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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
For Annual and Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
[X] Annual Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of
1934 For the fiscal year ended
September 30, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ________ to ________
Commission File Number 0-18991
PEOPLES BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1811284
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
212 West 7th Street, Auburn, Indiana 46706
------------------------------------ ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (260) 925-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Aggregate market value of voting stock held by non-affiliates of the registrant,
as of March 31, 2004: $71,434,197.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of December 14, 2004:
3,366,019 shares of Common Stock, par value $1.00 per share
Documents Incorporated by Reference:
Portions of the definitive Proxy Statement (Part III) and the Annual Report
to Stockholders for the year ended September 30, 2004 (Parts II and IV).
PART I
Peoples Bancorp (the "Company") may from time to time make written or oral
"forward-looking statements", including statements contained in the Company's
filings with the Securities and Exchange Commission (including this annual
report on Form 10-K and the exhibits thereto), in its reports to stockholders
and in other communications by the Company, which are made in good faith by the
Company pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance and other actual results to
differ materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward-looking statements: the strength of the
United States economy in general and the strength of the local economies in
which the Company conducts operations; the effects of, and changes in, trade,
monetary and fiscal policies and laws, including interest rate policies of the
board of governors of the federal reserve system, inflation, interest rates,
market and monetary fluctuations; changes in real estate values and the real
estate market; loss of deposits and loan demand to other financial institutions;
the timely development of and acceptance of new products and services of the
Company and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors' products
and services; the willingness of users to substitute competitors' products and
services for the Company's products and services; the success of the Company in
gaining regulatory approval of its products and services, when required; the
impact of changes in financial services laws and regulations (including laws
concerning taxes, banking, securities and insurance); technological changes;
acquisitions; changes in consumer spending and saving habits; increases in
compensation and employee expenses; unanticipated results in pending legal
proceedings; other factors described in "Investment Considerations" in Item 1;
and the success of the Company in managing the risks resulting from these
factors.
The Company cautions that the listed factors are not exclusive. The Company
does not undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time or on behalf of the Company.
Item 1. Business
INVESTMENT CONSIDERATIONS
In analyzing whether to make or to continue an investment in the Company,
investors should consider, among other factors, the following:
Economic Conditions and Related Uncertainties. Commercial banking is
affected, directly and indirectly, by local, domestic, and international
economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values, international conflicts
and other factors beyond the Company's control may adversely affect the
potential profitability of the Company. Any future rises in interest rates,
while increasing the income yield on the Company's earnings assets, may
adversely affect loan demand and the cost of funds and, consequently, the
profitability of the Company. Any future decreases in interest rates may
adversely affect the Company's profitability because such decreases may reduce
the amounts that the Company may earn on its assets. Economic downturns could
result in the delinquency of outstanding loans. Management does not expect any
one particular factor to materially affect the Company's results of operations.
However, downtrends in several areas, including real estate, construction and
consumer spending, could have a material adverse impact on the Company's ability
to remain profitable.
Effect of Interest Rates on the Banks and the Company. The operations of
financial institutions such as the Company are dependent to a large degree on
net interest income, which is the difference between interest income from loans
2
and investments and interest expense on deposits and borrowings. An
institution's net interest income is significantly affected by market rates of
interest that in turn are affected by prevailing economic conditions, by the
fiscal and monetary policies of the federal government and by the policies of
various regulatory agencies. Like all financial institutions, the Company's
balance sheet is affected by fluctuations in interest rates. Volatility in
interest rates can also result in disintermediation, which is the flow of funds
away from financial institutions into direct investments, such as US Government
and corporate securities and other investment vehicles, including mutual funds,
which, because of the absence of federal insurance premiums and reserve
requirements, generally pay higher rates of return than financial institutions.
See "Item 7: Management's Discussion of Financial Condition and Results of
Operations" and "Item 7A: Quantitative and Qualitative Disclosure about Market
Risk".
Federal and State Government Regulations. The operations of the Company and
the Banks are heavily regulated and will be affected by present and future
legislation and by the policies established from time to time by various federal
and state regulatory authorities. In particular, the monetary policies of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past, and are expected to continue to do so in the future. Among
the instruments of monetary policy used by the Federal Reserve Board to
implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank deposits. It is not
possible to predict what changes, if any, will be made to the monetary polices
of the Federal Reserve Board or to existing federal and state legislation or the
effect that such changes may have on the future business and earnings prospects
of the Company.
During the past several years, significant legislative attention has been
focused on the regulation and deregulation of the financial services industry.
Non-bank financial institutions, such as securities brokerage firms, insurance
companies and money market funds, have been permitted to engage in activities
that compete directly with traditional bank business.
Competition. The Company faces strong competition from other banks, savings
institutions and other financial institutions that have branch offices or
otherwise operate in the Company's market area, as well as many other companies
now offering a range of financial services. Many of these competitors have
substantially greater financial resources and larger branch systems than the
Company. In addition, many of the Banks' competitors have higher legal lending
limits than do the Banks. Particularly intense competition exists for sources of
funds including savings and retail time deposits and for loans, deposits and
other services that the Banks offer. See "Item 1: Business - Competition."
As a result of the repeal of the Glass Steagall Act, which separated the
commercial and investment banking industries, all banking organizations face an
increase in competition. See "Item 1: Business - Supervision and Regulation -
Financial Services Modernization Act".
Allowance for Loan Losses. The Company has established an allowance for
loan losses which management believes to be adequate to offset probable losses
on the Company's existing loans. However, there is no precise method of
estimating loan losses. There can be no assurance that any future declines in
real estate market conditions, general economic conditions or changes in
regulatory policies will not require the Company to increase its allowance for
loan losses.
An Economic Slowdown In Northeastern Indiana And Southwestern Michigan
Could Hurt Our Business. We focus our business in northeastern Indiana and
southwestern Michigan in DeKalb, Whitley, Noble, LaGrange, and the eastern
portion of Elkhart counties, Indiana and St. Joseph, Cass, and the southwest
portion of Kalamazoo counties, Michigan. [verify correct counties]. An economic
slowdown in this area could have the following consequences, any of which could
hurt our business:
Loan delinquencies may increase;
Problem assets and foreclosures may increase;
Demand for the products and services of Peoples Federal or First Savings
may decline; and
Collateral for loans made by the Banks, especially real estate, may decline
in value, in turn reducing customers' borrowing power, and reducing the
value of assets and collateral associated with existing loans of the Banks.
3
Dividends. While the Board of Directors expects to continue its policy of
regular quarterly dividend payments, this dividend policy will be reviewed
periodically in light of future earnings, regulatory restrictions and other
considerations. No assurance can be given, therefore, that cash dividends on
common stock will be paid in the future. See page 2 of the Company's Annual
Report to Stockholders for the year ended September 30, 2004 and Note 14 of the
Notes to Consolidated Financial Company's Annual Report to Stockholders for the
year ended September 30, 2004.
Market for Common Stock. Although the Company's Common Stock is listed on
the Nasdaq National Market System, there has been only limited trading in the
Common Stock. There can be no assurance that a regular and active market for the
Common Stock will develop in the foreseeable future. See "Item 5: Market for the
Registrant's Common Stock and Related Stockholder Matters." Investors in the
shares of Common Stock must, therefore, be prepared to assume the risk of their
investment for an indefinite period of time.
"Anti-Takeover" and "Anti-Greenmail" Provisions and Management
Implications. The Articles of the Company presently contain certain provisions
which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that
such provisions may deter, discourage or make more difficult the assumption of
control of the Company by another corporation or person through a tender offer,
merger, proxy contest or similar transaction or series of transactions. The
overall effects of the "anti-takeover" and "anti-greenmail" provisions may be to
discourage, make more costly or more difficult, or prevent a future takeover
offer, prevent shareholders from receiving a premium for their securities in a
takeover offer, and enhance the possibility that a future bidder for control of
the Company will be required to act through arms-length negotiation with the
Company's Board of Directors. Copies of the Articles of the Company are on file
with the Securities and Exchange Commission and the Indiana Secretary of State.
Stock Not an Insured Deposit. Investments in the shares of the Company's
Common Stock are not deposits insured against loss by the FDIC or any other
entity.
General
The Company is an Indiana corporation organized in October 1990 to become
the thrift holding company for Peoples Federal Savings Bank of DeKalb County
("Peoples Federal"). The Company is the sole shareholder of Peoples Federal.
Peoples Federal conducts business from its main office in Auburn and its eight
full-service offices located in Avilla, Columbia City, Garrett, Kendallville,
LaGrange, Topeka and Waterloo, Indiana. Peoples Federal offers a full range of
retail deposit services and lending services to northeastern Indiana.
Peoples Federal 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, it has been a member of the Federal Home Loan Bank System
("FHLB System") and the Federal Home Loan Bank of Indianapolis ("FHLB of
Indianapolis"). Its savings accounts are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF"), as administered by the Federal
Deposit Insurance Corporation (the "FDIC").
On February 29, 2000 a merger was completed with Three Rivers Financial
Corp. and its subsidiary First Savings Bank ("First Savings") of Three Rivers,
Michigan. The Company became the sole shareholder of First Savings. First
Savings conducts business from its main office in Three Rivers, Michigan, and
its five full service offices in Union and Schoolcraft, Michigan, and Howe and
Middlebury, Indiana.
The Company has no other business activity other than being the holding
company for Peoples Federal and First Savings (collectively the "Banks") and is
subject to regulation by the OTS. The Company's securities are registered with
the Securities and Exchange Commission ("SEC") pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As such, the Company is
subject to the information, proxy solicitation, insider trading, and other
restrictions and requirements of the Exchange Act.
4
In February, 2003, the Board authorized a two year stock repurchase
program. Purchases of up to 300,000 shares of the Company's common stock may be
made in open market or in privately negotiated transactions. As of September 30,
2004, the Company had repurchased 101,205 shares.
On a yearly basis, the Company updates its long-term strategic plan. This
plan includes, among other things, the Company'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 the Banks' interest rate risk is also cited as an
important goal. As a result, the Company expects to emphasize 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.
The Banks offer a wide range of consumer and commercial financial services.
These services include: consumer demand deposit accounts; NOW accounts; regular
and term savings accounts and savings certificates; residential and commercial
real estate loans; and secured and unsecured consumer loans. During 1999,
Peoples Federal added agricultural and commercial lending officers to its staff.
Since these types of loans pose a higher credit risk than traditional mortgage
lending, they typically offer higher yields and are for shorter terms. It is
expected that these loans will assist Peoples Federal in managing its interest
rate risk, and increase its overall profitability. The Banks provide these
services through a branch network comprised of fifteen full-service banking
offices. They also provide credit card services, as well as enhancements to its
loan and deposit products designed to provide customers with added conveniences.
The Company has historically concentrated its business activities in
northeastern Indiana. The purchase of First Savings has extended this area to
southern Michigan. The Company's current strategy is to maintain its branch
office network as well as remain alert to new opportunities.
Over the years, the Company has broadened its product line and enhanced its
operations in order to accommodate its growth and to meet the vigorous
competition from various financial institutions and other companies or firms
that engage in similar activities.
The Thrift Industry
Thrift institutions are financial intermediaries which historically have
accepted savings deposits from the general public and, to a lesser extent,
borrowed funds from outside sources and invested those deposits and funds
primarily in loans secured by first mortgage liens on residential and other
types of real estate. Such institutions may also invest their funds in various
types of short and long-term securities. The deposits of thrift institutions are
insured by the SAIF as administered by the FDIC, and these institutions are
subject to extensive regulations. These regulations govern, among other things,
the lending and other investment powers of thrift institutions, including the
terms of mortgage instruments these institutions are permitted to utilize, the
types of deposits they are permitted to accept, and reserve requirements.
The operations of thrift institutions, including those of the Banks, 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 such as the Banks are influenced
by a number of factors including interest rates on competing investments and
levels of personal income.
Earnings
The Banks' earnings depend primarily on the difference between income from
interest-earning assets such as loans and investments, and interest paid on
interest-bearing liabilities such as deposits and borrowings. The Banks
typically engage 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.
5
Generally, rapidly rising interest rates cause the cost of interest-bearing
liabilities to increase more rapidly than yields on interest-earning assets,
thereby adversely affecting the earnings of many thrift institutions. While the
industry has received expanded lending and borrowing powers in recent years
permitting different types of investments and mortgage loans, including those
with floating or adjustable rates and those with shorter terms, earnings and
operations are still highly influenced by levels of interest rates and financial
market conditions and by substantial investments in long-term mortgage loans.
Competition
The Banks experience strong competition both in making real estate loans
and in attracting savings deposits. The Banks compete for real estate loans with
commercial banks, mortgage banking companies, insurance companies, and other
institutional lenders. The most direct competition for savings comes from other
thrift institutions, mutual savings banks, commercial banks and credit unions.
During periods of generally high interest rates, additional significant
competition for savings accounts comes from corporate and government securities
as well as money market mutual funds. The principal methods generally used by
the Banks 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 Banks' weighted average rate at which new loans are originated and
the weighted average cost of interest-bearing liabilities. The Banks' 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 Banks have supplemented their interest income through purchases of
investments when appropriate. This activity usually 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 interest rates and changes in the composition of the Banks'
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 eight
of Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's 2004 Annual Report to Stockholders incorporated
herein by reference.
For information regarding the combined weighted average effective interest
rate earned by the Banks on their loan portfolios and investments, the combined
weighted average effective cost of the Banks' deposits and borrowings, the
interest rate spread of the Banks, and the net yield on combined monthly
weighted average interest-earning assets of the Banks on their loan portfolios
and investments for the fiscal years ending September 30, 2004, 2003, and 2002
refer to page four of Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's 2004 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 Banks' interest income and expense during the fiscal years ending September
30, 2004, 2003, and 2002 refer to page nine of Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's 2004
Annual Report incorporated herein by reference.
6
Market Area
Peoples Federal's market area in northeastern Indiana spans the counties of
DeKalb, Whitley, Noble, and LaGrange. This market area has a population of
approximately 154,000 and has 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.
With the addition of First Savings Bank to the Company, the market area has
expanded into southern Michigan and additional towns of Howe and Middlebury in
northeastern Indiana. First Savings serves St. Joseph, southern Kalamazoo, and
Cass counties in Michigan and LaGrange and eastern Elkhart counties in Indiana.
This expanded market area is contiguous to the Peoples Federal market area and
is a natural expansion. This aggregate market area has a population estimate of
566,700 and consists of a diversified economic base that includes manufacturing,
wholesale and retail trades, small farming, and service industries. The general
area serviced by First Savings would be classified as rural.
Lending Activities
General
The Banks have attempted to emphasize investments in adjustable-rate
residential mortgages and consumer loans in their market areas. In order to
lessen their risk from interest rate fluctuations, the Banks emphasize the
origination of interest rate sensitive loan products, such as one-year
adjustable-rate mortgage loans, and prime plus equity loans. However, during the
recent low interest rate market, customers preferred fixed rate products. The
Banks reacted to this trend by offering a new mortgage product of a seven-year
fixed rate loan, which converts to a one-year adjustable product at the end of
the seventh year. In this way, the Banks offered a fixed rate product to satisfy
the customer demand, but are not locked into low interest rates for a long
period of time. For regulatory reporting purposes, these loans are shown as
fixed rate product until the period remaining to the next repricing is under
five years. Seven year/one year loans originated during the initial
implementation of this product are now shown in this Form 10-K as adjustable
rate product. More recent originations of these types of loans are shown as
fixed rate mortgages. First Savings sells any loans it originates for longer
than seven year fixed rate terms on the secondary market.
