana Auburn, Indiana Director since 1990. Director since 1954. Robert D. Ball John C. Harvey Maurice F. Winkler,III Former principal owner of the Physician, President and Chief Ball Brass and Aluminum Auburn, Indiana. Operating Officer of Foundry Inc., Auburn, Indiana Director since 1979. the Bank, Auburn, Director since 1982. Indiana, Director since 1993. Lawrence R. Bowmar Douglas D. Marsh Lloyd M. Cline Retired Vice President Sales Associate of Bassett Director Emeritus Consumer Loans the Bank Office Furniture & Supply, Director from 1974-1992 and Auburn, Indiana 1993-1996. Regional Director of Excel Jesse A.(Jack)Sanders Communications Dallas, Texas Director Emeritus Secretary and Director of Applied Innovations Chicago, Illinois Russell A. Spice Director since 1982. Director Emeritus Executive Officers of the Bank Roger J. Wertenberger Lee Ann Hines Chief Executive Officer Vice President-Trust Officer Maurice F. Winkler, III Carole J. Leins President and Chief Corporate Secretary Operating Officer Deborah K. Stanger Max E. Robart Vice President-Chief Executive Vice President Financial Officer Herma F. Fields Vice President-Savings Branch Managers and Associates Photograph of branch managers Seated left to right: Kristie Liebing, Avilla; Richard Lewton, LaGrange; Kay Smith, Garrett. Standing left to right: Dewayne Anderson, Columbia City; R. Clark Ream, Kendallville. Associates Molly Allen o Jodi Altimus o Karyn Alwine o Dewayne Anderson o Katrina Andrews o Cheryl Bherns o Lisa Boardman o Shane Bowen o Kay Brandon o Mona Brown o Jean Bush o Retha Butler o Michele Carnahan o Chris Coleman o Larry Cooney o Linda Cummins o Sharleen DeJohn o Herma Fields o Terenna Flauding o Delores Forbes o Terry Frye o Michelle Gaskill o Scott Gates o Jennifer Gose o Jay Grate o Sheryl Hanes o Bonnie Harlan o Marilee Harris o Stephanie Harris o Paula Hertsel o Lee Ann Hines o Adina Houser o Sherry Johnson o Cindy Jollief o Dixie Jones o Heather Jones o Paula Jones o Debby Kennedy o Mary Ann Ketzenberger o Rebecca Klingenberger o Lisa LaVergne o Carole Leins o Ann Leis o Richard Lewton o Kristie Liebing o Helen Lindley o Eleanor Manns o Sandra McAfee o Delara Miller o Gayle Morris o Nadia Mundroff o Josh Noel o Donna O'Dell o Jane Pepple o Deborah Pickard o Clark Ream o Lora Refner o Karen Reust o Rita Richardson o Max Robart o Linda Rodebaugh o Katherine Rohrbach o Joatta Sayles o Richard Shankle o Elizabeth Shawver o Monica Sheets o Kay Shepherd o Diane Slone o Kay Smith o Thoma Smith o Deborah Stanger o Brenda Strohm o Shannon Talley o Cheri Taylor o John Thrapp o Shalisa Troyer o Patricia Trumbull o Kathy VanAllen o Linda Walker o Jennifer Warfield o John Weigel o Roger Wertenberger o Maury Winkler o Becky Workman o Monique Zawadzke Office Locations Auburn Office--212 West 7th St., Auburn, IN 46706 Avilla Office--105 North Main St., Avilla, IN 46710 Columbia City Office--123-129 S. Main St., Columbia City, IN 46725 Garrett Office--1212 S. Randolph St., Garrett, IN 46738 Kendallville Office--116 W. Mitchell St., Kendallville, IN 46755 LaGrange Office--114-118 S. Detroit St., LaGrange, IN 46761 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 five full-service offices located in Avilla, Columbia City, Garrett, Kendallville, and LaGrange, Indiana. Peoples Federal offers a full range of retail deposit services and lending services to northeastern Indiana. The Company's primary business activity is being the holding company for Peoples Federal. Historically, the principal business of savings banks, including Peoples Federal, has consisted of attracting deposits from the general public and making loans secured by residential real estate. Peoples Federal's net earnings are contingent on the difference or spread between the interest earned on its loans and investments and the interest paid on its consumer deposits and borrowings. The Bank is also significantly affected by prevailing economic conditions, government policies, regulations, interest rates, and local competition. The Company's earnings are primarily dependent upon the earnings of the Bank. Interest income is a function of the balance of loans and investments outstanding during a given period and the yield earned on such loans and investments. Interest expense is a function of the amounts of deposits and borrowings outstanding during the same period and the rates paid on such deposits and borrowings. Peoples Federal's earnings are also affected by gains and losses on sales of loans and investments, provisions for loan losses, service charges, income from subsidiary activities, operating expenses and income taxes. On a yearly basis, Peoples Federal updates its long-term strategic plan. This plan includes, among other things, Peoples Federal's commitment to maintaining a strong capital base and continuing to improve the organization's return on assets through asset growth and controlling operating expenses. Continued careful monitoring of Peoples Federal's interest rate risk is also cited as an important goal. As a result, continued origination of short-term consumer and installment loans, prime plus equity loans, adjustable rate mortgage loans, and fixed-rate real estate loans with original terms of 15 years or less will be emphasized. The following table sets forth the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities for the years ending September 30, 1996, 1995, and 1994. September 30 ---------------------------------------- 1996 1995 1994 ------------ ------------- ------------ Weighted average interest rate on: Loans 8.33% 8.17% 7.84% Mortgage-backed securities 8.07 9.11 9.37 Securities 5.59 5.20 5.42 Other interest-earning assets 6.19 7.19 3.65 Combined 7.85 7.68 7.26 Weighted average cost of: NOW and savings deposits 2.64 2.61 2.60 Certificates of deposit 5.70 5.59 4.74 Borrowings 5.94 5.73 3.95 Combined 4.79 4.65 4.01 Interest rate spread 3.06 3.03 3.25 Net yield on weighted average interest-earning assets 3.75 3.70 3.83 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, 1996, 1995 and 1994. At September 30 ------------------------------- 1996 1995 1994 ---------- --------- -------- Weighted average interest rate on: Loans 8.02% 8.31% 8.30% Mortgage-backed securities 9.22 9.05 8.75 Securities 5.18 5.19 4.89 Other interest-earning assets 6.81 6.41 --- Combined 7.57 7.79 7.72 Weighted average cost of: NOW and savings deposits 2.80 2.70 2.71 Certificates of deposit 5.72 5.92 5.27 Borrowings --- 5.83 --- Combined 4.89 4.94 4.41 Interest rate spread 2.68 2.85 3.31 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. The following table illustrates the projected maturities and the repri- cing mechanisms of the major asset and liability categories of Peoples Federal as of September 30, 1996. 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: Consolidated Maturity and Rate" filed as part of Peoples Federal's September 30, 1996, quarterly report. The data contained in the following report is the contractual repricing information and does not contain any assumptions regarding repricing. At September 30, 1996 (Dollars in Thousands) --------------------------------------------------- More than Over Period to maturity 3 Months 3 Months 1-3 3-5 5 or repricing or Less Thru 1 Year Years Years Years Total -------- ----------- ----- ----- ------ ----- Interest earning assets: Adjustable rate loans ...... 22,590 $43,742 $3,037 $9,345 $-- $78,714 Fixed rate loans ........... 1,341 1,366 1,106 3,087 127,079 133,979 Investment securities ...... 11,822 4,142 14,801 11,626 4,949 47,340 Consumer and other loans ... 1,369 2,335 3,050 1,834 3,248 11,836 --------- -------- ------- -------- -------- ------ Total Assets Subject to Repricing 37,122 51,585 21,994 25,892 135,276 271,869 --------- -------- ------- -------- -------- ------ Liabilities Subject to Repricing Certificates of deposit .... 30,418 64,238 64,181 7,656 -- 166,493 N.O.W. and other transaction accounts 24,506 -- -- -- -- 24,506 Passbook accounts .......... 39,584 -- -- -- -- 39,584 Money market accounts ...... 4,222 -- -- -- -- 4,222 Borrowings ................. 