Residential Mortgage Loans
A substantial portion of the Banks' lending activity involves the
origination of loans secured by residential real estate, consisting of
single-family dwelling units. The Banks also lend on the security of mid-size
multifamily dwelling units. The residential mortgage loans included in the
Banks' portfolio are primarily conventional fixed-rate loans with a maturity of
up to 30 years.
The Banks also offer adjustable-rate mortgage loans. Currently, these loans
generally have interest rates that adjust (up or down) every year. Generally,
these loans provide for a maximum adjustment of 6% over the life of the loans
with a maximum adjustment of 2% during any given year. Adjustments are based
upon an index established at the time the commitments are issued by the Banks.
The index used for most loans is tied to the applicable United States Treasury
security index. While adjustable-rate mortgage loans assist the Banks in
maintaining a positive spread during periods of high interest rates, it is not
expected that adjustments in interest rates on adjustable-rate mortgages will
match precisely changes in the Banks' cost of funds. The majority of the
adjustable rate mortgages originated by the Banks have limitations on the amount
(generally 6%) and frequency of interest rate changes.
During the fiscal year ended September 30, 2004, the Banks originated
$75,178,991 of residential loans of which $27,525,151 were five- to 30-year
fixed-rate mortgages and $47,653,840 were adjustable-rate loans. The rates
offered on the Banks' adjustable-rate residential mortgage loans are generally
competitive with the rates offered by other thrift institutions in the Banks'
market areas and are based upon the Banks' cost of funds and the rate of return
7
the Banks 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 Banks' market areas.
Set forth below is the amounts and percentages of fixed-rate and
adjustable-rate loans (which include consumer loans) in the Banks' portfolios at
September 30, 2004, 2003, and 2002 (Dollars in thousands).
September 30,
- ------------------------------------------------------------------
2004 2003 2002
- -------------------- --------------------- ---------------------
Adjustable Fixed Adjustable Fixed Adjustable Fixed
- ---------- -------- ---------- -------- ---------- --------
$238,586 $127,408 $231,122 $133,032 $239,265 $153,346
65.2% 34.8% 63.5% 36.5% 60.9% 39.1%
The terms of the residential loans originated by the Banks 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. However, with the
recent refinancing rush, many consumers now have low rate loans. With interest
rates rising, these consumers may not be as willing to prepay these low rate
loans, and the loans may remain outstanding for a much longer period. At
September 30, 2004, the average contractual maturity of the Banks' portfolios of
fixed-rate loans was 8 years and 1 months, and 18 years and 3 months with
respect to its portfolio of adjustable-rate loans.
Substantially all of the Banks' residential mortgages include so-called
"due on sale" clauses, which are provisions giving the Banks 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 Banks 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 Banks'
policy is to lend up to 90% of the appraised value of the property securing the
loan. The Banks apply the same standards to residential loans purchased in the
secondary market.
Commercial Real Estate Loans
The Banks also originate commercial real estate loans. From September 30,
2003, to September 30, 2004, commercial real estate loans increased from
$14,750,000 to $22,447,000, with the percentage of commercial real estate loans
to total loans increasing from 4.10% to 6.10%. These loans consisted of
construction and permanent loans secured by mortgages on mid-size commercial
real estate and farms. Of these loans, approximately $9.1 million are secured by
agricultural 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 Banks
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 Banks offer 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.
8
Construction loans involve greater underwriting and default risks to the
Banks 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 Banks could be negatively impacted in that they
would have to take control of the project and attempt either to arrange for
completion of construction or dispose of the unfinished project.
The Banks' underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. The Banks carefully consider 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 Banks 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 Banks 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 Banks
limit the number of properties that can be constructed on a "speculative" or
unsold basis by a developer at any one time and generally require the borrower
or its principals to personally guarantee repayment of the loan.
Consumer and Other Loans
Federal laws and regulations permit a federally-chartered savings
institution to make secured and unsecured consumer loans including home equity
loans (loans secured by the equity in the borrower's residence, but not
necessarily for the purpose of improvement), home improvement loans (loans
secured by a residential second mortgage), loans secured by deposit accounts,
and credit card loans (unsecured). The Banks offer all of these types of loans
and are currently emphasizing home equity loans to take advantage of the
adjustable interest rate feature of this type of loan versus the mortgage
product. These loans also carry a higher rate of interest than conventional
mortgages, thereby increasing the profit potential while reducing the interest
rate risk.
Loan Portfolio Cash Flows
The following table sets forth the estimated maturity of the Banks' loan
portfolios by type of loan at September 30, 2004. The estimated maturity
reflects contractual terms at September 30, 2004. Contractual principal
repayments of loans do not necessarily reflect the actual term of the Banks'
loan portfolios. The average life of mortgage loans is substantially less than
their contractual terms because of loan prepayments and because of enforcement
of "due on sale" clauses. The average life of mortgage loans tends to increase,
however, when current mortgage loan rates substantially exceed rates on existing
mortgage loans.
Due in One Year Due After
One Year Through Five
or Less Five Years Years Total
------------ ------------- ------------ ----------
(In thousands)
Type of Loan:
Construction loans --
Residential real estate $ 5,861 $ - $ - $ 5,861
Commercial -
Real estate loans:
Mortgage-residential 51,223 96,774 167,477 315,474
Commercial 4,071 11,336 3,868 19,275
Installment loans --
Consumer 7,822 4,614 90 12,526
Commercial 10,296 2,437 124 12,857
------- -------- ------------ --------
Total $79,273 $115,161 $171,559 $365,993
======= ======== ============ ========
The following table sets forth the total amount of loans due after one year
from September 30, 2004, which have a fixed rate or an adjustable rate. (Dollars
in thousands)
9
Loans Due
October 1, 2005 and thereafter
- ------------------------------------
Fixed Adjustable Total at September 30, 2004
- --------------- ---------------- ---------------------------
$98,112 $188,608 $286,720
Loan Portfolio Composition
The following table sets forth the composition of the Banks' loan
portfolios by type of loan at the dates indicated. The table includes a
reconciliation of total net loans receivable, after consideration of undisbursed
portion of loans, deferred loan fees and discounts, and allowance for losses on
loans.
2004 2003 2002 2001 2000
----------------------------------------------------------------------------------------------
TYPE OF LOAN AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- -------- ---------- ------- --------- ------ ---------- ------- ---------- -------
Residential: (Dollars in thousands)
Single family unit$ 288,452 78.8% $ 301,265 82.7% $ 312,509 79.5% $ 336,586 81.6% $ 332,847 83.4%
2-4 family units 1,550 0.4% 1,797 0.5% 2,954 0.8% 3,243 0.8% 3,263 0.8%
Over 4 family units 2,401 0.7% 2,593 0.7% 3,485 0.9% 1,452 0.4% 3,018 0.8%
Commercial real estate 22,447 6.1% 14,750 4.1% 20,870 5.3% 21,906 5.3% 16,665 4.2%
Land acquisition and
development 1,683 0.5% 1,480 0.4% 1,516 0.4% 1,938 0.5% 1,926 0.5%
Consumer and other loans 48,785 13.3% 41,748 11.5% 50,233 12.8% 46,177 11.2% 39,657 10.0%
Loans on deposits 675 0.2% 521 0.1% 1,044 0.3% 979 0.2% 1,052 0.3%
---------- -------- ---------- ------- --------- ------ ---------- ------- ---------- -------
365,993 100.0% 364,154 100.0% 392,611 100.0% 412,281 100.0% 398,428 100.0%
---------- -------- ---------- ------- --------- ------ ---------- ------- ---------- -------
Less:
Undisbursed portion
of loans 2,440 3,467 3,821 5,262 4,341
Deferred loan fees and
discounts 1,434 1,623 1,653 1,829 2,002
---------- ---------- --------- ---------- ----------
3,874 5,090 5,474 7,091 6,343
---------- ---------- --------- ---------- ----------
Total loans receivable 362,119 359,064 387,137 405,190 392,085
Allowance for losses
on loans 1,958 2,111 2,117 1,895 1,650
---------- ---------- --------- ---------- ----------
Net loans $ 360,161 $ 356,953 $ 385,020 $ 403,295 $ 390,435
========== ========== ========= ========== ==========
Origination, Purchase and Sale of Loans and Loan Concentrations
The Banks originate residential loans in conformity with standard
underwriting criteria to assure maximum eligibility for possible resale in the
secondary market. Although the Banks have authority to lend anywhere in the
United States, they have confined their loan origination activities primarily in
the Banks' service areas.
Loan originations are developed from a number of sources, primarily from
referrals from real estate brokers, builders, and existing and walk-in
customers. Peoples Federal 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 Peoples Federal.
The Banks' mortgage loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan, and the
adequacy of the value of the property that will secure the loan. The loan
committees of the Banks can approve residential and commercial loans ranging up
to $500,000. The Banks' Boards of Directors must approve loans exceeding
10
$500,000. The Banks utilize independent qualified appraisers approved by the
Board of Directors to appraise the properties securing their loans and require
title insurance or title opinions so as to insure that the Banks have a valid
lien on the mortgaged real estate. The Banks require 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
Banks also evaluate 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 Banks
for a permanent long-term loan to replace the construction loan upon completion
of construction.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan, and the value of the collateral, if any. A consumer loan officer must
approve consumer loans. Consumer loan originations currently are being generated
primarily through advertising.
Currently, it is the Banks' policy to originate both fixed-rate and
adjustable-rate loans, providing all such loans are eligible for sale in the
secondary market. Peoples Federal currently holds all originated and purchased
loans in its portfolio. First Savings is currently active in the secondary
market and sells the majority of its fixed rate loan products.
The following table shows mortgage and other loan origination, purchase,
and repayment activity for the Banks during the periods indicated:
Years Ended September 30
-------------------------------
2004 2003 2002
--------- ---------- ----------
(Dollars in thousands)
Mortgage loans originated
for the purpose of:
Construction-commercial $ $ $ 365
Construction-residential 10,693 10,321 10,715
Purchase/refinance-commercial 3,526 3,349 3,884
Purchase/refinance-residential 75,179 123,978 109,247
Consumer and other loans originated 24,678 29,805 30,329
--------- --------- ----------
Total loans originated 114,076 167,453 154,540
--------- --------------------
Loan credits:
Loans sold 9,498 37,157 22,766
Principal repayments and other adjustments 100,869 158,249 149,650
--------- --------------------
Other:
Provision for losses on loans 40 537 348
Amortization of loan fees (506) (759) (680)
Loan foreclosures, net 967 336 731
--------- ---------- ----------
501 114 399
--------- ---------- ----------
Total credits, net 101,370 158,363 150,049
--------- ---------- ----------
Net increases (decreases) in mortgage and other
loans receivable, net $ 3,208 $ (28,067) $ (18,275)
========= ========== ==========
11
Interest Rates, Points and Fees
The Banks realize interest, point, and fee income from their lending
activities. The Banks also realize 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 Banks account 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.
First Savings also realizes income from gains on sales of loans, and
servicing fees for loans sold with servicing retained.
Nonperforming Assets
Loans are reviewed on a regular basis and are generally placed on
nonaccrual status when the loans become 90 days or more past due, 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 Banks are unable to resolve a delinquency satisfactorily within 45 days
after the loan is past due, they will undertake foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Real estate acquired by the Banks as a result of foreclosure or by deed in
lieu of foreclosure is classified as "real estate owned" until it is sold. When
property is so acquired, it is recorded at the lower of loan balance or fair
market value at the date of acquisition. Periodically, real estate owned is
reviewed to ensure that net realizable value is not less than carrying value,
and any allowance resulting there from is charged to operations as a provision
for loss on real estate owned. All costs incurred in maintaining the property
from the date of acquisition are expensed.
The following table reflects the amount of loans in delinquent status at
September 30, 2004:
Loans Delinquent For
-----------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
-----------------------------------------------------------------------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------------------- ---------- ---------------------------- ------------------- -----------
Real estate: (Dollars in thousands)
One to four 28 $ 1,985 0.69% 4 $267 0.09% 7 $ 467 0.16%
family
Consumer 26 141 0.29% 11 82 0.17% 6 52 0.11%
------- ---------- -------- -------- ------- ----------
Total 54 $ 2,126 0.58% 15 $349 0.10% 13 $ 519 0.14%
======= ========== ======== ======== ======= ==========
The following table sets forth the Banks' nonperforming assets at the dates
indicated:
12
At September 30,
-----------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------ -----
(Dollars in thousands)
Nonaccrual loans $ 493 $1,127 $ 801 $676 $587
Loans past due 90 days and
still accruing 26 90 106 52 7
------- ------- ------- ------ -----
519 1,217 907 728 594
Real estate owned, net
of allowance 940 854 489 117 165
Total Nonperforming ------- ------- ------- ------ -----
assets $1,459 $2,071 $1,396 $845 $759
======= ======= ======= ====== =====
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.
The decrease in non-accrual loans since September 30, 2003 is primarily
from the 1 to 4 family portion of the loan portfolio, and management believes
the increase has been appropriately considered in determining the adequacy of
the allowance for loan and REO losses at September 30, 2004. There have been no
significant changes in potential problem loans since September 30, 2003. Net
charge-offs for the years ended September 30, 2004 and 2003 were $192,751 and
$543,635, respectively. Net charge-offs were slightly above average during
fiscal 2003 due to the aforementioned economic conditions. This was combined
with a large loss on one commercial loan to make up the net charge-off increase
for this year.
Interest income that would have been recognized for the year ended
September 30, 2004, if nonaccrual loans had been current in accordance with
their original terms, approximated $11,000. Interest income recognized on such
loans for the year ended September 30, 2003, approximated $7,000. At September
30, 2004 the Banks had no loans that were deemed impaired in accordance with
Statement of Financial Accounting Standards No. 114.
Federal regulations require savings associations to review their assets on
a regular basis and to classify them as: special mention; substandard; doubtful
and loss. Loans classified as special mention are loans which currently do not
expose the Banks to an unusual risk of loss but based on information available
require the attention of management. This classification usually includes loans
secured by unusual collateral, loans with documentary items that are being
addressed by counsel, and relatively large loans where the borrower has had a
history of delinquent payments and the collateral has a cashflow shortfall,
however, the borrower has continued to service the debt. It is the Company's
policy to reserve 5% of the loan balance for loans classified as special
mention.
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).
Substandard loans are reserved at 20% of the loan balance. 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, and
the company reserves 50% of the loan balance.
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.
13
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, the Banks' management
continually reviews the mix and delinquency status of its loan portfolio and
classifies those loans, which it deems appropriate.
As of September 30, 2004, loan balances were classified by the Banks as
follows:
Loss $ -0-
Doubtful -0-
Substandard 1,653,000
Special Mention 1,369,000
Allowance for Losses on Loans
The allowances for loan losses represent amounts available to absorb
inherent losses in the loan portfolios. The allowance is 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
allowance 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 allowance to levels considered necessary by management. Losses are
charged to the allowance when considered probable. As of September 30, 2004
allowance for losses on loans was $1,958,569. Overall, the general composition
of the loan portfolio has remained similar to the prior year with no significant
shift of risk between components of the loan portfolio that would impact the
calculation of the allowance for loan losses. The Banks' management believes
that the allowance is adequate to absorb known and inherent losses in the
portfolios. No assurance can be given, however, that economic conditions which
may adversely affect the Banks' markets or other circumstances will not result
in additions to the allowance for loan and real estate owned losses.
The following table presents an allocation of the Banks' allowance for loan
losses at the dates indicated and the percentage of loans in each category to
total loans. The unallocated portion relates to qualitative factors in the
portfolio such as economic conditions in the banks' market areas, which cannot
be separated by loan type.
September 30,
2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- ---------------
Amount % Amount % Amount % Amount % Amount %
------- ------ ------- ------ ------- ------ ------- ------- -------- ------
Balance at end of (Dollars in thousands)
period applicable to:
Residential Mortgage Loans $1,334 87.8% $1,420 82.1% $1,361 81.2% $ 910 82.4% $1,122 84.2%
Commercial/ Commercial Real
Estate Loans 231 8.8% 166 5.8% 404 5.7% 527 6.2% 101 5.5%
Consumer Loans 140 3.4% 311 12.1% 294 13.1% 342 11.4% 196 10.3%
Unallocated 254 214 58 116 231
-------- ------ ------- ------ ------- ------ ------- ------- -------- ------
Total $1,959 100.0% $2,111 100.0% $2,117 100.0% $1,895 100.0% $1,650 100.0%
======== ====== ======= ====== ======= ====== ======= ======= ======== ======
The following table is a summary of activity in the Banks' allowance for
loan losses for the periods indicated.
14
Summary of Loan Loss Experience Years ended September 30,
--------------------------------------
2004 2003 2002 2001 2000
------- ------ ------ ------- ------
Balance of loan loss allowance at (Dollars in Thousands)
beginning of year $2,111 $2,117 $1,895 $1,650 $1,005
Allowance acquired in merger - - - - 562
Charge-offs
Residential 4 25 36 4 -
Commercial real estate 144 - - - -
Commercial - 395 - - -
Consumer 93 138 118 139 118
-------- ------ ------ ------ ------
Total Charge-offs 241 558 154 143 118
-------- ------ ------ ------ ------
Recoveries
Residential - - - - -
Consumer 49 15 28 34 41
-------- ------ ------ ------ ------
Total Recoveries 49 15 28 34 41
-------- ------ ------ ------ ------
Net Charge-offs (Recoveries) 192 543 126 109 77
Provision for loan losses 40 537 348 354 160
-------- ------ ------ ------ ------
Balance of loan loss allowance at
end of year $1,959 $2,111 $2,117 $1,895 $1,650
======== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding 0.05% 0.14% 0.03% 0.02% 0.01%
Investment Activities
Federal thrift institutions, such as the Banks, 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 Banks 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.
The carrying values of the Banks' investment securities, including its
liquid assets, as of the dates indicated are presented in the following table.
15
At September 30,
----------------------------
2004 2003 2002
-------- --------- -------
Interest-bearing deposits and (Dollars in thousands)
certificates of deposit (1) $ 7,725 $ 29,965 $30,995
U.S. government and federal
agency securities
Held to maturity - - -
Available for sale 71,985 61,352 36,713
Mortgage backed securities
Held to Maturity 1,112 2,117 6,848
Available for sale 10,742 13,953 13,504
Stock in FHLB of Indianapolis 4,737 4,519 4,405
Other
Held to maturity - - 295
Available for sale(2) 12,954 10,199 4,679
-------- -------- -------
Total investments $109,255 $122,105 $97,439
======== ======== =======
- --------------------------------------------
(1) In Interest-bearing accounts at FHLB of Indianapolis $4,654, In insured
certificates of deposit $3,071 at September 30, 2004; In Interest-bearing
accounts at FHLB of Indianapolis $26,695, In Insured certificates of
deposit $3,270 at September 30, 2003; In Interest-bearing accounts at FHLB
of Indianapolis $27,175, In Insured Certificates of deposit $3,820 at
September 30, 2002;
(2) Van Kampen Prime Income Fund $2,442, Van Kampen Senior Income Trust $1,538,
State and Municipal obligations $8,974 at September 30, 2004; Van kampen
Prime Income Fund $2,298, Van Kampen Senior Income Trust $1,397, State and
Municipal obligations $6,504 at September 30, 2003; Van Kampen Prime Income
Fund $2,146, Van Kampen Senior Income Trust $1,160, State and Municipal
oblications $1,668 at September 30, 2002;
The following table sets forth information regarding the maturity
distribution of investment securities at September 30, 2004, and the weighted
average yield on those securities.
At September 30, 2004
----------------------------------------------------------------
Available for Sale Held to Maturity
-------------------------------- -------------------------------
Weighted Approximate Weighted Approximate
Amortized Average Fair Amortized Average Fair
Maturity Distribution at September 30: Cost Yield Value Cost Yield Value
---------- --------- ----------- --------- -------- ------------
(Dollars in thousands)
Due in one year or less $ 591 2.93% $ 596 $ - $ -
Due after one through five years 53,713 3.03% 53,683 - -
Due after five through ten years 24,265 3.62% 24,251 - -
Due after ten years 2,492 3.42% 2,429 - -
---------- ---------- ---------- ---------
81,061 80,959 - -
Mortgage-backed securities 10,773 3.84% 10,742 1,112 4.84% 1,144
Marketable equity securities 3,980 3,980 - -
---------- ---------- ---------- -----------
Total $95,814 $95,681 $1,112 $1,144
========== ========== ========== ===========
16
Sources of Funds
General
Deposits have traditionally been the primary source of funds of the Banks
for use in lending and investment activities. In addition to deposits, the Banks
derive 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 Banks' primary market
areas 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 Banks also offer individual retirement
accounts ("IRA's").
The Banks' policies are designed primarily to attract deposits from local
residents rather than to solicit deposits from areas outside their primary
markets. The Banks do 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 Banks on a periodic basis.
Determination of rates and terms are predicated upon funds acquisition and
liquidity requirements, rates paid by competitors, growth goals and federal
regulations.
A major determinant of the Banks' average cost of funds is the distribution
of the Banks' accounts by interest rate paid. An important indicator of the
Banks' stability of lendable funds is the distribution of the Banks' accounts by
maturity.
For information on the amounts of certificate accounts at September 30,
2004, maturing during the next five years and thereafter see Note 6 of Notes to
Consolidated Financial Statements on page 24 and 25 of the Company's 2004 Annual
Report to Stockholders.
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.
At September 30,
------------------------
2004
------------
(Dollars In thousands)
3 months or less $ 3,223
3-6 months 777
6-12 months 8,291
over 12 months 21,139
------------
Total $ 33,430
============
Borrowings
As members of the FHLB System and the FHLB of Indianapolis, the Banks are
eligible to arrange borrowings or advances for various purposes and on various
terms. As of September 30, 2004, 2003 and 2002 the Banks had outstanding
advances from the FHLB of Indianapolis of $50,100,000, $54,100,000, and
$59,100,000, respectively. See Note 8 of the Notes to Consolidated Financial
Statements beginning on page 25 of the Company's 2004 Annual Report to
Stockholders for the maturity breakdown of these long-term instruments.
Reverse repurchase agreements, another source of borrowing for Peoples
Federal, are retail obligations of Peoples Federal with a maturity of 90 days or
less, and are generally secured with specific investment securities owned by
Peoples Federal.
17
The following tables set forth certain information as to the Banks'
short-term borrowings consisting of 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
------------------------
2004 2003 2002
------- ------ ------
(Dollars in thousands)
Average balance of short-term borrowings $3,328 $4,294 $2,885
Highest month-end balance of total short-term borrowings 5,166 7,136 5,131
Weighted average interest rate of total short-term borrowings1.26% 1.53% 2.39%
At Sep30
---------------------
2004 2003 2002
------- ------ ------
Reverse Repurchase agreements 3,321 2,650 3,193
------- ------ -----
Total short-term borrowings $3,321 $2,650 $3,193
======= ====== ======
Weighted average interest rate 1.38% 1.49% 1.98%
Trust Department
In October 1984, the FHLB of Indianapolis granted full trust powers to
Peoples Federal, one of the first savings institutions in Indiana to be granted
such powers. As of September 30, 2004, Peoples Federal's trust department assets
totaled approximately $85,766,000 including self-directed Individual Retirement
Accounts ("IRA's"), and it was offering a variety of trust services including
estate planning. As of that date, the trust department was administering
approximately 740 trust accounts, including estates, guardianships, revocable
and irrevocable trusts, testamentary trusts, and self-directed IRA accounts. The
trust department also offers and administers self-directed IRA's and Simplified
Employee Pension IRA's for small businesses. The trust department provides a
needed service to the communities served by Peoples Federal, as well as
generating fee income which is largely unaffected by interest rate fluctuations.
During 2003, Peoples Federal purchased the trust business of First Federal
Savings Bank of Huntington, IN. The purchase was affected using a revenue
sharing agreement, rather than an up-front cash payment. Regulatory approval has
been received, and these assets are included in the number of accounts and
amount of assets referenced above.
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 Peoples Federal and conducts
a general insurance business within the State of Indiana under the name of
Peoples Insurance Agency. During fiscal years ended September 30, 2004 and 2003,
PFSI recorded total income of $51,078 and 54,326, respectively, with net income
for such periods amounting to $4,244 and $5,686, respectively.
Alpha Financial was organized under the laws of the state of Michigan in
1975 as a wholly owned subsidiary of First Savings. First Savings' investment in
Alpha Financial, Inc. was $251,825 at September 30, 2004. The assets of Alpha
Financial consist of cash and seven percent of the stock of MBT Title Services,
which reinsures credit life insurance policies written on the lives of borrowers
of various financial institutions.
Employees
As of September 30, 2004, the Banks employed 146 persons on a full-time
basis and 17 persons on a part-time basis. The Banks' employees are not
represented by any collective bargaining group, and management considers its
relations with its employees to be excellent. The holding company has no
employees.
18
REGULATION
General
The Company, as a savings and loan holding company, and the Banks, as
federally chartered savings associations, are subject to extensive regulation by
the OTS and the FDIC. The lending activities and other investments of the Banks
must comply with various federal regulatory requirements, and the OTS
periodically examines the Banks for compliance with various regulatory
requirements and for safe and sound operations. The FDIC also has the authority
to conduct examinations. The Banks must file reports with the OTS describing
their activities and financial condition and are also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve
System. This supervision and regulation is intended primarily for the protection
of depositors and the deposit insurance funds and not for the protection of
stockholders of the Company. Certain of these regulatory requirements are
referred to below or appear elsewhere herein.
Recent Legislation
Sarbanes-Oxley. The Sarbanes-Oxley Act requires audit committees to be
directly responsible for the appointment, compensation and oversight of the
Company's public accounting firm, including the resolution of disagreements
between management and the auditor regarding financial reporting. The auditors
are required to report directly to the audit committee, and members of the audit
committee must be truly independent unless the SEC grants an exemption. If the
audit committee does not include a financial expert, the absence of such expert
must be disclosed. Audit committees are required to adopt written procedures to
receive and address complaints regarding accounting, internal controls and
auditing issues, including procedures to maintain the confidentiality of whistle
blowers.
USA Patriot Act of 2001. The Patriot Act is intended is to strengthen the
U.S law enforcement and the intelligence communities' abilities to work
cohesively to combat terrorism on a variety of fronts. The potential impact of
the Patriot Act on financial institutions of all kinds is significant and wide
ranging. The Patriot Act contains sweeping anti-money laundering and financial
transparency laws and requires various regulations, including:
due diligence requirements for financial institutions that administer,
maintain, or manage private banks accounts or correspondent accounts for
non-US persons;
standards for verifying customer identification at account opening;
rules to promote cooperation among financial institutions, regulators, and
law enforcement entities in identifying parties that may be involved in
terrorism or money laundering; and
reports by non-financial trades and businesses filed with the Treasury
Department's Financial Crimes Enforcement Network for transactions
exceeding $10,000, and filing of suspicious activities reports securities
by brokers and dealers if they believe a customer may be violating U.S.
laws and regulations.
The implementing regulations require financial institutions to among other
things, incorporate into their written money laundering plans a board approved
customer identification program implementing reasonable procedures for:
verifying the identity of any person seeking to open an account, to the
extent reasonable and practicable;
maintaining records of the information used to verify the person's
identity; and
determining whether the person appears on any list of known or suspected
terrorists or terrorist organizations within a reasonable time after the
account is opened.
Account is defined as a formal banking or business relationship established to
provide ongoing services, dealings, or other financial transactions and includes
a relationship to establish a safety deposit box or other safekeeping services,
or cash management, custodian and trust services..
Financial Services Modernization Legislation. Financial Services
Modernization Act repealed the two affiliation provisions of the Glass-Steagall
Act: Section 20, which restricted the affiliation of Federal Reserve Member
Banks with firms "engaged principally" in specified securities activities; and
Section 32, which restricts officer, director, or employee interlocks between a
19
member bank and any company or person "primarily engaged" in specified
securities activities. In addition, the Financial Services Modernization Act
contains provisions that expressly preempt any state law restricting the
establishment of financial affiliations, primarily related to insurance. The
general effect of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and
other financial service providers by revising and expanding the Bank Holding
Company Act framework to permit a holding company system to engage in a full
range of financial activities through a new entity known as a "Financial Holding
Company." "Financial activities" is broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking and additional
activities that the Federal Reserve Board, in consultation with the Secretary of
the Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally.
The Financial Services Modernization Act provides that no company may
acquire control of an insured savings association, unless that company engages,
and continues to engage, only in the financial activities permissible for a
Financial Holding Company, unless grandfathered as a unitary savings and loan
holding company. The Financial Institution Modernization Act grandfathers any
company that was a unitary savings and loan holding company on May 4, 1999 (or
becomes a unitary savings and loan holding company pursuant to an application
pending on that date). Such a company may continue to operate under laws prior
to the Financial Services Modernization Act as long as the company continues to
meet the two tests: (i) it can control only one savings institution, excluding
supervisory acquisitions, and (ii) each such institution must meet the QTL test.
It further requires that a grandfathered unitary savings and loan holding
company must continue to control at least one savings association, or a
successor institution, that is controlled on May 4, 1999.
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities permitted
under new sections of the Bank Holding Company Act of 1956 ("BHCA") or permitted
by regulation.
The Company and the Banks do not believe that the Financial Services
Modernization Act will have a material adverse effect on the operations of the
Company and the Banks in the near-term. However, to the extent that the act
permits banks, securities firms, and insurance companies to affiliate, the
financial services industry may experience further consolidation. The Financial
Services Modernization Act is intended to grant to community banks certain
powers as a matter of right that larger institutions have accumulated on an ad
hoc basis and which unitary savings and loan holding companies already possess.