8 -- -- -- -- 8 -------- --------- ------- ------- ---- ------ Total Liabilities Subject to Repricing 98,738 64,238 64,181 7,656 -- 234,813 -------- --------- ------- ------- ----- ------- Excess (deficiency) of rate sensitive assets over rate sensitive liabilities $(61,616) $(12,653)$(42,187)$18,236$135,276 $37,056 ========= ========= ======= ======= ======= ======= Cumulative excess (deficiency) of rate sensitive assets over rate sensitive liabilities $(61,616) $(74,269)$(116,456)$(98,220)$37,056$37,056 ========= ========= ========= ======== ====== ====== As a % of Total Assets Subject to Repricing (22.66)% (27.32)% (42.84)% (36.13)% 13.63% 13.63% A negative Interest Rate Gap leaves Peoples Federal's earnings vulnerable to periods of rising interest rates because during such periods, the interest expense paid on liabilities will generally increase more rapidly than the interest income earned on assets. Conversely, in a falling interest rate environment, the total expense paid on liabilities will generally decrease more rapidly than the interest income earned on assets. A positive Interest Rate Gap will have the opposite effect. The Company's management believes that the Bank's Interest Rate Gap in recent periods has generally been maintained within an acceptable range in view of the prevailing interest rate environment. INTEREST INCOME 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. The following table sets forth the weighted average yields earned on the Bank's assets and the weighted average interest rates paid on the Bank's liabilities. Years ended September 30 (Dollars in Thousands) ------------------------------------------------------------------------------------ 1996 1995 1994 ----------------------------- --------------------------- --------------------------- Average Interest Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate ------------- -------- ---- --------- ------ ----- ------- ----- ---- Interest-earning assets: Loans $223,861 $18,646 8.33% $218,789 $17,877 8.17% $204,644 $16,037 7.84% Mortgage-backed securities 719 58 8.07 878 80 9.11 1,131 106 9.37 Investment securities 35,936 2,010 5.59 42,383 2,204 5.20 37,191 2,014 5.42 Other interest-earning assets 16,513 1,022 6.19 7,290 524 7.19 14,595 533 3.65 --------- ------- --------- ------- -------- ------- Total interest-earning assets 277,029 21,736 7.85 269,340 20,685 7.68 257,561 18,690 7.26 ------- ------- ------- Allowance for loan losses (932) .(977) (1,030) Other assets 3,796 3,571 2,314 --------- --------- -------- Total Assets $279,893 $271,934 $258,845 ========= ========= ======== Interest-bearing liabilities: NOW and savings deposits $70,043 $1,846 2.64 $72,382 $1,892 2.61 $75,140 $1,950 2.60 Certificates of deposit 163,758 9,341 5.70 157,902 8,819 5.59 144,869 6,873 4.74 Borrowings 724 43 5.94 279 16 5.73 177 7 3.95 Total interest- --------- ------- ---------- ------- -------- -------- bearing liabilities 234,525 11,230 4.79 230,563 10,727 4.65 220,186 8,830 4.01 ------- ------- -------- Other liabilities 2,513 1,006 1,260 Stockholders' equity 42,855 40,365 37,399 ---------- ----------- --------- Total Liabilities and Stockholders' equity $279,893 $271,934 $258,845 ========== =========== ========= Net interest income/spread $10,506 3.06 $9,958 3.03 $9,860 3.25 ======= ======== ======= Net yield on interest earning assets 3.75 3.70 3.83
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. Years ended September 30, ---------------------------------------------------------------------------- 1996 vs 1995 1995 vs 1994 1994 v. 1993 ------------------------- ------------------------ ------------------------- Increase Increase Increase (Decrease) Total (Decrease) Total (Decrease) Total Due to Increase Due to Increase Due to Increase ------------ ------------- ------------- Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease) ------- ---- ---------- ------ ---- --------- ------ ---- ---------- Interest income from: Loans $417 $352 $769 $1,144 $696 $1,840 $110 $(1,236) $(1,126) Mortgage-backed securities (14) (8) (22) (26) - (26) (73) 9 (64) Investment securities (371) 177 (194) 274 (84) 190 906 (288) 618 Other interest-earning 581 (83) 498 (267) 258 (9) (55) 18 (37) ----- ---- ------ ------- ---- ------ ------ ----- ------ Total interest income 613 438 1,051 1,125 870 1,995 888 (1,497) (609) ----- ---- ------ ------- ---- ------- ------ ------- ------ Interest expense from: NOW and savings deposits (70) 24 (46) (66) 8 (58) 279 6 285 Certificates of deposit 341 181 522 651 1,296 1,947 182 (687) (505) Borrowings 26 1 27 9 - 9 (82) (15) (97) ----- ---- ----- ------- ---- ------ ----- ------ ----- Total interest expense 297 206 503 594 1,304 1,898 379 (696) (317) ----- ---- ----- ------- ----- ------ ----- ------ ----- Net interest income (expense) $316 $232 $548 $531 $(434) $97 $509 $(801) $(292) ===== ==== ===== ======= ===== ====== ===== ====== ======
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 2.12%, 1.50%, and 1.60% for fiscal years ended September 30, 1996, 1995, and 1994, respectively. However, the ratio for 1996 includes the special assessment by the FDIC to recapitalize the SAIF. Without this assessment, the ratio for 1996 would have been 1.58%. The Bank continuously seeks to reduce operating expenses. In this regard, the budget committee of the Board of Directors monitors the Bank's current operating budget on at least a quarterly basis to ascertain that expense levels remain within projected ranges and to establish competitive, as opposed to aggressive, rates for the Bank's various deposit accounts. The Bank's efforts to contain operating expense also include underwriting policies that attempt to reduce potential losses and conservative expansion of personnel. LIQUIDITY AND CAPITAL RESOURCES The standard measure of liquidity for savings banks is the ratio of cash and eligible investments to a certain percentage of net withdrawable savings and borrowings due within one year. The minimum required ratio is currently set by OTS regulation at 5%, of which 1% must be comprised of short-term investments (i.e., generally with a term of less than one year). Liquid assets consist of cash and eligible investments, which include certain United States Treasury obligations, securities of various federal agencies, certificates of deposit at insured banks, federal funds, and bankers acceptances. At September 30, 1996, the Bank had liquid assets of $43,897,745. This represents a ratio of liquid assets to total assets of 15.7%. 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 ($4,229,200 at September 30, 1996, all for residential mortgage loans), consumer loan commitments ($7,697,400 at September 30, 1996, primarily for home equity lines) and other obligations and expenditures. During the year ended September 30, 1996, there was a net decrease of $0.9 million in cash and cash equivalents. This decrease was primarily due to lower levels of cash on hand this year versus last. The loan portfolio increased approximately $4 million. The major sources of cash during the year were the increase in deposits of $2.3 million and operating activities which provided $3.8 million. During the year ended September 30, 1995, there was a net increase of $5 million in cash and cash equivalents. This increase was primarily due to maturities of investment securities of approximately $4 million which were not reinvested in securities in order to increase short term liquidity. The loan portfolio increased approximately $9 million. The major sources of cash during the year were the increase in deposits of $5.9 million and operating activities which provided $3.9 million. RESULTS OF OPERATIONS, FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1995 The Company's net interest income increased to $10,497,586 for the fiscal year ended September 30, 1996, an increase of $589,987 from 1995. This increase was a combination of higher interest income partially offset by higher interest expense. Interest on loans increased $768,543 due to a combination of higher loan volume and higher rates being charged on loans. Interest income on securities and other interest earning assets showed an increase of $282,346. These increases were partially offset by an increase in interest expense of $502,136 from 1995. This increase was also due to a combination of higher volumes of deposits and higher rates paid by the Bank on these deposits. Provision for loan losses decreased $41,234 from $50,058 to $8,824 reflecting