Nevertheless, this act may have the result of increasing the amount of
competition that the Company and the Bank face from larger institutions and
other types of companies offering financial products, many of which may have
substantially more financial resources that the Company and the Bank. In
addition, because the Company may only be acquired by other unitary savings and
loan holding companies or Financial Holding Companies, the legislation may have
an anti-takeover effect by limiting the number of potential acquirers or by
increasing the costs of an acquisition transaction by a bank holding company
that has not made the election to be a Financial Holding Company under the new
legislation.
Regulation of the Company
General. The Company is a savings and loan holding company as defined by
the Home Owners' Loan Act, as amended (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 Banks are subject to certain restrictions in their 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 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
20
safety, soundness or stability of its subsidiary savings institution, the OTS
may impose such restrictions as deemed necessary to address such risk including
limiting: (i) payment of dividends by the savings institution; (ii) transactions
between the savings institution and its affiliates; and (iii) any activities of
the savings institution that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL test,
then such unitary holding company shall also become subject to the activities
restrictions applicable to multiple holding companies and, unless the savings
institution requalifies as a QTL within one year thereafter, register as, and
become subject to, the restrictions applicable to a bank holding company. See
"Regulation of the Bank--Qualified Thrift Lender."
Restrictions on Acquisitions. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the OTS, (i) control of any
other savings institution or savings and loan holding company or substantially
all the assets thereof or (ii) more than 25% 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 11 of te Home Owners' Loan Act and
Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval
of the OTS, no director or officer of a savings and loan holding company or
person owning by proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
Regulation of the Banks
Federal Home Loan Bank System. The Banks are members 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
members of the FHLB of Indianapolis, the Banks are 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 Banks were in compliance with this requirement with an
investment in FHLB of Indianapolis stock at September 30, 2004, of $4,736,500.
The FHLB of Indianapolis serves as a reserve or central bank for its member
institutions within its assigned district. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members secured by certain prescribed collateral in accordance with
policies and procedures established by the FHFB and the Board of Directors of
the FHLB of Indianapolis. Long-term advances may only be made for the purpose of
providing funds for residential housing finance. Members must meet standards of
community investment or service established by the FHLB of Indianapolis in order
to maintain continued access to long-term advances. As of September 30, 2004,
the Banks had advances totaling $50,100,000 outstanding. See "Business of the
Company--Deposit Activity and Other Sources of Funds" and "--Borrowings."
Liquidity Requirements. Under OTS regulations, a savings association is
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations, and certain other investments) in each calendar quarter
sufficient to ensure its safe and sound operation. The Banks maintain liquid
assets in compliance with these regulations. Monetary penalties may be imposed
upon an institution for violations of liquidity requirements.
Qualified Thrift Lender Test. Savings institutions must meet a qualified
thrift lender ("QTL") test, which test may be met either by maintaining a
specified level of assets in qualified thrift investments as specified in HOLA
21
or by meeting the definition of a "domestic building and loan association" in
section 7701 of the Internal Revenue Code of 1986, as amended (the "Code"). If
the Banks maintain an appropriate level of certain specified investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualify as QTL's or a domestic
building and loan association, they will continue to enjoy full borrowing
privileges from the FHLB. The required percentage of investments under HOLA is
65% of assets while the Code requires investments of 60% of assets. An
association must be in compliance with the QTL test or definition of domestic
building and loan association on a monthly basis in nine out of every 12 months.
Associations that fail to meet the QTL test will generally be prohibited from
engaging in any activity not permitted for both a national bank and a savings
association. As of September 30, 2004, the Banks were in compliance with their
QTL requirements and met the definition of a domestic building and loan
association.
Branching. Subject to certain limitations, the HOLA and the OTS regulations
currently permit federally chartered savings institutions such as the Banks to
establish branches in any state of the United States. Federal savings
associations with branches in more than one state must satisfy either the QTL or
the DBLA test on a state-by-state basis. The authority for a federal savings
institution to establish an interstate branch network would facilitate a
geographic diversification of the institution's activities. This authority under
the HOLA and the OTS regulations preempts any state law purporting to regulate
branching by federal savings institutions.
Regulatory Capital Requirements. Under OTS capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of risk-weighted
assets. In addition, OTS regulations impose certain restrictions on savings
associations that have a total risk-based capital ratio that is less than 8.0%,
a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio
of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the
institution is rated Composite 1 under the OTS examination rating system).
The OTS has adopted an amendment to its risk-based capital requirements
that requires savings institutions with more than a "normal" level of interest
rate risk to maintain additional total capital (the OTS is delaying
implementation of this requirement). A savings institution's interest rate risk
will be measured in terms of the sensitivity of its "net portfolio value" to
changes in interest rates. Net portfolio value is defined, generally, as the
present value of expected cash inflows from existing assets and off-balance
sheet contracts less the present value of expected cash outflows from existing
liabilities. A savings institution will be considered to have a "normal" level
of interest rate risk exposure if the decline in its net portfolio value after
an immediate 200 basis point increase or decrease in market interest rates
(whichever results in the greater decline) is less than 2% of the current
estimated economic value of its assets. A savings institution with a greater
than normal interest rate risk will be required to deduct from total capital,
for purposes of calculating its risk-based capital requirement, an amount (the
"interest rate risk component") equal to one-half the difference between the
institution's measured interest rate risk and the normal level of interest rate
risk, multiplied by the economic value of its total assets.
On December 1, 1998, the OTS issued Thrift Bulletin 13a ("TB 13a"), which
replaced previous thrift bulletins and certain other guidance on interest rate
risk to assist institutions in interpreting the rules governing interest rate
risk. TB 13a sets forth a definition and sources of interest rate risk and
directs the Board of Directors of a savings association to set interest rate
risk limits for the savings association and to adopt a system for measuring
interest rate risk. TB 13a also describes certain due diligence management
should undertake before taking a position in investment securities or financial
derivatives, requires certain record-keeping of such investments, and states
that the savings association's activities in this area will be subject to
assessment by examiners. TB 13a discusses the two elements to an examiner's
assessment of interest rate risk; the level of market risk as measured by a net
portfolio value model, and the quality of the savings association's practices
for managing interest rate risk. In the event the OTS believes supervisory
action is required to address interest rate risk at a savings association, TB
13a outlines the range of agency responses, from written plans from the board to
reduce risk to formal enforcement action, including supervisory agreements or
cease and desist orders.
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
22
general, savings institutions with less than $300 million in assets and a
risk-based capital ratio above 12% are exempt from this interest rate risk
component unless the OTS terminates such exemption. Although the Bank qualifies
for the exemption, management believes that based on current financial data, the
Bank would not be deemed to have more than a normal level of interest rate risk.
In addition to generally applicable capital standards for savings
institutions, the Director of the OTS is authorized to establish the minimum
level of capital for a savings institution at such amount or at such ratio of
capital-to-assets as the Director determines to be necessary or appropriate for
such institution in light of the particular circumstances of the institution.
The Director of the OTS may treat the failure of any savings institution to
maintain capital at or above such level as an unsafe or unsound practice and may
issue a directive requiring any savings institution which fails to maintain
capital at or above the minimum level required by the Director to submit and
adhere to a plan for increasing capital. Such a directive may be enforced in the
same manner as an order issued by the OTS.
At September 30, 2004, the Banks exceeded all regulatory minimum capital
requirements.
Insurance of Deposit Accounts. The Banks' deposit accounts are insured by
the SAIF to the maximum amount permitted by law. Insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system as of September 30, 2002, SAIF members paid within a range of 0
cents to 23 cents per $100 of domestic deposits, depending upon the
institution's risk classification. This risk classification is based on an
institution's capital group and supervisory subgroup assignment. Pursuant to the
Economic Growth and Paperwork Reduction Act of 1996 (the "Act"), the Bank pays,
in addition to its normal deposit insurance premium as a member of the SAIF an
amount equal to approximately 6.4 basis points toward the retirement of the
Financing Corporation bonds ("Fico Bonds") issued in the 1980s to assist in the
recovery of the savings and loan industry. Members of the Bank Insurance Fund
("BIF"), by contrast, pay, in addition to their normal deposit insurance
premium, approximately 1.3 basis points. Under the Act, the FDIC also is not
permitted to establish SAIF assessment rates that are lower than comparable BIF
assessment rates. The rate paid to retire the Fico Bonds is equal for members of
the BIF and the SAIF. The Act also provided for the merging of the BIF and the
SAIF by January 1, 1999, provided there were no financial institutions still
chartered as savings associations at that time. Although legislation to
eliminate the savings association charter had been proposed at January 1, 1999,
financial institutions such as the Banks were still chartered as savings
associations.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to 3% on
the first $54.0 million of transaction accounts, and $1,620,000 plus 10% on the
amount over $54.0 million. . 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, 2004, the Banks met
their reserve requirements.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends. A savings institution that
is a subsidiary of a savings and loan holding company, such as the Bank, must
file an application or a notice with the OTS at least 30 days before making a
capital distribution. Savings institutions are not required to file an
application for permission to make a capital distribution and need only file a
notice if the following conditions are met: (1) they are eligible for expedited
treatment under OTS regulations, (2) they would remain adequately capitalized
after the distribution, (3) the annual amount of capital distribution does not
exceed net income for that year to date added to retained net income for the two
preceding years, and (4) the capital distribution would not violate any
agreements between the OTS and the savings institution or any OTS regulations.
Any other situation would require an application to the OTS.
23
In addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that the distribution would constitute an unsafe or unsound practice.
A federal savings institution is prohibited from making a capital distribution
if, after making the distribution, the savings institution would be unable to
meet any one of its minimum regulatory capital requirements. Savings
institutions cannot distribute regulatory capital that is needed for its
liquidation account.
Affiliate Restrictions. Transactions between a savings association and its
"affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not make
a loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings association
may not purchase or invest in securities of an affiliate other than shares of a
subsidiary; a savings association and its subsidiaries may not purchase a
low-quality asset from an affiliate; and covered transactions and certain other
transactions between a savings association or its subsidiaries and an affiliate
must be on terms and conditions that are consistent with safe and sound banking
practices. With certain exceptions, each loan or extension of credit by a
savings association to an affiliate must be secured by collateral with a market
value ranging from 100% to 130% (depending on the type of collateral) of the
amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") decides to treat such subsidiaries
as affiliates. The regulation also requires savings associations to make and
retain records that reflect affiliate transactions in reasonable detail, and
provides that certain classes of savings associations may be required to give
the OTS prior notice of affiliate transactions.
Standards for Safety and Soundness. Under applicable regulatory
requirements, the Banks are required to prescribe standards, by regulation or
guideline, relating to internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, asset quality, operational and managerial standards as the
agencies deem appropriate. The OTS and the federal bank regulatory agencies have
adopted a set of guidelines prescribing safety and soundness standards pursuant
to the statute. The safety and soundness guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate risk exposure, asset
growth, and compensation, asset quality and earnings standards, and fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks associated with each
aspect of an institution's operations. The guidelines also prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
stockholder.
With respect to asset quality and earnings standards, a savings institution
would be required to maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
24
Prompt Corrective Action. The prompt corrective action regulation of the
OTS requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that falls
within certain undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
risk-based capital, leverage capital, and tangible capital ratios are used to
determine an institution's capital classification. At September 30, 2004, the
Banks met the capital requirements of "well capitalized" institutions under
applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept Brokered Deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew, or roll-over Brokered
Deposits.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
Real Estate Lending Standards. Under joint regulations of the federal
banking agencies, including the OTS, 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
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, approval and
reporting requirements. An institution's real estate lending policy must reflect
consideration of the Interagency Guidelines for Real Estate Lending Policies
(the "Interagency Guidelines") that have been adopted by the federal banking
agencies. The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits specified in the
Interagency Guidelines for the various types of real estate loans. 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 not exceeding those specified, but require that
the aggregate amount of loans with loan-to-value ratios in excess of certain
specified levels may not exceed the amount of the savings association's total
capital. (Amounts in excess of core capital must be deducted on a
dollar-for-dollar basis from this capital.)
Federal Consumer Credit and Non-Discrimination Legislation. The Banks'
mortgage lending activities arc subject to the provisions of various federal and
state statutes, including, among others, the Truth in Lending Act, the Equal
Credit Opportunity Act, the Real Estate Settlement Procedures Act, the Fair
Housing Act and the regulations promulgated thereunder. These statutes and
regulations, among other things, prohibit discrimination on the basis of race,
gender or other designated characteristics, prohibit unfair and deceptive trade
practices, require the disclosure of certain basic information to mortgage
borrowers concerning credit terms and settlement costs, and otherwise regulate
terms and conditions of credit and the procedures by which credit is offered and
administered. Each of the foregoing statutes provides for various
administrative, civil and, in limited circumstances, criminal enforcement
procedures, and violations thereof may also lead to class actions seeking actual
and/or punitive damages.
Community Reinvestment Act and Fair Lending Developments. The Banks are
subject to certain fair lending requirements and reporting obligations involving
home mortgage lending operations and Community Reinvestment Act ("CRA")
activities. The CRA generally requires the federal banking agencies to evaluate
the record of a financial institution in meeting the credit needs of its local
communities, including low- and moderate-income neighborhoods. A savings
association may be subject to substantial penalties and corrective measures for
25
a violation of certain fair lending laws. The federal banking agencies may take
compliance with such laws and CRA obligations into account when regulating and
supervising other activities.
A savings association's compliance with its CRA obligations is based on a
performance-based evaluation system that bases CRA ratings on an institution's
lending service and investment performance. When a holding company applies for
approval to acquire another financial institution or financial institution
holding company, the OTS will review the assessment of each subsidiary savings
association of the applicant; and such records may be the basis for denying the
application. As of the latest CRA Examinations, the Banks each received a rating
of "satisfactory" in complying with its CRA obligations.
Item 2. Properties
Peoples Federal owns nine full-service banking offices located in Avilla,
Auburn, Columbia City, Garrett, Kendallville, LaGrange, Topeka, and Waterloo,
Indiana.
The following table provides certain information with respect to Peoples
Federal's full-service offices at September 30, 2004:
Full Service Date Net Book
Offices Opened Value (1)
- ------------------------------------------------------------
(Dollars in thousands)
Main Office, Auburn 1973 $ 299
Avilla 1980 91
Garrett 1972 41
Columbia City-Downtown 1971 91
Columbia City-North 1998 504
Kendallville 1941 391
LaGrange 1972 227
Waterloo 2000 900
Topeka 2002 485
(1) Of real estate at September 30, 2004.
The total net book value of Peoples Federal's premises and equipment at
September 30, 2004, was $3.8 million.
First Savings Bank owns six full-service banking offices located in Three
Rivers, Union, and Schoolcraft, Michigan and Howe and Middlebury, Indiana.
The following table provides certain information with respect to First
Saving's full service offices at September 30, 2004.
Full Service Date Net Book
Offices Opened Value (1)
- ------------------------------------------------------------
(Dollars in thousands)
Main Office, Three Rivers 1981 $ 554
Schoolcraft 1971 55
Union 1988 167
Three Rivers, branch 1988 577
Howe 1998 340
Middlebury 1998 596
(1) Of real estate at September 30, 2004.
26
The total net book value of First Savings' premises and equipment at
September 30, 2004 was $2.6 million.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company, the
Banks 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 Item 12 under Part III of this form 10-K for the
Equity Compensation Plan Table required by Regulation S-K.
The Company did not sell any common stock during the year ended September
30, 2004 that was not registered for sale under the Securities Act of 1933.
The following table details the common stock information for the years
ended September 30, 2004 and 2003.
Market Price
---------------------- Dividends
Low High Per Share
------------------------------------
Fiscal 2004
1st QTR $21.60 $25.75 $0.17
2nd QTR 23.67 27.66 0.17
3rd QTR 22.78 26.95 0.17
4th QTR 21.50 24.98 0.18
Fiscal 2003
1st QTR $15.86 $19.88 $0.16
2nd QTR 17.25 20.99 0.16
3rd QTR 18.90 21.50 0.16
4th QTR 21.15 25.51 0.17
In February 2003, the Board authorized a two year stock repurchase program.
Purchases of up to 300,000 shares of the Company's common stock may be made in
open market or in privately negotiated transactions. As of September 30, 2004,
the Company had repurchased 101,205 shares and 198,795 shares may yet be
purchased under the plan. This plan expires on February 18, 2005.
The following table details stock repurchased by the Company during fiscal
year 2004 as per the plan referenced on page 3 of this document.
27
Total Maximum
Numer of Number of
Total Average Shares Purchased Shares that
Number of Price as Part of May yet
Shares Paid Publicly be Purchased
Period Purchased Per Share Announced Plan Under the Plan
- --------------------------------------------------------------------------------
July 1-31, 2004 4,799 $ 23.90 4,799 203,529
August 1-31, 2004 4,524 15.75 4,524 199,005
September 1-30, 2004 210 21.55 210 198,795
------- ---------- ------------
Total 9,533 $ 19.98 9,533
======== ========== =============
Item 6. Selected Financial Data
Reference is made to page 2 of the Company's Annual Report to Stockholders
for the year ended September 30, 2004, 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 3 to 11 of the Company's Annual Report to
Stockholders for the year ended September 30, 2004, for the information required
by this Item, which is hereby incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to page 5 of the Company's Annual Report to Stockholders
for the year ended September 30, 2004, 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 39 of the Company's Annual Report to
Stockholders for the year ended September 30, 2004 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.
Item 9A. Controls and Procedures
Our management, with participation of our chief executive officer and chief
financial officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures, as defined in Exchange Act Rule 13a-15*e) as
of September 30, 2004. Based on that evaluation, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
were effective in reaching a reasonable level of assurance that management Is
timely alerted to material information relating to us during the period when our
periodic reports are being prepared.
No changes occurred in our internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f), during the quarter ended September 30,
2004 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
The Company's management, including the CEO and CFO, does not expect that
its disclosure controls or its internal controls and procedures for financial
reporting will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
28
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Effective November 16, 2004 Mr. Maurice F. Winkler III, a director and
Chief Executive Officer of the Company and President and Chief Executive Officer
of Peoples entered into an employment agreement with the Company and Peoples.
The employment agreement provides for full-time employment for a period of three
years as President and Chief Executive Officer of the Company and Peoples. The
agreement provides for a base salary of $132,500 per year subject to cost of
living increases or decreases in certain circumstances. Additionally, upon a
change in control of the Company or Peoples, as defined in the agreement, Mr.
Winkler will receive 2.99 times his base salary plus 2.99 times the average
amount of any bonus compensation earnings during the three year period prior to
any change in control, plus certain other benefits as provided for in the
agreement. In addition, Mr. Winkler will be eligible to receive such benefits as
are made available to senior executives of Peoples. A copy of the employment
agreement is filed as Exhibit 10.8.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the section captioned "Proposal 1-Election of
Directors" in the Company's Proxy Statement dated December 10, 2004 for the
information required by this Item, which is hereby incorporated by reference.
Code of Ethics. The company has adopted an ethics policy that applies to
Financial Managers of the Company and its subsidiaries. A copy of the Ethics
Policy is attached as Exhibit 14 to this annual report. The Company intends to
satisfy the disclosure requirement under Item 10 of Form 8-K regarding an
amendment to a provision of its Code of Ethics and Conduct by posting such
information on the Company's website www.Peoplesbancorp.us.
Item 11. Executive Compensation
Reference is made to the section captioned "The Peoples Bancorp Annual
Meeting-Compensation of Executive Officers and Directors" in the Company's Proxy
Statement dated December 10, 2004 for the information required by this Item,
which is hereby incorporated by reference.
Equity Compensation Plan Information
(c)
Number of securities
remaining available for
future issuance under
(b) equity compensation
(a) Weighted-average plans
(excluding
Plan Category Number of securities to exercise price of securities reflected in
be issued upon exercise outstanding options, column (a))
of outstanding options, warrants and rights
warrants and rights
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved 88,043(1) $14.40 89,751
by security holders.................
Equity compensation plans not -0- -0-
approved by security holders........
Total............................... 88,043 $14.40 89,751
29
(1)......80,249 shares were assumed in connection with the acquisition of Three
Rivers Financial Corp at a weighted average exercise price of $11.78.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the sections captioned "Election of Directors-Nominees
for Election as Directors" and "Securities Ownership of Certain Beneficial
Owners" in the Company's Proxy Statement dated December 10, 2004 for the
information required by this Item which is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the section captioned "Transactions with Certain
Related Persons" in the Company's Proxy Statement dated December 10, 2004 for
the information required by this Item, which is hereby incorporated by
reference.
Item 14. Principal Accounting Fees and Services
Reference is made to the section captioned "Accountant's Fees" in the
Company's Proxy Statement dated December 10, 2004 for the information required
by this Item, which is hereby incorporated by reference.
Item 15. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) The following consolidated financial statements of Peoples Bancorp and
Its Wholly-owned Subsidiaries, included in the Annual Report to Stockholders of
the registrant for the year ended September 30, 2004 are filed as part of this
report:
1. Financial Statements
REPORT OF BKD LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PAGE 13.
CONSOLIDATED BALANCE SHEETS - AS OF SEPTEMBER 30, 2004, AND 2003 PAGE 14.
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 2004,
2003, AND 2002 PAGE 15.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
SEPTEMBER 30, 2004, 2003, AND 2002 PAGE 16.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30,
2004, 2003, AND 2002 PAGE 17.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PAGES 18-39.
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, as amended and restated on December 14, 2004.
(2)
10.1 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)
30
10.2* 1998 Peoples Bancorp Stock Option and Incentive Plan. (4)
10.3*Three Rivers Financial Corporation Stock Option and Incentive Plan (as
assumed by Peoples Bancorp). (5)
10.4* Employment Agreement with Maurice F. Winkler III.
10.5* Employment Agreement with G. Richard Gatton.
13 Annual Report to Stockholders
14 Code of Ethical Conduct for Financial Managers
22 Subsidiaries of the Registrant
23 Consent of BKD LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO
31.1 Rule 13a-14(a)/15d-14(a) Certification of CFO.
32.1 Section 1350 Certifications
* Indicates management contract or compensatory plan, contract or arrangement.
- --------------------------------
(1) Incorporated by reference to the same Exhibit in the Company's
Registration Statement on Form S-4 (33-37343) filed with the Securities and
Exchange Commission on October 17, 1990.
(2) Incorporated by reference to the same Exhibit in the Company's Current
Report on Form 8-K (Commission File Number 0-18991) filed with the Securities
and Exchange Commission on December 20, 2004.
(3) Incorporated by reference to the same Exhibit in the Company's Annual
Report on Form 10-K (Commission File Number 0-18991) for the year ended
September 30, 1992.
(4) Incorporated by reference to the same Exhibit in the Company's Annual
Report on Form 10-K (Commission File Number 0-18991) for the year ended
September 30, 1998.
(5) Incorporated by reference to the same Exhibit in the Three Rivers
Financial Corporation's Annual Report on Form 10-KSB (Commission File Number
1-13826) for the year ended June 30, 1996.
(b) A report on Form 8-K was filed on August 2, 2004 reporting earnings for
the period ended June 30, 2004.
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission including the Company.
That address is http://www.sec.gov.
31
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 14, 2004 /s/Roger J. Wertenberger,
Chairman of the Board,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
December 14, 2004 /s/Roger J. Wertenberger,
Chairman of the Board,
and Director
December 14, 2004 /s/Maurice F. Winkler III,
President, Chief Executive Officer
and Director
December 14, 2004 /s/Deborah K. Stanger
Vice President-Chief Financial Officer
December 14, 2004 /s/G. Richard Gatton, Director
December 14, 2004 /s/Bruce S. Holwerda, Director
December 14, 2004 /s/Erica D. Dekko, Director
December 14, 2004 /s/Douglas D. Marsh, Director
December 14, 2004 /s/Stephen R. Olson, Direct
December 14, 2004 /s/John C. Thrapp, Director
32
Exhibit 10.4
Employment Agreement with Maurice F. Winkler, III
This Employment Agreement ("Agreement") is made and entered into as of this
16th day of November 2, (the "Effective Date") by and among Peoples Bancorp,
("Peoples"), the holding company of Peoples Federal Savings Bank of DeKalb
County (the "Bank"), the Bank and Maurice F. Winkler, III ("Executive"), with
reference to the following:
WHEREAS, Executive is currently employed by the Bank, which is a wholly owned
subsidiary of Peoples;
WHEREAS, Peoples and the Bank desire to provide for the employment of the
Executive by the Bank;
WHEREAS, the Executive is willing to commit himself to serving the Bank on the
terms and conditions herein provided;
NOW, THEREFORE, IN CONSIDERATION OF the recitals set forth above and the
mutual promises, covenants, agreements, conditions and undertakings hereinafter
set forth, the adequacy and receipt of which consideration is hereby
acknowledged, the parties hereto agree as follows:
1. Term.
This Agreement shall have a term of three (3) years, commencing as of the
Effective Date set forth above (the "Term"). Where used herein, "Term" shall
refer to the entire period of employment of Executive by the Bank from and after
the Effective Date of this Agreement, whether for the period provided above and
as extended or terminated earlier as hereinafter provided.
2. Position and Duties.
(a) During the Term, Executive shall be employed on a full-time basis to
serve as President and Chief Executive Officer of the Bank and perform the
duties customarily performed by such officer of a savings association, including
the general supervision and operation of the business and affairs of the Bank,
and reporting to the applicable regulatory authorities regarding the activities
of the Bank, subject to the direction of and the powers vested by law in the
Board of Directors of the Bank (the "Board") and the Bank's shareholder,
Peoples. Except as provided for herein, the duties and position of Executive as
President and Chief Executive Officer hereunder may be changed only by the
mutual written agreement of the parties hereto. The parties may mutually agree
to extend Executive's full-time status for additional 12-month periods following
the Effective Date.
(b) During the Term hereof, Executive shall perform the services herein
contemplated to be performed by Executive faithfully, diligently and to the best
of Executive's ability in compliance with instructions and policies of the
Board, the Bank's Federal Charter and Bylaws and with all applicable laws and
regulations.
3. Compensation.
(a) Base Salary. For executive's services rendered hereunder, the Bank
shall pay or cause to be paid a base salary to Executive at the rate of $132,500
per annum, payable in conformity with the Bank's normal payroll periods and
procedures. During the Term, Executive's base salary shall be reviewed at least
once every twelve (12) months and shall be increased (but not reduced) at any
time, and from time to time, as shall be substantially consistent with increases
in base salary generally awarded in the ordinary course of business to other
executives of the Bank, provided that Executive's Base Salary shall be increased
33
by a percentage no less than the annual increase of the cost of living index for
the Fort Wayne, Indiana metropolitan area. Any increase in base salary shall not
serve to limit or reduce any other obligation to the Executive under this
Agreement. The term "Base Salary" as utilized in this Agreement shall refer to
base salary as so increased.
(b) Discretionary Bonus. In addition to Executive's Base Salary provided
for under Paragraph 4(a) above, the Executive shall participate in an equitable
manner with all other senior management executives of the Bank in discretionary
bonuses that the Board may award from time to time to the Bank's senior
management executives. No other compensation provided for in this Agreement
shall be deemed a substitute for the Executive's right to participate in such
discretionary bonuses.
(c) Stock Awards. The Executive shall be eligible for consideration for
stock option grants by Peoples pursuant to any stock option plan adopted by
Peoples, for so long as Executive shall be employed by the Bank.
(e) Other benefits. The Executive will eligible to participate in or
receive benefits under any employee benefit plans of the Bank which are
available to senior executives and key management employees of the Bank, subject
to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements. Nothing paid to Executive under
any such plan or arrangement will be deemed to be in lieu of other compensation
to which the Executive is entitled under this Agreement.
4. Vacation and Sick Leave.
During the Term hereof, Executive shall be entitled to paid vacation and
paid sick leave, the amount and term of which shall be determined in accordance
with the policies of the Bank as in effect from time to time, but in no event
shall the vacation period be less than four weeks per year.
5. Group Medical, Life Insurance and Other Benefits.
The Executive shall participate in any plan that the Bank maintains for the
benefit of its executives if the plan relates to (i) pension, profit sharing or
other retirement benefits, (ii) medical insurance or the reimbursement of
medical or dependent care expenses, or (iii) other group benefits, including
disability and life insurance plans.
6. Business Expenses.
Executive shall be entitled to reimbursement by the Bank for any and all
ordinary and necessary business expenses reasonably incurred by Executive in the
performance of Executive's duties and in acting for the Bank during the Term of
this Agreement, provided that Executive furnishes to the Bank, for review and
approval by the Chairman of the Board, adequate records and other documentation
as may be required for the substantiation of such expenditures as a business
expense of the Bank.
7. Termination for Cause.
(a) The Board may for cause terminate Executive's employment at any time
during the Term of this Agreement. In such event, all rights of Executive under
this Agreement shall terminate and Executive shall have no right to receive
compensation or other benefits for any period after the effective date of such
34
termination for cause. Termination for cause shall be defined as the Executive's
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of this Agreement.
(b) Notwithstanding the foregoing, no termination for cause shall be
effective with respect to the Executive unless and until there shall have been
delivered to him a copy of a resolution, finding that in the good faith opinion
of the Board of Directors of the Bank (the "Board"), the Executive's actions
and/or failure to act justifies termination for cause and specifying the
particulars thereof in detail. Reasonable notice shall be provided to the
Executive and he shall receive an opportunity, together with counsel, to be
heard before the Board. The Executive shall not have the right to receive
compensation or other benefits for any period after a termination for cause,
except that benefits previously vested or accrued shall be unaffected by such
termination.
8. Events of Termination; Payments to Executive.
The provisions of this Paragraph 9 shall apply upon the occurrence of an
Event of Termination (as herein defined).
(a) As used in this Agreement, an "Event of Termination" shall mean and
include any one or more of the following: (i) the termination by the Bank of the
Executive's employment hereunder for any reason other than for cause (as defined
in Paragraph 7 hereinabove) during the Term; or (ii) the Executive's resignation
or constructive termination from the Bank's employ, upon any (A) material change
in the Executive's function, duties, or responsibilities, which change would
cause the Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof (and any such
material change shall be deemed a continuing breach of this Agreement), (B)
Relocation of the principal place at which Executive's duties are to be
performed to a location outside a thirty (30) mile radius around the principal
location at which Executive's duties are performed immediately prior to the
termination of employment, (C) material reduction in the benefits and
perquisites to the Executive from those being provided as of the Effective Date
of this Agreement except for any changes that are generally applicable to senior
executives and key management employees or expressly contemplated by this
Agreement (any such reduction to be deemed a continuing breach of this
Agreement), or (D) or any other material breach of this Agreement by the Bank.