an adjustment due to management's continuing review of its earning asset portfolio. Management's review of its loan portfolio is based on historical information, review of specific loans, and general economic conditions. Other income increased $10,864 to $640,928 from $630,064 due to increased service charges on NOW accounts. Total non-interest expense was $5,930,049, an increase of $1,783,858. The special assessment from the FDIC accounted for $1,500,870 of this increase. The balance of the increase was composed of several small increases. Deposit insurance, excluding the special assessment, increased $13,964 to $531,316 due to higher volumes of insured deposits. The effective tax rates for the Company for the years ended 1996 and 1995 were 38.3% and 39.0% respectively. RESULTS OF OPERATIONS, FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1994 The Company's net interest income remained stable at $9,907,599 for the fiscal year ended September 30, 1995, an increase of only $71,419 from 1994. This increase was a combination of higher interest income offset by higher interest expense. Interest on loans increased $1,840,037 due to a combination of higher loan volume and higher rates being charged on loans. Interest income on securities and other interest earning assets showed a slight increase of $155,197. These increases were almost entirely offset by an increase in interest expense of $1,888,591 from 1994. This increase was also due to a combination of higher volumes of deposits and higher rates paid by the Bank on these deposits. Provision for loan losses increased $26,312 from $23,746 to $50,058 reflecting the adjustment due to management's continuing review of its earning asset portfolio. Management's review of its loan portfolio is based on historical information, review of specific loans, and general economic conditions. Other income increased $23,342 to $630,064 from $606,722. This increase was due to a $12,000 gain on the sale of the Bank's education loan portfolio, and increased service charges on NOW accounts. Total non-interest expense was $4,146,191, a decrease of $113,645. This decrease was composed of several small increases and decreases. Post-retirement benefit expense for 1995 was a credit of $83,234 due to a change in actuarial methods used in the calculation of the benefit obligation. The liability for post-retirement benefit obligations has been reduced to a cumulative balance of $28,379. Occupancy expense and equipment expense both showed slight decreases due to assets becoming fully depreciated, and lower maintenance costs incurred. Deposit insurance increased $29,029 to $517,351 due to higher volumes of insured deposits. Salaries and employee benefits increased $85,740 to $2,097,596 due to normal increases in pay rates, and benefit costs. The effective tax rates for the Company for the years ended 1995 and 1994 were 39.0% and 39.2% respectively. REGULATORY CHANGES Management of the Company believes that competition has been and will continue to be influenced by federal legislation affecting the operations of all federally regulated financial institutions. On September 30, President Clinton signed the Small Business Job Protection Act ("Act") to recapitalize the SAIF portion of the FDIC and resolve the premium disparity between federally insured banks and savings institutions. Banks have had their deposit insurance premium reduced to four cents per $100 in deposits per year, while Savings Institutions are still paying 23 cents per $100 until January 1, 1997, when the premium will decrease to $.065 per $100 in deposits. The solution to this disparity was an assessment to all federally insured savings institutions of .657 basis points per $100 in deposits to build up the reserves of the Savings Association Insurance Fund (SAIF). After this assessment, the Bank Insurance Fund (BIF) and the SAIF will be merged into one fund provided the bank and thrift charter are merged into one. The above mentioned Act also gives thrift institutions relief from the recapture of pre-1987 bad debt reserves if thrifts are required to convert to banks. The Act also provides an income tax deduction for the assessment on deposits insured by the SAIF. The Act repeals the percentage-of-taxable-income method in determining thrift bad debt deductions effective for tax years beginning after December 31, 1995. Under the act, "large thrift institutions" (i.e., thrifts with assets greater than $500 million) can no longer maintain a reserve for bad debts (similar to the rules currently applied to large commercial banks). Thrifts constituting "small thrifts", such as the Bank will be able to maintain bad debt reserves utilizing the bank experience method (and will be able to continue to deduct reasonable additions to the reserve for bad debts). Furthermore, small thrifts will be allowed to maintain their base year for purposes of determining experience method computations. For small thrifts, the reserve subject to recapture is the excess of the thrift's bad debt reserve (generally the increase in the tax bad debt reserve since the 1989 tax year) as of the close of its taxable year beginning before January 1, 1996, over the amount which would have been allowed as a reserve under the experience method as of the close of the same taxable year. Like "large institutions", a "small" institution's bad debt reserve is exempt from recapture to the extent it does not exceed the institution's bad debt base year reserve. The exemption also applies to future tax years in which the institution ceases to be a "small institution". The Department of the Treasury is currently studying the effects of eliminating the current thrift charter and forcing savings institutions to convert to a federal or state bank charter. They also are considering the consolidation of regulators under this uniform charter. How these proposed changes will impact the Company can not be predicted at this time. 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. CURRENT ACCOUNTING ISSUES The Financial Accounting Standards Board (the "FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. A review is required only if events or circumstances indicate the need. In performing the review for recoverability, the entity must estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future net cash flows, (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss must be recognized. Measurement of the impairment loss for such assets that an entity expects to hold and use is based on the fair value of the asset. Fair value of assets is based on the best information available under the circumstances. After an impairment is recognized, the reduced carrying value of the asset becomes its new cost. For depreciable assets, this new cost is depreciated over the asset's remaining useful life. Restoration of previously recognized impairment losses is prohibited. Longer-lived assets and identifiable intangibles that will be disposed of must be reported at the lower of carrying amount or fair value less cost to sell, except for assets covered by APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, which will continue to be reported at the lower of cost or net realized value. The statement is effective for the Company's financial statements for the fiscal year beginning October 1, 1996. The changes required by SFAS No. 121 are not expected to have a material impact on the Company's consolidated financial position or results of operations. The FASB issued SFAS No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. SFAS No. 122 pertains to mortgage banking enterprises and financial institutions that conduct operations that are substantially similar to the primary operations of mortgage banking enterprises. SFAS No. 122 eliminates the accounting distinction between mortgage servicing rights that are acquired through loan origination activities and those acquired through purchase transactions. Under SFAS No. 122, if a mortgage banking enterprise sells or securitizes loans and retains the mortgage servicing rights, the enterprise must allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the rights) based on their relative fair values if it is practicable to estimate those fair values. If it is not practicable, the entire cost should be allocated to the mortgage loans and no cost should be allocated to the mortgage servicing rights. An entity would measure impairment of mortgage servicing rights and loans based on the excess of the carrying amount of the mortgage servicing rights portfolio over the fair value of that portfolio. SFAS No. 122 is to be applied prospectively in fiscal years beginning after December 15, 1995, to transactions in which an entity acquires mortgage servicing rights and the impairment evaluation of all capitalized mortgage servicing rights. SFAS No. 122 will not have an impact on the Company since it is not currently in the business of selling loans or purchasing servicing rights. The FASB issued SFAS No. 123 ACCOUNTING FOR STOCK- BASED COMPENSATION. This Statement establishes a fair value based method of accounting for stock-based compensation plans. The FASB encourages all entities to adopt this method of accounting for all arrangements under which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of its stock. The Statement permits a company to continue the accounting for stock-based compensation prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. If a company elects that option, proforma disclosures of net income (and EPS, if presented) are required in the footnotes as if the provisions of this Statement had been used to measure stock-based compensation. The disclosure requirements of Opinion No. 25 have been superseded by the disclosure requirements of this Statement. Once an entity adopts that fair value based method for accounting for these transactions, that election cannot be reversed. This Statement is not expected to have a material impact on the financial statements of the Company. FASB No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, deals with resolving long-standing questions about whether transactions should be accounted for as secured borrowings or as sales. The Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are considered secured borrowings. A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The transferor has surrendered control over transferred assets only if all of the following conditions are met: The transferred assets have been isolated from the transferor-put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. Each transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets, or the transferee is a qualifying special-purpose entity and the holders of beneficial interest in that entity have the right, free of conditions that constrain them from taking advantage of that right, to pledge or exchange those interests. The transferor does not maintain effective control over the transferred assets through an agreement that both entitles and obligates the transferor to repurchase or redeem them before their maturity, or an agreement that entitles the transferor in repurchase or redeem transferred assets are not readily obtainable. This Statement provides detailed measurement standards for assets and liabilities included in these transactions. It also includes implementation guidance for assessing isolation of transferred assets and for accounting for transfers of partial interest, servicing of financial assets, securitization, transfers or sales type and direct financing lease receivables, securities lending transactions, repurchase agreements, "wash sales," loan syndications and participation, risk participation in banker's acceptances, factoring arrangements, transfers of receivables with recourse and extinguishment of liabilities. The Statement supersedes FASB No. 76 EXTINGUISHMENT OF DEBT and No. 77 REPORTING BY TRANSFERORS FOR TRANSFERS OF RECEIVABLES WITH RECOURSE, and No. 122 ACCOUNTING FOR MORTGAGE SERVICING RIGHTS and amends FASB No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, in addition to clarifying or amending a number of other statements and technical bulletins. This Statement is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996 and is to be applied prospectively. Earlier or retroactive application is not permitted. This Statement is not expected to have a material impact on the financial statements of the Company. SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY September 30 ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------- Financial Condition Data: Total assets ............. $280,011,850 $276,607,771 $266,455,068 $251,116,307 $234,935,267 Loans receivable, net .... 223,011,251 218,663,928 209,330,499 201,092,662 198,804,704 Investments and other interest-earning assets 47,970,950 47,811,103 44,711,326 43,514,676 29,523,448 Deposits ................. 235,081,440 232,747,018 226,851,009 213,590,085 198,723,824 Borrowed funds ........... -- 1,000,000 -- 542,659 2,232,218 Stockholders' equity ..... 42,676,765 41,624,026 38,720,750 36,077,655 33,143,730 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Operating Data: Interest income .......... $21,736,000 $20,685,111 $18,689,877 $19,298,823 $20,072,030 Interest expense ......... 11,229,590 10,727,454 8,829,951 9,146,451 11,132,381 ----------- ----------- ----------- ------------ ---------- Net interest income ...... 10,506,410 9,957,657 9,859,926 10,152,372 8,939,649 Provision for losses on loans .... 8,824 50,058 23,746 154,343 212,657 ----------- ----------- ----------- ------------ ---------- Net interest income after provision for losses on loans .... 10,497,586 9,907,599 9,836,180 9,998,029 8,726,992 Other income ............. 640,928 630,064 606,722 508,021 524,949 Other expenses ........... 5,930,049 4,146,191 4,259,836 4,087,292 3,694,084 ----------- ----------- ----------- ----------- ----------- Income before income taxes 5,208,465 6,391,472 6,183,066 6,418,758 5,557,857 Income tax expense ....... 1,996,007 2,492,042 2,424,950 2,571,899 2,250,618 ----------- ----------- ----------- ----------- ----------- Net income ............... $ 3,212,458 $ 3,899,430 $ 3,758,116 $ 3,846,859 $ 3,307,239 =========== =========== =========== =========== =========== Net income per common share $ 1.37 $ 1.65 $ 1.59 $ 1.63 $ 1.43 =========== =========== ============ =========== =========== Dividends per common share $ 0.560 $ 0.460 $ 0.410 $ 0.370 $ 0.345 =========== =========== ============ =========== =========== Other Data: Average yield on all interest-earning assets................... 7.85% 7.68% 7.26% 7.96% 8.81% Average cost of all interest-bearing liabilities.............. 4.79 4.65 4.01 4.40 5.67 ------------ ----------- ------------ ----------- ------------ Interest rate spread ...... 3.06% 3.03% 3.25% 3.56% 3.14% ============ =========== ============ =========== ============ Number of full service banking offices 6 6 6 6 6 Return on assets (net income divided by average total assets) ... 1.15% 1.43% 1.45% 1.58% 1.44% Return on equity (net income divided by average total equity).... 7.50% 9.66% 10.06% 11.10% 10.30% Dividend payout ratio (dividends per common share divided by net income per common share)........ 41.01% 27.88% 25.79% 22.70% 24.13% Equity to assets ratio (average total equity divided by average total assets).... 15.37% 14.84% 14.43% 14.21% 13.97%