Upon the occurrence of any event described in clauses (A), (B), (C) or (D)
above, the Executive shall have the right to elect to terminate his employment
under this Agreement by resignation upon not less than sixty (60) days prior
written notice given within a reasonable period of time not to exceed, except in
case of a continuing breach, four calendar months after the later of the (i)
occurrence of the event giving rise to said right to elect termination or (ii)
actual knowledge of such event by the Executive. In the case of a continuing
breach, the Executive may give such sixty (60) days prior notice at any time.
Either of Executive's sixty (60) days prior notice of his Date of Termination
shall be referred to as "Notice of Termination." The date specified in
Executive's Notice of Termination to the Bank of his last date of employment
shall be the "Date of Termination."
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in this Paragraph 9, the Bank shall pay the Executive,
or, in the event of his subsequent death, his beneficiary or beneficiaries as he
may have designated, or his estate, if no beneficiary designation has been made,
or if no beneficiaries survive the Executive, as severance pay or liquidated
damages, or both, a sum equal to (i) the amount of Base Salary of the Executive
for each year during the remaining Term of this Agreement, plus (ii) bonuses in
an amount equal to the last bonus received, multiplied by the number of years
remaining in the Term of this Agreement, as well as (iii) health and/or medical
benefits as provided under Paragraph 6 and retirement benefits under Paragraph 6
of this Agreement, provided, however, that if the Bank is not in compliance with
its minimum capital requirements or if such payments would cause the Bank's
capital to be reduced below its minimum capital requirements, such payments
shall be deferred until such time as the Bank is in capital compliance. Such
35
health benefit payments shall be made as incurred, and such salary, bonus and
retirement benefit payments shall be made in a lump sum within ten (10) days of
the Date of Termination unless the Executive makes an election within ten (10)
days of the Notice of Termination to have such payments made under the Bank's
current payment procedures during the remaining Term of Employment under this
Agreement.
(c) The payments provided under this Paragraph 9 upon an Event of
Termination shall be in lieu of any other payments or damages recoverable in any
causes of action by Executive related to this Agreement. As a condition to
receipt of payments hereunder, the Executive shall execute a Release and
Settlement Agreement pursuant to which the Executive shall waive any and all
claims resulting from employment at or termination from the Bank other than
payments or benefits which are expressly provided for in this Agreement.
9. Termination as a Result of a Change of Control.
(a) Change of Control. For purposes of this Agreement and except as
provided in Paragraph 12(c) below relating to supervisory transactions, the term
"Change of Control" shall mean the occurrence of any of the following events:
(i) Any "person" (as such term is used in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a
trustee or other fiduciary holding securities under an employee benefit plan of
Peoples or a corporation owned directly or indirectly by the shareholders of
Peoples in substantially the same proportions as their ownership of stock in
Peoples, becomes after the date hereof the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of
Peoples representing fifty percent (50%) or more of the total voting power
represented by Peoples then outstanding securities that vote generally in the
election of directors ("Voting Securities");
(ii) Any "person" (as such term is used in Section 13(d) and 14(d) of the
Exchange Act), other than a trustee or other fiduciary holding securities under
an employee benefit plan of Peoples or a corporation owned directly or
indirectly by the shareholders of Peoples in substantially the same proportions
as their ownership of stock in Peoples, becomes after the date hereof the
"beneficial owner" (as defined in Rule 13 d-3 under the Exchange Act), directly
or indirectly, of twenty-five percent (25%) or more of the Voting Securities of
Peoples, and, within a period of twelve (12) months of such acquisition of
beneficial ownership, individuals who at the beginning of such period constitute
the Board of Directors of Peoples, or any new director whose election or
nomination was approved by a vote of at least two-thirds of the directors of
Peoples then still in office who were directors at the beginning of such period,
or whose election or nomination was previously so approved, cease for any reason
to constitute at least sixty percent (60%) of the directors of Peoples;
36
Exhibit 10.5
EMPLOYMENT AGREEMENT WITH G. RICHARD GATTON
The Employment Agreement ("Agreement") is made and entered into as of this
29th day of February, 2000, (the "Effective Date") by and among Peoples Bancorp,
("Peoples"), the holding company of First Savings Bank, A Federal Savings Bank
(the "Bank"), the Bank and G. Richard Gatton ("Executive"), with reference to
the following:
WHEREAS, Executive is currently employed by the Bank, which became a wholly
owned subsidiary of Peoples as a result of the merger of Three Rivers Financial
Corporation, the parent of Bank, with and into Peoples, in which Peoples was the
surviving corporation ("Merger");
WHEREAS, Peoples and the Bank desire to provide for the employment of the
Executive by the Bank upon closing of the Merger and in consideration of the
Executive's agreement to terminate his former employment agreement with the
Bank, for the period provided in this Agreement; and
WHEREAS, the Executive is willing to commit himself to serving the Bank on
the terms and conditions herein provided.
NOW, THEREFORE, IN CONSIDERATION OF the recitals set forth above and the
mutual promises, covenants, agreements, conditions and undertakings hereinafter
set forth, the adequacy and receipt of which consideration is hereby
acknowledged, the parties hereto agree as follows:
1. Supersedure. This Agreement shall supersede and replace the Employment
Agreement by and between the Bank and Executive dated August 23, 1995 (the
"Prior Agreement"), but shall not replace or otherwise effect the Bank's Salary
Continuation Agreement dated September 18, 1996 (the "Salary Continuation
Plan"), except that the parties agree that the Merger shall not be deemed a
"Change of Control" under the Salary Continuation Plan.
2. Term. This Agreement shall have a term of six (6) years, commencing as
of the Effective Date set forth above (the "Term"). Where used herein, "Term"
shall refer to the entire period of employment of Executive by the Bank from and
after the Effective Date of this Agreement, whether for the period provided
above and as extended or terminated earlier as hereinafter provided.
3. Position and Duties. (a) For the first three (3) years of the Term,
Executive shall be employed on a full-time basis to serve as President and Chief
Executive Officer of the Bank and perform the duties customarily performed by
such officer of a savings association, including the general supervision and
operation of the business and affairs of the Bank, and reporting to the
applicable regulatory authorities regarding the activities of the Bank, subject
to the direction of and the powers vested by law in the Board of Directors of
the Bank (the "Board") and the Bank's shareholder, Peoples. Except as provided
for herein, the duties and position of Executive as President and Chief
Executive Officer hereunder may be changed only by the mutual written agreement
of the parties hereto. If Executive Continues his full-time employment with the
Bank for a period of no less than thirty (30) months following the Effective
Date, the parties may mutually agree to extend Executive's full-time status for
an additional 12-month period; i.e., for a total period of four (4) years
37
following the Effective Date. If Executive continues his full-time employment
with the Bank for three and one-half (3 1/2) years following the Effective Date,
the parties may mutually agree to extend Executive's full-time status for a
further twelve (12) month period; i.e., five (5) years following the Effective
Date. Following the conclusion of his status as a full-time employee, whether or
not extended beyond the first three (3) years of the Term, Executive shall
perform services for the Bank in accordance with Paragraph 3(b), hereinbelow.
(b) Commencing with the third (3rd) anniversary of the Effective Date (or
upon subsequent termination of Executive's full-time status, following one or
more extensions under Paragraph 3 (a), and for three (3) years thereafter or
until October 3, 2007 ("Reduced Service Period"), Executive shall devote not
less than twenty (20) hours per week in order to monitor the activities of the
Bank and to perform such other services as are reasonably established by the
Board of Directors in consultation with the Executive. Executive's non-working
time during each year in the Reduced Service Period shall be spread out as
evenly as possible during the year so as to ensure that he continues to
appropriately monitor the activities of the Bank throughout the year. If
Executive agrees to continue his full-time status for four years, the Reduced
Services Period will remain at three years but will end three years after the
end of the Executive's full-time status. If Executive agrees to continue his
full-time status for five years, the Reduced Services Period will end on October
3, 2007.
(c) During the Term hereof, Executive shall perform the services herein
contemplated to be performed by Executive faithfully, diligently and to the best
of Executive's ability in compliance with instructions and policies of the
Board, the Bank's Federal Charter and Bylaws and with all applicable laws and
regulations.
4. Compensation. (a) Base Salary. For Executive's services rendered
hereunder, during his full-time employment as set forth in Paragraph 3(a)
hereinabove, the Bank shall pay or cause to be paid a base salary to Executive
at the rate of One Hundred Four Thousand Five Hundred Dollars ($104,500) per
annum, payable in conformity with the Bank's normal payroll periods and
procedures. Subject to the provisions of Paragraph 11(a) hereinbelow, for each
year during the Reduced Service Period, the Bank shall pay or cause to be paid a
base salary to Executive at the rate of Seventy-Five Thousand Dollars ($75,000)
per annum, paid in conformity with the Bank's normal payroll periods and
procedures. During the Term, Executive's base salary shall be reviewed at least
once every twelve (12) months and shall be increased (but not reduced) at any
time, and from time to time, as shall be substantially consistent with increases
in base salary generally awarded in the ordinary course of business to other
executives of the Bank, provided that Executive's Base Salary shall be increased
by a percentage no less than the annual increase of the cost of living index for
the Detroit, Michigan metropolitan area. Any increase in base salary shall not
serve to limit or reduce any other obligation to the Executive under this
Agreement. The term "Base Salary" as utilized in this Agreement shall refer to
base salary as so increased, or to the $75,000 (or $60,000 if Section 11(a)
hereof applies) amount applicable during the Reduced Service Period.
(b) Discretionary Bonus. In addition to Executive's Base Salary provided
for under Paragraph 4(a) above, the Executive shall participate in an equitable
manner with all other senior management executives of the Bank in discretionary
bonuses that the Board may award from time to time to the Bank's senior
management executives. No other compensation provided for in this Agreement
shall be deemed a substitute for the Executive's right to participate in such
discretionary bonuses.
38
(c) Automobile Allowance. The Bank shall provide Executive an automobile
titled in the name of the Bank with a purchase price not to exceed $30,000. The
automobile currently being used by Executive shall be traded in at the time this
newly acquired automobile is purchased. Executive shall select the automobile to
be purchased. The Bank shall pay the cost of the insurance and the title for the
automobile and shall reimburse Executive for his business use of the automobile.
(d) Stock Awards. The Executive shall be eligible for consideration for
stock option grants by Peoples pursuant to any stock option plan adopted by
Peoples, for so long as Executive shall be employed by the Bank. Upon the
termination of this Agreement, for any reason, Executive shall immediately
become vested in any accrued but unvested options to which he may be entitled.
(e) Other Benefits. The Executive will be eligible to participate in or
receive benefits under any employee benefit plans of the Bank which are
available to senior executives and key management employees of the Bank, subject
to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements. Nothing paid to Executive under
any such plan or arrangement will be deemed to be in lieu of other compensation
to which the Executive is entitled under this Agreement.
5. Vacation and Sick Leave. During the Term hereof, Executive shall be
entitled to paid vacation and paid sick leave, the amount and term of which
shall be determined in accordance with the policies of the Bank as in effect
from time to time, but in no event shall the vacation period be less than five
(5) weeks per year.
6. Group Medical, Life Insurance and Other Benefits. (a) The Executive
shall participate in any plan that the Bank maintains for the benefit of its
executives if the plan relates to (i) pension, profit-sharing or other
retirement benefits, (ii) medical insurance or the reimbursement of medical or
dependent care expenses, or (iii) other group benefits, including disability and
life insurance plans. As of the Effective Date, the Executive shall be
immediately vested in the health and medical benefits that are currently
provided by the Bank and such benefits shall continue until Executive reaches
the age of sixty-five (65) years. Such benefits shall not be affected by any
termination of the Executive's employment under any provision of this Agreement.
In the event the Bank enhances its health and medical benefits, the Executive
shall be immediately vested in the enhanced benefits. To the extent that the
commencement date of Medicare benefits is extended beyond age 65, the provisions
of the Paragraph 6 shall be extended to the commencement date of such Medicare
benefits, whether or not this Agreement is then in effect.
(b) During the Term of this Agreement, the Executive shall continue to
participate in the Three Rivers Financial Corporation's Retirement Plan and the
Salary Continuation Plan. Unless there is a termination for cause or a voluntary
early termination by Executive of either his full-time employment or employment
under the Reduced Service Period, Executive shall receive additional retirement
benefits from Peoples or the Bank equivalent to the amount of retirement
benefits he would have received as if he had continued in the employment of the
Bank continuously through the age of sixty-five (65) years, which are not
otherwise paid to him under the Retirement Plan and the Salary Continuation
Plan.
39
7. Business Expenses. Executive shall be entitled to reimbursement by the
Bank for any and all ordinary and necessary business expenses reasonably
incurred by Executive in the performance of Executive's duties and in acting for
the Bank during the Term of this Agreement, provided that Executive furnishes to
the Bank, for review and approval by the Chairman of the Board, adequate records
and other documentation as may be required for the substantiation of such
expenditures as a business expense of the Bank. During the period of employment
hereunder the Executive shall be entitled to an office or offices of a size and
with furnishings and other appointments, and to exclusive personal secretarial
and other assistance, at least equal to the most favorable of the foregoing as
provided generally at any time hereafter with respect to other executives of the
Bank. The Executive shall also be entitled to receive reimbursement for
membership fees and/or dues in the Michigan county club, of which he is
currently a member, for each year during the Term.
8. Termination for Cause. (a) The Board may for cause terminate Executive's
employment at any time during the Term of this Agreement. In such event, all
rights of Executive under this Agreement shall terminate and Executive shall
have no right to receive compensation or other benefits for any period after the
effective date of such termination for cause. Termination for cause shall be
defined as the Executive's dishonesty, incompetence, willful misconduct, breach
of fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement.
(b) Notwithstanding the foregoing, no termination for cause shall be
effective with respect to the Executive unless and until there shall have been
delivered to him a copy of a resolution, find that in the good faith opinion of
the Board of Directors of the Bank, (the "Board"), the Executive's actions
and/or failure to act justifies termination for cause and specifying the
particulars thereof in detail. Reasonable notice shall be provided to the
Executive and he shall receive an opportunity, together with counsel, to be
heard before the Board. The Executive shall not have the right to receive
compensation or other benefits for any period after a termination for cause,
except that he shall immediately become vested in any accrued but unvested
options granted to him pursuant to any stock option plan adopted by the Bank
upon his termination for cause and any other benefits previously vested or
accrued shall be unaffected by such termination; including without limitation,
vested and/or accrued but unvested right of the Executive under the Three Rivers
Financial Corporation Retirement Plan and the Salary Continuation Plan and the
benefits provided under Paragraph 6(a) of this Agreement.
9. Events of Termination; Payments to Executive.
The provisions of the Paragraph 9 shall apply upon the occurrence of an
Event of Termination (as herein defined).