PEOPLES BANCORP AND SUBSIDIARY Consolidated Balance Sheet September 30, 1996 1995 ------------- ------------- Assets Cash and due from banks $ 3,207,845 $ 4,160,756 Interest-bearing demand deposits 7,823,900 7,800,686 ------------- ------------- Total cash and cash equivalents 11,031,745 11,961,442 Interest-bearing time deposits -- 390,256 Investment securities Available for sale 25,886,015 11,069,862 Held to maturity 14,261,035 28,940,555 ------------- ------------- Total investment securities 40,147,050 40,010,417 Loans Loans 223,898,729 219,576,196 Less: Allowance for loan losses 887,478 912,268 ------------- ------------- Net loans 223,011,251 218,663,928 Premises and equipment 1,467,764 1,606,509 Federal Home Loan Bank of Indianapolis stock, at cost 2,004,400 1,941,100 Other assets 2,349,640 2,034,119 ------------- ------------- Total assets $280,011,850 $276,607,771 ============= ============= Liabilities NOW and savings deposits $ 68,344,163 $ 71,286,904 Certificates of deposit 166,737,277 161,460,114 Short-term borrowings -- 1,000,000 Advances by borrowers for taxes and insurance 3,450 80,053 Other liabilities 2,250,195 1,156,674 ------------- ------------- Total liabilities 237,335,085 234,983,745 ------------- ------------- 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--2,325,494 and 2,362,898 shares 2,325,494 2,362,898 Additional paid-in capital 7,690,289 8,423,385 Retained earnings-substantially restricted 32,762,852 30,865,260 Net unrealized loss on securities available for sale (101,870) (27,517) ------------ ------------- Total stockholders' equity 42,676,765 41,624,026 ------------ ------------- Total liabilities and stockholders equity $280,011,850 $276,607,771 ============= ============= See notes to consolidated financial statements. PEOPLES BANCORP AND SUBSIDIARY Consolidated Statement of Income Year Ended September 30 1996 1995 1994 ------------- ------------ ------------ Interest Income Loans $18,645,609 $17,877,066 $16,037,029 Investment securities 2,068,753 2,284,206 2,119,746 Other interest and dividend income 1,021,638 523,839 533,102 -------------- ------------ ------------ 21,736,000 20,685,111 18,689,877 -------------- ------------ ------------ Interest Expense Deposits NOW and savings deposits 1,845,731 1,892,010 1,950,180 Certificates of deposit 9,340,756 8,819,245 6,872,484 Short-term borrowings 43,103 16,199 7,287 -------------- ------------ ------------ 11,229,590 10,727,454 8,829,951 -------------- ------------ ------------ Net Interest Income 10,506,410 9,957,657 9,859,926 Provision for loan losses 8,824 50,058 23,746 -------------- ------------ ------------ Net Interest Income After Provision for Loan Losses 10,497,586 9,907,599 9,836,180 -------------- ------------ ------------ Other Income Fiduciary activities 63,089 64,146 64,284 Fees and service charges 445,691 410,179 389,539 Other income 132,148 155,739 152,899 -------------- ------------ ------------ 640,928 630,064 606,722 -------------- ------------ ------------ Other Expenses Salaries and employee benefits 2,253,254 2,097,596 2,011,856 Net occupancy expenses 255,784 254,707 292,115 Equipment expenses 155,863 160,585 222,785 Data processing expense 303,577 294,283 295,973 Deposit insurance expense 2,032,186 517,351 488,322 Other expenses 929,385 821,669 948,785 -------------- ------------ ------------ Total other expenses 5,930,049 4,146,191 4,259,836 -------------- ------------ ------------ Income Before Income Tax 5,208,465 6,391,472 6,183,066 Income tax expense 1,996,007 2,492,042 2,424,950 -------------- ------------ ------------ Net Income $ 3,212.458 $ 3,899,430 $ 3,758,116 ============== ============ ============ Net Income Per Common Share $1.37 $1.65 $1.59 Average Common Shares Outstanding 2,352,450 2,362,771 2,360,152 See notes to consolidated financial statements. PEOPLES BANCORP AND SUBSIDIARY Consolidated Statement of Changes in Stockholders' Equity Common Stock Net Unrealized ---------------------- Additional Loss on Total Number Paid-in Retained Securities Stockholders' of Shares Amount Capital Earnings Available for Sale Equity ------------ -------- -------- -------- ------------------- ------------- Balances October 1, 1993 2,356,652 $2,356,652 $8,458,558 $25,262,445 -- $36,077,655 Exercise of stock options 6,600 6,600 26,400 -- -- 33,000 Net income for 1994 -- -- -- 3,758,116 -- 3,758,116 Cumulative effect of change in method of accounting for -- -- -- -- $(179,997) (179,997) securities Cash dividends ($0.41 per share) -- -- -- (968,024) -- (968,024) ------------- ---------- --------- ------------ ----------- ------------- Balances September 30, 1994 2,363,252 2,363,252 8,484,958 28,052,537 (179,997) 38,720,750 Exercise of stock options 4,000 4,000 16,000 -- -- 20,000 Repurchase of stock (4,354) (4,354) (77,573) -- (81,927) Net income for 1995 -- -- -- 3,899,430 -- 3,899,430 Net change in unrealized loss on securities available for sale -- -- -- -- 152,480 152,480 Cash dividends ($0.46 per share) -- -- -- (1,086,707) -- (1,086,707) ------------ ------------ --------- ------------ ----------- ------------ Balances September 30, 1995 2,362,898 2,362,898 8,423,385 30,865,260 (27,517) 41,624,026 Exercise of stock options 3,400 3,400 13,600 -- -- 17,000 Repurchase of stock (40,804) (40,804) (746,696) -- -- (787,500) Net income for 1996 -- -- -- 3,212,458 -- 3,212,458 Net change in unrealized loss on securities available for sale, -- -- -- -- (74,353) (74,353) Cash dividends ($0.56 per share) -- -- -- (1,314,866) -- 1,314,866) ------------ ------------ --------- ------------ ---------- ------------ Balances September 30, 1996 2,325,494 $2,325,494 $7,690,289 $32,762,852 $(101,870) $42,676,765 ============ ========== ========== ============ ========= ============
See notes to consolidated financial statements. PEOPLES BANCORP AND SUBSIDIARY Consolidated Statement of Cash Flows Year Ended September 30 1996 1995 1994 ----------- ----------- ----------- Net income $ 3,212,458 $ 3,899,430 $3,758,116 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 8,824 50,058 23,746 Depreciation and amortization 204,083 223,897 265,950 Investmentment securities amortization, net (23,481) 35,052 59,841 Amortization of deferred loan fees (368,361) (412,144) (525,455) Deferred income tax (385,000) 207,773 122,717 Change in Interest receivable (170,033) (216,202) (245,600) Interest payable (4,603) 111,051 (683) Other adjustments 1,412,211 21,547 (65,670) ------------ ----------- ---------- Net cash provided by operating activities 3,886,098 3,920,462 3,392,962 ------------ ----------- ---------- Investing Activities Net change in interest-bearing deposits 390,256 (373,826) -- Purchases of securities available for sale(22,544,576) (117,678) -- Purchases of securities held to maturity -- (245,000) (28,989,794) Proceeds from maturities and paydowns of securities held to maturity 14,688,070 1,262,258 8,850,468 Proceeds from maturities of securities available for sale 7,620,000 4,000,000 -- Net change in loans (4,098,609) (9,238,270) (7,885,222) Purchases of premises and equipment (65,338) (101,415) (49,269) Proceeds from sales of real estate owned 42,499 235,314 205,912 Purchases of Federal Home Loan Bank of Indianapolis stock (63,300) (69,900) -- ------------ ----------- ---------- Net cash used by investing activities (4,030,998) (4,648,517) (27,867,905) ------------ ----------- ----------- Financing Activities Net change in NOW and savings deposits (2,943,040) (4,773,195) 4,524,040 Certificates of deposit 5,279,885 10,560,392 8,735,211 Short-term borrowings (1,000,000) 1,000,000 (542,659) Net change in advances by borrowers for taxes and insurance (76,603) 11,898 13,805 Cash dividends (1,274,539) (1,039,489) (943,731) Exercise of stock options 17,000 20,000 33,000 Repurchase of common stock (787,500) (81,927) -- ------------ ----------- ---------- Net cash provided (used) by financing activities (784,797) 5,697,679 11,819,666 ------------ ----------- ---------- Net Change in Cash and Cash Equivalents (929,697) 4,969,624 (12,655,277) Cash and Cash Equivalents, Beginning of Year 11,961,442 6,991,818 19,647,095 ------------ ----------- ----------- Cash and Cash Equivalents, End of Year $11,031,745 $11,961,442 $6,991,818 ============ =========== =========== Additional Cash Flows and Supplementary Information: Interest paid $11,231,922 $10,649,528 $8,828,279 Income tax paid 2,315,550 2,117,721 2,305,700 See notes to consolidated financial statements. 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 and the Federal Deposit Insurance Corporation. The Bank generates mortgage and consumer loans and receives deposits from customers located primarily in DeKalb County, Indiana, and surrounding counties. The Bank's loans are generally secured by specific items of collateral including real property and consumer assets. CONSOLIDATION--The consolidated financial statements include the accounts of the Company, the Bank and Peoples Financial after elimination of all material intercompany transactions and accounts. INVESTMENT SECURITIES--The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115 Accounting for Certain Investments in Debt and Equity Securities, on September 30, 1994. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity and marketable equity securities are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately, net of tax, in stockholders' equity. The Company holds no securities for trading. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. PEOPLES BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements LOANS are carried at the principal amount outstanding. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans. ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES are maintained to absorb loan and real estate losses based on management's continuing review and evaluation of the loan and real estate portfolios and its judgment as to the impact of economic conditions on the portfolios. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolios, the current condition and amount of loans and foreclosed real estate outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses and the valuation of real estate is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that, as of September 30, 1996, the allowance for loan losses and carrying value of foreclosed real estate are adequate based on information currently available. A worsening or protracted economic decline in the area within which the Bank operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation. Depreciation is computed using accelerated and straight-line methods based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. FEDERAL HOME LOAN BANK stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. FORECLOSED REAL ESTATE is carried at the lower of cost or fair value less estimated selling costs. When foreclosed real estate is acquired, any required adjustment is charged to the allowance for loan losses. All subsequent activity is included in current operations. PENSION PLAN COSTS are based on actuarial computations and charged to current operations. The funding policy is to pay at least the minimum amounts required by ERISA. INCOME TAX in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with its subsidiary. EARNINGS PER SHARE have been computed based upon the weighted average common shares outstanding during each year. The dilutive effect on earnings per share from unissued stock option shares is not material. RECLASSIFICATIONS of certain amounts in the 1995 consolidated financial statements have been made to conform to the 1996 presentation. 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, 1996, was $622,000. NOTE 3--INVESTMENT SECURITIES September 30, 1996 ---------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ------- --------- ------------ Available for sale Federal agencies $20,710,594 $36,838 $156,982 $20,590,450 State and municipal obligations 5,346,630 6,981 58,046 5,295,565 ----------- ------- -------- ------------ Total available for sale 26,057,224 43,819 215,028 25,886,015 ----------- ------- -------- ------------ Held to maturity Federal agencies 13,175,118 424 156,862 13,018,680 State and municipal obligations 455,414 12,210 -- 467,624 Mortgage-backed securities 630,503 32,809 479 662,833 ----------- ------- -------- ------------ Total held to maturity 14,261,035 45,443 157,341 14,149,137 ----------- ------- -------- ------------ Total investment securities $40,318,259 $89,262 $372,369 $40,035,152 =========== ======= ======== ============ September 30, 1995 ---------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------- -------- ----------- Available for sale Federal agencies $ 6,992,316 $22,371 $ 48,125 $6,966,562 State and municipal obligations 4,125,401 7,378 29,479 4,103,300 ------------ ------- -------- ----------- Total available for sale 11,117,717 29,749 77,604 11,069,862 ------------ ------- -------- ----------- Held to maturity Federal agencies 26,987,247 3,750 341,005 26,649,992 Corporate obligations 715,374 -- 15,044 700,330 State and municipal obligations 443,606 931 -- 444,537 Mortgage-backed securities 794,328 39,002 625 832,708 ------------ ------- -------- ----------- Total held to maturity 28,940,555 43,683 356,674 28,627,564 ------------ ------- -------- ----------- Total investment securities $40,058,272 $73,432 $434,278 $39,697,426 ============ ======= ======= ============ 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, 1996, 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. Held to Maturity Available for Sale ------------------------- ------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ----------- ----------- ----------- ----------- Within one year $ 5,209,172 $ 5,203,994 $ 2,932,475 $ 2,931,213 One to five years 8,130,946 7,979,686 18,455,266 18,295,759 Five to ten years 290,414 302,624 4,328,731 4,320,827 After ten years -- -- 340,752 338,216 ----------- ----------- ----------- ----------- 13,630,532 13,486,304 26,057,224 25,886,015 Mortgage-backed securities 630,503 662,833 -- -- ----------- ----------- ----------- ----------- $14,261,035 $14,149,137 $26,057,224 $25,886,015 =========== =========== =========== =========== Securities with a carrying value of $1,995,695 were pledged at September 30, 1995, to secure Federal Home Loan Bank advances and for other purposes as permitted or required by law. There were no securities pledged at September 30, 1996. There were no sales of securities during the year ended September 30, 1996, 1995, or 1994. NOTE 4--LOANS AND ALLOWANCE September 30 1996 1995 ------------ ------------ Real estate loans $210,541,364 $205,047,331 Construction loans 5,197,237 5,444,498 Individuals' loans for household and other personal expenditures 11,836,185 12,237,615 ------------ ------------ 227,574,786 222,729,444 ------------ ------------ Less: Undisbursed portion of loans 2,717,235 2,236,763 Deferred loan fees and discounts 958,822 916,485 ------------ ------------ 3,676,057 3,153,248 ------------ ------------ Total loans $223,898,729 $219,576,196 ============ ============ Year Ended September 30 1996 1995 1994 --------- ---------- ----------- Allowance for loan losses Balances, October 1 $912,268 $1,034,439 $1,025,000 Provision for losses 8,824 50,058 23,746 Recoveries on loans 21,715 27,851 20,980 Loans charged off (55,329) (200,080) (35,287) --------- ----------- ----------- Balances, September 30 $887,478 $ 912,268 $1,034,439 ========= =========== =========== PEOPLES BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements The Company adopted Statement of Financial Accounting Standards (SFAS) No. 114 and No. 118 ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN AND ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN--INCOME RECOGNITION AND DISCLOSURES on October 1, 1995. The adoption of SFAS Nos. 114 and 118 did not have a material impact on the Company's financial position or results of operations. NOTE 5--PREMISES AND EQUIPMENT September 30 1996 1995 ---------- ---------- Land $ 356,238 $ 356,238 Buildings 2,561,159 2,555,039 Equipment 1,204,628 1,145,411 ----------- ---------- Total cost 4,122,025 4,056,688 Accumulated depreciation (2,654,261) (2,450,179) ----------- ----------- Net $1,467,764 $1,606,509 =========== =========== NOTE 6--OTHER ASSETS AND OTHER LIABILITIES September 30 1996 1995 ------------ ---------- Other assets Interest receivable Loans $1,234,223 $1,143,651 Investment securities 675,603 596,142 Foreclosed real estate 110,297 46,596 Deferred income tax asset 100,545 -- Prepaid expenses and other 228,972 247,730 ---------- ---------- $2,349,640 $2,034,119 ========== ========== Other liabilities Dividends payable on common stock $ 347,709 $ 307,177 Deferred income tax liability -- 314,926 Accrued deposit insurance premium 1,500,872 -- Accrued expenses 202,470 172,729 Other 199,144 361,842 ---------- ---------- $2,250,195 $1,156,674 ========== ========== NOTE 7--DEPOSITS September 30 1996 1995 ------------ ------------ Demand deposits $ 28,728,351 $ 30,919,276 Savings deposits 39,583,982 40,336,097 Certificates and other time deposits of $100,000 or more 16,664,414 14,008,083 Other certificates and time deposits 149,828,480 147,204,926 Interest payable 276,213 278,636 ------------ ------------ $235,081,440 $232,747,018 ============ ============ Certificates maturing in years ending September 30: 1997 $ 94,820,497 1998 52,497,216 1999 11,535,760 2000 4,901,576 2001 2,642,845 Thereafter 95,000 ------------ $166,492,894 ============ NOTE 8--SHORT-TERM BORROWINGS The Company's advances from the FHLB totaled $1,000,000 at September 30, 1995. Such advances matured in June, 1996. There were no advances from the FHLB outstanding at September 30, 1996. PEOPLES BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements NOTE 9--INCOME TAX Year Ended September 30 1996 1995 1994 ----------- ----------- ---------- Income tax expense: Currently payable: Federal $1,809,917 $1,731,032 $1,799,938 State 571,090 553,237 502,295 Deferred: Federal (270,000) 186,114 93,562 State (115,000) 21,659 29,155 ----------- ----------- ----------- Total income tax expense $1,996,007 $2,492,042 $2,424,950 =========== =========== =========== Reconciliation of federal statutory to actual tax expense: Federal statutory income tax at 34% $1,770,878 $2,173,100 $2,102,242 Effect of state income taxes 301,019 379,431 350,757 Other, net (75,890) (60,489) (28,049) ----------- ----------- ----------- Actual tax expense $1,996,007 $2,492,042 $2,424,950 =========== =========== =========== A cumulative deferred tax asset and liability of $100,545 and $314,926 is included in other assets and other liabilities at September 30, 1996, and 1995, respectively. The components of the asset and liability are as follows: September 30 1996 1995 ---------- ---------- Differences in accounting for accrued expenses $594,000 $ -- Differences in accounting for loan fees 231,457 365,304 Differences in depreciation methods (24,389) (9,330) Differences in accounting for loan and real estate losses 351,441 417,915 Tax bad debt reserves in excess of base year (975,221) (1,037,545) FHLB of Indianapolis stock dividend (78,527) (78,527) Differences in accounting for pensions and other employee benefits 13,469 11,381 Net unrealized losses on securities available for sale 69,340 20,338 Other (81,025) (4,462) ---------- ----------- $100,545 $ (314,926) ========== =========== Assets $1,259,707 $ 814,938 Liabilities (1,159,162) (1,129,864) ----------- ----------- $ 100,545 $ (314,926) =========== =========== PEOPLES BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements Retained earnings at September 30, 1996, 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, 1996. NOTE 10--COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit, which are not included in the accompanying consolidated financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheet. Financial instruments whose contract amount represents credit risk at September 30 were $11,926,000 for 1996 and $13,569,350 for 1995 consisting entirely of committments to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include residential real estate, income-producing commercial properties, or other assets of the borrower. The Bank has employment agreements with two officers which include provisions for payment to them of three years' salary in the event of their termination in connection with any change in ownership or control of the Company, other than by agreement. The agreements have terms of three years which may be extended annually for successive periods of one year. The Company and subsidiary are also subject to possible claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate determination of such possible claims or lawsuits will not have a material adverse effect on the consolidated financial position of the Company. PEOPLES BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements NOTE 11--RESTRICTION ON DIVIDENDS The Company is not subject to any regulatory restrictions on the payment of dividends to its stockholders. The Office of Thrift Supervision ("OTS") regulations provide that a savings association which meets fully phased-in capital requirements and is subject only to "normal supervision" may pay out, as a dividend, 100 percent of net income to date over the calendar year and 50 percent of surplus capital existing at the beginning of the calendar year without supervisory approval but with 30 days prior notice to the OTS. Any additional amount of capital distributions would require prior regulatory approval. At September 30, 1996, total stockholders' equity of the Bank was $33,123,537 of which approximately $13,778,000 was available for the payment of dividends to the Company. In 1995, the Company's board of directors approved the repurchase of up to 100,000 of the Company's outstanding shares of common stock ("1995 Plan"). Such purchases will be made subject to market conditions in the open market or block transactions. At September 30, 1996, the Company has repurchased 44,302 shares of its outstanding stock under the 1995 Plan. NOTE 12--REGULATORY CAPITAL The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate actions by the regulatory agencies that, if undertaken, could have a material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. At September 30, 1996, the management of the Company believes that it meets all capital adequacy requirements to which it is subject. The most recent notification from the regulatory agency categorized the Company and Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since that notification that management believes have changed this categorization. PEOPLES BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements The Bank's actual and required capital amounts and ratios are as follows: September 30, 1996 ------------------------------------------------- Required for Adequate To Be Well Actual Capital(1) Capitalized(1) -------------- ------------------- -------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total risk-based capital(1)(to risk-weighted assets) $34,054 25.63% $10,630 8.0% $13,288 10.0% Core capital(1)(to adjusted tangible assets) 33,186 12.09% 8,236 3.0% 16,472 6.0% Core capital(1)(to adjusted total assets) 33,186 12.09% 8,236 3.0% 13,727 5.0% (1)As defined by regulatory agencies The Bank's tangible capital at September 30, 1996, was $33,186,000, which amount was 12.09 percent of tangible assets and exceeded the required ratio of 1.5 percent. NOTE 13--EMPLOYEE BENEFIT PLANS The Bank is a participant in a pension fund known as the Financial Institutions Retirement Fund ("FIRF"). This plan is a multi-employer plan; separate actuarial valuations are not made with respect to each participating employer. According to FIRF administrators, the market value of the fund's assets exceeded the value of vested benefits in the aggregate as of June 30, 1996, the date of the latest actuarial valuation. Pension expense was $153,848, $114,070, and $96,646 for 1996, 1995 and 1994. This plan provides pension benefits for substantially all of the Bank's employees. The Company has a stock option plan in which 108,000 common shares were reserved at September 30, 1996, for issuance under the plan. The option exercise price will not be less than the fair market value of the common stock on the date of the grant of the option. The date on which the options are first exercisable is determined by the Board of Directors, and the terms of the stock options will not exceed ten years from the date of grant. The weighted option price at September 30, 1996 and 1995 and for those options exercised in 1996, 1995, and 1994, was $5.00 per share. September 30 1996 1995 1994 ------- ------- ------- Shares under option after restatement for stock split: Outstanding at beginning of year 3,400 7,400 14,000 Exercised during the year 3,400 4,000 6,600 Outstanding and exercisable at end of year -- 3,400 7,400 The Company has established an employee stock ownership plan ("ESOP") covering substantially all employees of the Company. The ESOP is designed to enable eligible employees to acquire Company common stock. The cost of the ESOP is borne by the Company through annual contributions to an employee stock ownership trust ("Trust") in amounts determined annually by the Board of Directors. Shares of common stock acquired by the ESOP are to be allocated to each participating employee and held until the employee's termination, retirement or death. At September 30, 1996 and 1995, the Trust owned 33,041 and 33,781 shares of the Company's common stock, all of which shares have been allocated to employee accounts. Employees may vote allocated shares, and the trustees may vote unallocated shares. Plan contributions charged to expense totaled $73,940, $72,824, and $68,762 for 1996, 1995, and 1994, respectively. PEOPLES BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements NOTE 14--FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents--The fair value of cash and cash equivalents approximates carrying value. Interest-bearing Deposits--The fair value of interest-bearing time deposits approximates carrying value. Securities and Mortgage-backed Securities--Fair values are based on quoted market prices. Loans--For both short-term loans and variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans, including one-to-four family residential, are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. 