(a) As used in this Agreement, an "Event of Termination" shall mean and
include any one of more of the following: (i) the termination by the Bank of the
Executive's employment hereunder for any reason other than for cause (as defined
in Paragraph 8 hereinabove) during the Term; or (ii) the Executive's resignation
or constructive termination from the Bank's employ, upon any (A) material change
in the Executive's function, duties, or responsibilities (other than the changes
contemplated by Paragraph 3(b) hereof), which change would cause the Executive's
position to become one of lesser responsibility, importance, or scope from the
position and attributes thereof described in Paragraph 3 above (and any such
material change shall be deemed a continuing breach of this Agreement), (B)
Relocation of the principal place at which Executive's duties are to be
performed to a location outside a thirty (30) mile radius around the principal
location at which Executive's duties are performed immediately prior to the
termination of employment, (C) material reduction in the benefits and
perquisites to the Executive from those being provided as of the Effective Date
40
of this Agreement except for any changes that are generally applicable to senior
executives and key management employees or expressly contemplated by this
Agreement (any such reduction to be deemed a continuing breach of this
Agreement), or (D) or any other material breach of this Agreement by the Bank.
Upon the occurrence of any event described in clauses (A), (B), (C) or (D)
above, the Executive shall have the right to elect to terminate his employment
under this Agreement by resignation upon not less than sixty (60) days prior
written notice given within a reasonable period of time not to exceed, except in
case of a continuing breach, four calendar months after the later of the (i)
occurrence of the event giving rise to said right to elect termination or (ii)
actual knowledge of such event by the Executive. In the case of a continuing
breach, the Executive may give such sixty (60) days prior notice at any time.
Either of Executive's sixty (60) days prior notice of his Date of Termination
shall be referred to as "Notice of Termination". The date specified in
Executive's Notice of Termination to the Bank of his last date of employment
shall be the "Date of Termination".
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in this Paragraph 9, the Bank shall pay the Executive,
or, in the event of his subsequent death, his beneficiary or beneficiaries as he
may have designed, or his estate, if no beneficiary designation has been made,
or if no beneficiaries survive the Executive, as severance pay or liquidated
damages, or both, a sum equal to (i) the amount of Base Salary of the Executive
for each year during the remaining Term of this Agreement, plus (ii) bonuses in
an amount equal to the last bonus received, multiplied by the number of
full-service years remaining in the Term of this Agreement, as well as (iii)
health and/or medical benefits as provided under Paragraph 6(a) and retirements
benefits under Paragraph 6(b) of this Agreement to the age of 65, provided,
however, that if the Bank is not in compliance with its minimum capital
requirements or if such payments would cause the Bank's capital to be reduced
below its minimum capital requirements, such payments shall be deferred until
such time as the Bank is in capital compliance. Such health benefit payments
shall be made as incurred, and such salary, bonus and retirement benefit
payments shall be made in a lump sum within ten (10) days of the Date of
Termination unless the Executive makes an election within ten (10) days of the
Notice of Termination to have such payments made under the Bank's current
payment procedures during the remaining Term of Employment under this Agreement.
Such payments shall not be reduced in the event the Executive obtains other
employment following termination of employment and the Executive shall be under
no duty or obligation to seek or accept other employment after the Event of
Termination and shall not be required to mitigate the amount of any payments
provided by this Agreement by seeking employment or otherwise.
(c) The payments provided under this Paragraph 9 upon an Event of
Termination shall be in lieu of any other payments or damages recoverable in any
causes of action by Executive related to this Agreement. As a condition to
receipt of payments hereunder, the Executive shall execute a Release and
Settlement Agreement pursuant to which the Executive shall waive any and all
claims resulting from employment at or termination from the Bank other than
payments or benefits which are expressly provided for in this agreement. Vested
and/or accrued but unvested rights of the Executive under the Three Rivers
Financial Corporation's Retirement Plan and the Salary Continuation Plan and the
benefits provided under Paragraphs 4(d) and 6(a) hereof, shall not be affected
by an Event of Termination under this Agreement.
41
10. Termination as a Result of a Change of Control. (a) Change of Control.
For purposes of this Agreement and except as provided in Paragraph 12(c) below
relating to supervisory transactions, the term "Change of Control" shall mean
the occurrence of any of the following events;
(i) Any "person" (as such term is used in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than a
trustee or other fiduciary holding securities under an employee benefit plan of
Peoples or a corporation owned directly or indirectly by the shareholders of
Peoples in substantially the same proportions as their ownership of stock in
Peoples, becomes after the date hereof the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of
Peoples representing fifty percent (50%) or more of the total voting power
represented by Peoples then outstanding securities that vote generally in the
election of directors ("Voting Securities");
(ii) Any "person" (as such term is used in Section 13(d) and 14(d) of the
Exchange Act), other than a trustee or other fiduciary holding securities under
an employee benefit plan of Peoples or a corporation owned directly or
indirectly by the shareholders of Peoples in substantially the same proportions
as their ownership of stock in Peoples, becomes after the date hereof the
"beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of twenty-five (25%) or more of the Voting Securities of Peoples,
and, within a period of twelve (12) months of such acquisition of beneficial
ownership, individuals who at the beginning of such period constitute the Board
of Directors of Peoples, or any new director whose election or nomination was
approved by a vote of at least two-thirds of the directors of Peoples then still
in office who were directors at the beginning of such period, or whose election
or nomination was previously so approved, cease for any reason to constitute at
least sixty percent (60%) of the directors of Peoples;
(iii) The merger or consolidation of Peoples with any other corporation,
other than a merger or consolidation in which the shareholders of Peoples
immediately prior thereto continue to own, directly or indirectly, Voting
Securities representing at least seventy-five percent (75%) of the total voting
power of the entity surviving such merger or consolidation; or
(iv) The complete liquidation of Peoples or the Bank or sale or disposition
by Peoples or the Bank (in one transaction or a series of transactions) of all
or substantially all of Peoples or the Bank's assets.
(b) Severance Payment. If Executive's employment with the Bank is
terminated as a result of a Change of Control of Peoples, Executive shall be
entitled to receive as his sole and exclusive remedy a severance payment equal
to 2.99 years of Executive's Base Salary, as provided for in Paragraph 3(a) of
this Agreement, plus the amount of any bonus compensation earned by Executive
during the 2.99 years immediately preceding the Change of Control, health
benefits under Paragraph 6(a) and retirement benefits under Paragraph 6(b), both
of which shall be received until Executive reaches the age of 65, as well as
rights to any vested or accrued but unvested options, less any amounts required
to be deducted by the Bank for federal and state taxes or other applicable
requirements. The severance payment hereunder shall be paid to Executive upon
the effectiveness of Executive's termination of employment from the Bank and the
termination of this Agreement. In the event a severance payment is paid to
Executive under this Paragraph 10(b), this Agreement shall be terminated and the
Bank shall have no further obligation to Executive under this Agreement, except
as provided herein.
42
(c) Upon the occurrence of a Change in Control, the Executive will be
entitled to any benefits granted to him pursuant to any stock option or any
other benefit plan of the Bank whether or not such benefits have vested in
accordance with Paragraph 4(d). Vested and/or accrued but unvested rights of
Executive under the Bank's Retirement Plan, the Retirement Plan of the Three
Rivers Financial Corporation, the Salary Continuation Plan or any supplemental
plan, and Executive's health and/or medical benefits provided under Paragraph
6(a) of this Agreement shall not be affected by a Change in Control.
(d) Notwithstanding the preceding paragraphs of this Paragraph 10, the
payments or benefits to be made or afforded to Executive under this Agreement
when aggregated with any other "golden parachute" amounts (defined under Section
280G of the Internal Revenue Code of 1986, as amended (the "Code") as
compensation that becomes payable or accelerated due to a Change in Control
payable under any other plans, agreements or policies of Peoples or the Bank,
shall be reduced to the highest amount permissible under Sections 280G and 4999
of the Code before the Executive becomes subject to the excess parachute payment
excise tax under Section 4999 of the Code and Peoples or the Bank loses all or
part of its compensation deduction for such payments. The allocation of the
reduction required hereby among the benefits to which the Executive is entitled
shall be determined by the Executive.
(e) Compliance with Law and Regulation. The parties hereto expressly
acknowledge and agree that any payments made to Executive pursuant to this
Agreement or otherwise are subject to and conditioned upon compliance with 12
U.S.C. Section 1828(k) and any regulations promulgated thereunder.
11. Other Termination.
(a) Termination By Executive. At any time after the expiration of eighteen
(18) months following the Effective Date, the Executive shall have the right to
terminate his full-time employment with the Bank and continue employment with
the Bank in accordance with Section 3 (b), hereinabove. Notwithstanding any
provision to the contrary herein, should Executive exercise his right to
terminate his full-time employment prior to the conclusion of three (3) years
following the Effective Date, Executive's Base Salary shall be Sixty Thousand
Dollars ($60,000) per annum for the Reduced Services Period for the remainder of
the Term. Notwithstanding any provision to the contrary herein contained, during
the Term of this Agreement, the Executive shall have the right to terminate this
Agreement and his employment hereunder with no further obligation to the Bank,
upon thirty (30) days notice to the Bank. Upon termination by the Executive, he
shall be paid the compensation provided under Paragraph 4 (a) of this Agreement
only through the effective date of such termination and will not be entitled to
any further accruals of retirement benefits, except that any accrued but
unvested options granted to Executive pursuant to any stock option plan adopted
by the Bank will vest immediately upon the effective date of termination,
Executive shall be entitled to receive the health and medical benefits accruing
to Executive as set forth in Paragraph 6 (a) until he reaches the age of 65
years and Executive shall be entitled to receive all benefits pursuant to the
terms of any applicable welfare benefit plans as set forth in this Agreement.
(b) Disability. In the event that Executive shall fail, because of illness,
incapacity or injury, to render the services contemplated by this Agreement for
three (3) consecutive calendar months, or for shorter periods aggregating four
(4) months in twelve (12) month period, Executive's employment hereunder may be
terminated by written notice from the Bank to Executive. In the event that
Executive's employment is terminated under this Paragraph 11 (b), Executive
shall receive the difference between any disability payments provided by the
43
Bank's insurance plans and his Base Salary as set forth in Paragraph 4 (a)
hereof which he would have received during the remaining Term of this Agreement,
plus the amount of any bonus compensation payable to Executive under Section 4
(b) hereof for any number of full-service years remaining in the Term of this
Agreement, prorated as appropriate. Such termination shall not effect any rights
which Executive may have pursuant to any insurance or other death benefit,
retirement or stock award plans or arrangements of the Bank, or any stock option
plans or options thereunder, which rights shall continue to be governed by the
provisions of such plans and arrangements. No termination for disability shall
effect Executive's right to receive health and/or medical benefits until he
reaches the age of 65 years.
(c) Death. If Executive's employment is terminated by reason of Executive's
death, this Agreement shall terminate without further obligations of the Bank to
Executive (or Executive's heirs or legal representatives) under this Agreement,
other than for payment of (i) Executive's Base Salary which he was receiving at
the time of death, prorated through the date of termination; (ii) the amount of
any bonus compensation payable to Executive at the time of his death under
Section 4 (b) above, prorated through the date of termination; (iii) any
compensation previously deferred by Executive; (iv) any accrued vacation and/or
sick leave pay; (v) any vested and/or accrued but unvested rights in any stock
options and (vi) any amounts due pursuant to the terms of any applicable welfare
benefit plan. All of the foregoing amounts shall be paid to Executive's estate
or beneficiary, as applicable, in a lump sum in cash within thirty (30) days
after the date of termination or earlier as required by applicable law.
12. Regulatory Provisions.
(a) Suspension and Removal Orders. If Executive is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by notice served under Section 8 (e) (3) or 8 (g) (1) of the Federal Deposit
Insurance Act (12 U.S.C. Section 1818 (e) (3) and (g) (1)), the Bank's
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion: (i) pay Executive all or part of the
compensation withheld while its obligations under this Agreement were suspended;
and (ii) reinstate (in whole or in part) any of its obligations which were
suspended. If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8 (e) (4) or 8 (g) (1) of the Federal Deposit Insurance Act (12 U.S.C.
Section 1818 (e) (4) or (g) (1)), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the parties shall not be effected.
(b) Termination by Default. If the Bank is in default (as defined in
Section 3 (x) (1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1813
(x) (1)), all obligations under this Agreement shall terminate as of the date of
default, but vested rights of the parties shall not be affected.
(c) Supervisory Assistance or Merger. All obligations under this Agreement
shall be terminated, except to the extent that it is determined that
continuation of the Agreement is necessary for the continued operation of the
Bank: (i) by the Director of the Office of Thrift Supervision (the "Director")
or his or her designee, at the time that the Federal Deposit Insurance
Corporation or the Office of Thrift Supervision enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13 (c) of the Federal Deposit Insurance Act (12 U.S.C. Section 1823
(c)); or (ii) by the Director or his or her designee, at the time that the
Director or his or her designee approves a supervisory merger to resolve
problems related to the operation of the Bank or when the Bank is in an unsafe
or unsound condition. All rights of the parties that have already vested,
however, shall not be effected by such action.
44
13. Disclosure or Use of Trade Secrets/Non-Compete Agreement. During the
Term hereof, Executive will have access to and become acquainted with what
Executive and the Bank acknowledge are trade secrets of the Bank. Executive
shall not use or disclose any trade secrets or, directly or indirectly, cause
them to be used or disclosed in any manner, during the Term hereof or for a
period of one (1) year after the termination of this Agreement, except as may be
required or requested by the Bank, by court order or under applicable law or
regulation. While Executive is employed by the Bank and for a period of one year
after termination of Executive's employment by the Bank for cause or by the
Executive, Executive shall not directly or indirectly engage in any bank or
bank-related business which competes with the business of the Bank as conducted
during Executive's employment by the Bank for any financial institution,
including, but not limited to, banks, savings associations and credit unions
within a 50-mile radius of Three Rivers, Michigan.
14. Return of Documents. Executive expressly agrees that all manuals,
documents, files, reports, studies or other materials used and/or developed by
Executive for the Bank during the Term of this Agreement or prior thereto while
Executive was employed by the Bank are solely the property of the Bank, and that
Executive has no right, title or interest therein. Upon termination of this
Agreement, Executive or Executive's representative shall promptly deliver
possession of all such materials (including any copies thereof) to the Bank.
15. Notices. All notices, demands or other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered in
person, or sent by United States mail, certified or registered, with return
receipt requested, if to Executive, addressed to Executive at the last residence
address of Executive as shown in the records of the Bank, and if to the Bank,
addressed to the Chairman of the Board at the Bank's principal office.
16. Governing Law and Jurisdiction. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of Michigan. Each of the
parties hereto consents to the jurisdiction of the Michigan or federal courts,
as the case may be, for the enforcement of this Agreement and matters pertaining
to the transactions and activities contemplated hereby.
17. Attorneys' Fees. In the event that a dispute arises with respect to
this Agreement, the prevailing party in such dispute shall be entitled to
recover all expenses, including, without limitation, reasonable attorneys' fees,
incurred in connection with such dispute.
18. Benefit of Agreement. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that executive may not assign any interest in this
Agreement without the prior written consent of the Bank.