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 is estimated using a discounted cash flow calculation based on current rates for similar borrowings. Advances by Borrowers for Taxes and Insurance--The fair value of advances by borrowers for taxes and insurance approximates carrying value. Off-Balance Sheet Commitments--Commitments include commitments to purchase and originate mortgage loans, commitments to sell mortgage loans, and standby letters of credit and are generally of a short-term nature. The fair value of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. PEOPLES BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements The estimated fair values of the Company's financial instruments are as follows: September 30 1996 1995 ------------------------ ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ------------ ----------- Assets Cash and cash equivalents $11,031,745 $11,031,745 $11,961,442 $11,961,442 Interest-bearing deposits -- -- 390,256 390,256 Investment securities available for sale 25,886,015 25,886,015 11,069,862 11,069,862 Investment securities held to maturity 14,261,035 14,149,137 28,940,555 28,627,564 Loans 227,574,786 228,052,351 222,729,444 223,625,140 Interest receivable 1,909,826 1,909,826 1,739,793 1,739,793 Stock in FHLB 2,004,400 2,004,400 1,941,100 1,941,100 Liabilities Deposits 235,081,440 235,195,843 232,468,382 232,544,330 Short-term borrowings -- -- 1,000,000 998,906 Interest payable 276,304 276,304 280,908 280,908 Advances by borrowers for taxes and insurance 3,450 3,450 80,053 80,053 Off-balance sheet assets (liabilities) Commitments to extend credit -- -- -- -- Standby letters of credit -- -- -- -- PEOPLES BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Average Net Provision For Common Earnings Quarter Interest Interest Interest Loan Net Shares Per Ending Income Expense Income Losses Income Outstanding Share - ------- ---------- ----------- ----------- -------- ------- ------------ ------ Dec 95 $ 5,426,782 $ 2,855,748 $ 2,571,034 $(36,502) $1,031,209 2,362,898 $0.44 Mar 96 5,511,194 2,800,922 2,710,272 34,739 1,071,819 2,365,398 0.45 Jun 96 5,428,628 2,768,770 2,659,858 17,925 1,027,158 2,348,071 0.44 Sep 96 5,369,396 2,804,150 2,565,246 (7,338) 82,272 2,333,485 0.04 ----------- ----------- ----------- --------- ---------- $21,736,000 $11,229,590 $10,506,410 8,824 $3,212,458 =========== =========== =========== ========= ========== Dec 94 $ 5,029,904 $ 2,517,810 $ 2,512,094 (20,822) $1,032,181 2,363,252 $0.44 Mar 95 5,119,225 2,620,627 2,498,598 6,405 968,393 2,363,231 0.41 Jun 95 5,223,321 2,751,494 2,471,827 (118,912) 997,243 2,362,228 0.42 Sep 95 5,312,661 2,837,523 2,475,138 183,387 901,613 2,362,376 0.38 ----------- ----------- ----------- --------- ---------- $20,685,111 $10,727,454 $ 9,957,657 $ 50,058 $3,899,430 =========== =========== =========== ========= ========== NOTE 16--CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company. Condensed Balance Sheet September 30 1996 1995 ------------ ------------ Assets Cash $ -- $ 80,172 Securities purchased from subsidiary under agreement to resell 4,278,290 3,761,223 Investment in subsidiary 33,123,537 33,669,948 Securities available for sale 5,295,565 4,103,300 Securities held to maturity 245,000 245,000 Interest receivable 75,925 62,167 Other assets 6,157 9,393 ----------- ------------ Total assets $43,024,474 $41,931,203 ------------ ------------ Liabilities--dividends payable on common stock $ 347,709 $ 307,177 ------------ ------------ Stockholders' equity Common stock 2,325,494 2,362,898 Additional paid-in capital 7,690,289 8,423,385 Retained earnings 32,762,852 30,865,260 Net unrealized loss on securities available for sale (101,870) (27,517) ------------ ------------ 42,676,765 41,624,026 ------------ ------------ Total liabilities and stockholders' equity $43,024,474 $41,931,203 ============ ============ PEOPLES BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements Condensed Statement of Income September 30 1996 1995 ------------ ----------- Income Dividends from subsidiary $3,500,000 $2,500,000 Interest on investments 296,353 236,294 Expenses (69,211) (72,555) ------------ ----------- Income before equity in undistributed income of subsidiary 3,727,142 2,663,739 Equity in undistributed income of subsidiary (489,734) 1,249,891 ------------ ----------- Income before income tax 3,237,408 3,913,630 Income tax expense 24,950 14,200 ------------ ----------- Net income $3,212,458 $3,899,430 ============ =========== Condensed Statement of Cash Flows September 30 1996 1995 ------------ ------------ Net cash provided by operating activities $3,738,114 $2,735,186 ------------ ------------ Cash flows from investing activities: Purchases of securities available for sale (2,876,180) (150,080) Purchase of securities held to maturity --- (245,000) Proceeds from maturities of securities held to maturity 1,620,000 --- Net change in securities purchased under agreement to resell (517,067) (1,261,223) ------------ ------------ Net cash used by investing activities (1,773,247) (1,656,303) ------------ ------------ Cash flows from financing activities: Stock options exercised 17,000 20,000 Stock repurchased (787,500) (81,927) Cash dividends (1,274,539) (1,039,489) ------------ ------------ Net cash used by financing activities (2,045,039) (1,101,416) ------------ ------------ Net change in cash and cash equivalents (80,172) (22,533) Cash and cash equivalents at beginning of year 80,172 102,705 ------------ ------------- Cash and cash equivalents at end of year $ -- $ 80,172 ============ ============= 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, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. As discussed in the notes to the financial statements, the Company changed its method of accounting for certain securities on September 30, 1994. Indianapolis, Indiana October 23, 1996 STATEMENT OF MANAGEMENT'S RESPONSIBILITY The management of Peoples Bancorp is responsible for the preparation and integrity of the consolidated financial statements and all other information presented in this annual report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and therefore, include estimates based on management's judgment and estimates. Management maintains a system of internal controls to meet its responsibility for reliable financial information and the protection of assets. This system includes proper segregation of duties, the establishment of appropriate policies and procedures, and careful selection, training and supervision of qualified personnel. In addition, both independent auditors and management periodically review the system of internal controls and report their findings to the Audit Committee of the Board of Directors. The Committee is composed of non-management directors and meets periodically with the independent auditors and management to review their respective activities and responsibilities. Each has free and separate access to the Committee to discuss accounting, financial reporting, internal control and audit matters. Management recognized that the cost of a system of internal controls should not exceed the benefits derived and that there are inherent limitations to be considered in the potential effectiveness of any system. However, management believes that the Company's system of internal controls provides reasonable assurance that financial information is reliable and that assets and customer deposits are protected. Roger J. Wertenberger Chief Executive Officer Maurice F. Winkler III President Deborah K. Stanger Chief Financial Officer EX-27 3 FDS-YEAR ENDING 9/30/96 FOR PEOPLES BANCORP
9 1000 YEAR SEP-30-1996 SEP-30-1996 3208 7824 0 0 25886 14261 14149 223899 887 280012 235081 0 2254 0 0 0 42677 0 280012 18646 2069 1021 21736 11186 11230 10506 9 0 5930 5208 5208 0 0 3212 1.37 1.37 3.75 814 88 110 266 912 55 22 887 887 0 868
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