19. Captions. Captions and paragraph heading used in this Agreement are for
convenience only and shall not be used in interpreting or construing this
Agreement.
20. Entire Agreement. This Agreement contains the entire agreement of the
parties with respect to the employment of Executive by the Bank, and it
expressly supersedes any and all other agreements, either oral or written,
relating thereto.
45
21. Severability. Should any provision of this Agreement for any reason be
declared invalid, void or unenforceable by a court of competent jurisdiction,
the validity and binding effect of any remaining portions of this Agreement
shall remain in full force and effect as if this Agreement had been executed
with such invalid, void or unenforceable provisions eliminated; provided,
however, that the remaining provisions still reflect the intent of the parties
to this Agreement.
22. Amendments. This Agreement may not be amended or modified except by a
written agreement signed by Executive and the Bank. This Agreement and any
amendment thereof may be executed in counterparts.
46
Exhibit 13
Annual Report to Shareholders
TABLE OF CONTENTS
FINANCIAL REVIEW
Five Year Summary of Selected Financial Data 2
Management's Discussion and Analysis 3
Statement of Management's Responsibility 12
Independent Accountants' Report 13
Consolidated Balance Sheets 14
Consolidated Statements of Income 15
Consolidated Statements of Stockholder's Equity 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18
1
Selected Consolidated Financial Data of the Company
September 30
---------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Financial Condition Data:
Total assets $491,445,300 $502,920,006 $506,460,255 $479,412,813 $459,908,211
Loans receivable, net 360,454,908 356,953,361 385,019,764 403,627,702 390,435,094
Investments and other
interest-earning assets 109,254,698 122,104,691 97,439,040 53,306,663 44,651,407
Deposits 370,824,854 380,115,884 379,936,471 368,479,589 352,855,715
Borrowed funds 53,421,460 56,749,653 62,292,774 49,476,688 47,182,393
Stockholders' equity 64,991,560 63,924,854 60,846,197 58,053,551 57,299,548
For Year Ended September 30
---------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Operating Data:
Interest income $ 26,866,634 $ 29,748,296 $ 33,365,200 $ 35,560,673 $ 30,425,367
Interest expense 10,335,942 12,147,419 15,704,094 19,761,387 16,327,846
------------ ------------ ------------ ------------ ------------
Net interest income 16,530,692 17,600,877 17,661,106 15,799,286 14,097,521
Provision
for losses on loans 40,374 537,181 347,862 353,936 159,869
------------ ------------ ------------ ------------ ------------
Net interest income
after provision
for losses on loans 16,490,318 17,063,696 17,313,244 15,445,350 13,937,652
Other income 1,646,944 2,713,522 2,205,742 1,804,949 1,280,830
Other expenses 11,411,108 11,032,427 10,656,380 9,689,079 7,770,839
------------ ------------ ----------- ------------ -------------
Income before income taxes 6,726,154 8,744,791 8,862,606 7,561,220 7,447,643
Income tax expense 1,991,957 2,995,486 3,457,625 2,873,175 2,899,689
------------ ------------ ----------- ------------ -------------
Net income $ 4,734,197 $ 5,749,305 $ 5,404,981 $ 4,688,045 $ 4,547,954
============ ============ ============ ============ ============
Basic earnings per share $1.40 $1.67 $1.56 $1.33 $1.33
============ ============ ============ ============ ============
Diluted earnings per share $1.39 $1.66 $1.56 $1.32 $1.32
============ ============ ============ ============ ============
Dividends per common share $0.69 $0.65 $0.61 $0.57 $0.53
============ ============ ============ ============ ============
Other Data:
Average yield
on interest-earning assets 5.68% 6.21% 7.25% 8.04% 8.20%
Average cost
of interest-bearing liabilities 2.39 2.76 3.69 4.82 5.06
------------ ------------ ------------ ------------ ------------
Interest rate spread 3.29% 3.45% 3.56% 3.22% 3.14%
============ ============ ============ ============ ============
Number of full service banking offices 15 15 15 14 14
Return on assets (net income divided by
average total assets) 0.95% 1.14% 1.11% 0.99% 1.20%
Return on equity (net income divided
by average total equity) 7.41% 9.19% 9.14% 8.17% 8.66%
Dividend payout ratio
(dividends per common share divided by
net income per common share) 49.29% 38.92% 39.10% 42.86% 39.85%
Equity to assets ratio (average total equity
divided by average total assets) 12.87% 12.39% 12.15% 12.17% 13.53%
2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward Looking Statements
This Annual Report contains statements that constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements appear in a number of places in this report and include
statements regarding the intent, belief, outlook, estimate or expectations of
Peoples Bancorp (the "Company"), its directors or its officers primarily with
respect to future events and the future financial performance of the Company.
Readers of this report are cautioned that any such forward looking statements
are not guarantees of future events or performance and involve risks and
uncertainties, and that actual results may differ materially from those in the
forward looking statements as a result of various factors. The accompanying
information contained in this report identifies important factors that could
cause such differences. These factors include changes in interest rates, loss of
deposits and loan demand to other financial institutions, substantial changes in
financial markets, changes in real estate values and the real estate market,
regulatory changes, unanticipated conversion expenses, increases in compensation
and employee expenses, or unanticipated results in pending legal proceedings.
Overview
Peoples Bancorp had net income of $4,734,197 or $1.40 basic earnings per
share for the year ended September 30, 2004. Several factors combined to reduce
earnings from the prior year's record level of $1.67 per share. As interest
rates began to rise this year, fewer borrowers were refinancing mortgage loans.
Since many of these loans had already been refinanced in the prior year,
interest income was reflected at the lower rates. As deposit products reprice at
higher rates, the net interest margin begins to be compressed. Also, fewer
refinancings lead to fewer loan sales, reducing the gains on these sales, and
further reducing income. Management is aware of these pressures on income, and
expects them to continue in the coming year. As many consumers now have very low
interest mortgage loans, prepayments will probably slow down, and demand for new
loans will stay slow. This slower loan demand may depress loan sales, and
further reduce gains recognized on loan sales.
To offset these negative pressures on earnings, the Company will continue
to closely monitor costs. The Check Clearing for the 21st Century Act (Check 21)
offers potential cost savings in the processing of check products by presenting
electronic images rather than actual paper checks. This eliminates the need to
transport paper items from place to place, and increases the efficiency of the
process. The Company has made a significant investment in equipment to take full
advantage of Check 21.
Several branch facilities have been updated during the past year to better
serve customers. An ATM machine was added at the Peoples Federal Avilla, IN
office for a total of eight machines in the Peoples network. Internet
banking/bill pay was also implemented this year to give customers 24/7 accesses
to accounts and information. Data Warehouse software has been added in order to
better identify customer needs to allow management to more closely monitor
customer's accounts. Management believes the combination of new technology with
excellent customer service will position the Company for continued success in
the future.
Critical Accounting Policies
The notes to the consolidated financial statements contain a summary of the
Company's significant accounting policies presented on pages 18-39 of the annual
report for fiscal year 2004. Certain of these policies are important to the
portrayal of the Company's financial condition and results of operations, since
they require management to make difficult, complex or subjective judgments, some
of which may relate to matters that are significant and inherently uncertain.
Management believes that it's critical accounting policies include determining
the allowance for loan losses ("ALL") and accounting for goodwill.
Allowance For Loan Losses
The ALL is a significant estimate that can and does change based on
management's assumptions about specific borrowers and applicable economic and
environmental conditions, among other factors. Management reviews the adequacy
of the ALL on a monthly basis. This review is based on specific identified risks
or anticipated losses in individual loans, a percentage factor based on the
classification of certain loans, and managements' analysis of overall economic
conditions such as employment, bankruptcy trends, property value changes and
changes in delinquency levels.
Credits are evaluated individually based on degree of delinquency and/or
identified risk ratings of special mention or worse. Credits with delinquency
levels of less than 60 days and risk ratings of satisfactory/monitor or better,
are reviewed in the aggregate. Percentage factors applied to individual credits
are based on risk rating, the type of credit and estimated potential losses in
the event liquidation becomes necessary. Percentage factors applied to loans
reviewed in the aggregate are based solely on the type of credit. Anticipated
losses on loans transferred to real estate owned are recognized immediately upon
recording the asset.
The ALL also includes a component based on management's assumptions of
changes in risk in non-quantifiable areas such as market conditions, property
values, employment conditions and perceived changes in overall portfolio quality
due to changes in concentration, underwriting changes and both national and
regional trends.
External factors such as increases in unemployment, regional softness in
property values and increasing national numbers in bankruptcy and internal
factors such as the continuing increase in the commercial loan portfolio,
increasing unsecured delinquency and charge offs may result in larger losses in
3
Management's Discussion and Analysis of
Financial Condition and Results of Operations
current economic conditions. Charge-offs have remained stable over the last
five years at $100-$200 thousand, with the exception of 2003 when a large
charge-off was taken on a commercial loan caused by fraud on the part of the
borrower. Management feels they have done a good job of identifying specific
risks in the portfolio, however, as in the case of the commercial loan
charge-off, fraud on the part of borrowers can not always be anticipated by the
Banks. Changes in loan concentration, delinquency and portfolio are addressed
through the variation in percentages used in calculating the ALL for various
types of credit as well as individual review of "high risk" credits and large
loans.
Accounting for Goodwill
Goodwill is no longer amortized by the Company but instead is tested
annually for impairment. The impairment testing involves estimating the implied
fair value of the goodwill and comparing to the carrying amount. If the implied
fair value is less than the carrying value, goodwill impairment is indicated and
goodwill is written down to the implied fair value.
General
The Company is an Indiana corporation organized in October 1990 to become
the thrift holding company for Peoples Federal Savings Bank ("Peoples").
Effective February 29, 2000 the Company purchased Three Rivers Financial Corp.
and its wholly owned subsidiary, First Savings Bank ("First Savings"). The
Company is the sole stockholder of Peoples and First Savings ("collectively
Banks"). Peoples conducts business from its main office in Auburn and in its
eight full service offices located in Avilla, Columbia City, Garrett,
Kendallville, LaGrange, Topeka, and Waterloo Indiana. Peoples offers a full
range of retail deposit services and lending services to northeastern Indiana.
First Savings conducts business from its main office in Three Rivers, Michigan
and its five full service offices in Three Rivers, Schoolcraft and Union,
Michigan and Howe and Middlebury, Indiana. The Company's primary business
activity is being the holding company for Peoples and First Savings.
The Company's earnings are primarily dependent upon the earnings of the
Banks. Historically, the principal business of savings banks, including Peoples
and First Savings, has consisted of attracting deposits from the general public
and making loans secured by residential real estate. The Banks' net earnings are
contingent on the difference or spread between the interest earned on their
loans and investments and the interest paid on its consumer deposits and
borrowings. Prevailing economic conditions, government policies, regulations,
interest rates, and local competition also significantly affect the Banks.
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. The Banks' earnings are also affected by gains and
losses on sales of loans and investments, provisions for loan losses, service
charges, income from subsidiary activities, operating expenses and income taxes.
On a yearly basis, the Company updates its long-term strategic plan. This
plan includes, among other things, the Company'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 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 are 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, 2004, 2003, and 2002.
September 30
----------------------
2004 2003 2002
------ ------- ------
Weighted average interest rate on:
Loans 6.44% 7.09% 7.88%
Securities 3.31 3.69 4.57
Other interest-earning assets 2.49 2.03 3.04
Combined 5.68 6.21 7.25
Weighted average cost of:
NOW and savings deposits 0.73 0.86 1.59
Certificates of deposit 2.91 3.42 4.68
Borrowings 5.41 5.36 5.71
Combined 2.39 2.76 3.69
Interest rate spread 3.29 3.45 3.56
Net yield on weighted average
interest-earning assets 3.49 3.67 3.83
4
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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, 2004, 2003 and 2002.
At September 30
------------------------------
2004 2003 2002
--------- --------- --------
Weighted average interest rate on:
Loans 6.38% 6.69% 7.46%
Securities 3.36 3.13 4.14
Other interest-earning assets 3.95 1.78 3.72
Combined 5.70 5.69 6.76
Weighted average cost of:
NOW and savings deposits 0.76 0.76 1.87
Certificates of deposit 2.96 2.99 5.49
Borrowings 5.43 5.52 4.65
Combined 2.41 2.48 4.08
Interest rate spread 3.29 3.21 2.68
Asset and Liability Management
The Banks, like other savings banks, are subject to interest rate risk to
the degree that their 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 the Banks' real estate loans were made at fixed rates.
More recently, the Banks have 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 OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of thrift institutions. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Thrift
institutions with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Institutions that do not meet either of the filing requirements are not required
to file OTS Schedule CMR, but may do so voluntarily. Under the regulation,
institutions that must file are required to take a deduction (the interest rate
risk capital component) from their total capital available to calculate their
risk-based capital requirement if their interest rate exposure is greater than
"normal". The amount of that deduction is one-half of the difference between (a)
the institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets.
Presented below, as of September 30, 2004 and 2003, is an analysis
performed by the OTS of Peoples' interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts in the yield curve, in 100
basis point increments, up 200 basis points and down 100 basis points. At
September 30, 2004 and 2003, 2% of the present value of Peoples' assets were
approximately $7.8 million and $8.0 million. Because the interest rate risk of a
200 basis point increase in market rates (which was greater than the interest
rate risk of a 100 basis point decrease) was $10.3 million at September 30, 2004
and $5.5 million at September 30, 2003, Peoples Federal would have been required
to make a deduction from its total capital available to calculate its risk based
capital requirement at September 30, 2004 and 2003 if the OTS's regulation had
been enacted.
Peoples Federal Savings Bank
Interest Rate Risk As of September 30, 2004
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------
+300 bp 37,608 (17,540) -32% 10.40% (381)
+200 bp 44,829 (10,319) -19% 12.06% (215)
+100 bp 50,731 (4,417) -8% 13.32% (88)
0 bp 55,148 - - 14.20% -
- -100 bp 55,199 51 0% 14.10% (11)
Peoples Federal Savings Bank
Interest Rate Risk As of September 30, 2003
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------
+300 bp 42,468 (11,450) -21% 0.11% (224)
+200 bp 48,414 (5,503) -10% 12.57% (97)
+100 bp 52,878 (1,039) -2% 13.45% (10)
0 bp 53,918 - - 13.55% -
- -100 bp 54,222 305 1% 13.48% -7
5
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following, as of September 30, 2004 and 2003, is the same analysis
performed by the OTS of First Savings' interest rate risk. At September 30, 2004
and 2003, 2% of the present value of First Savings' assets were approximately
$2.4 million and $2.5 million. The interest rate risk of a 200 basis point
increase in market rates (which was greater than the interest rate risk of a 200
basis point decrease) was $.9 million at September 30, 2004, and $.02 million at
September 30, 2003. At September 30, 2004 and 2003, 2% of the present value of
First Savings assets exceeded the 200 basis point decrease of $.9 million and
$.6 million, therefore no reduction of capital would be required.
First Savings Bank
Interest Rate Risk As of September 30, 2004
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------
+300 bp 15,153 (2,015) -12% 13.32% (106)
+200 bp 16,242 (927) -5% 14.01% (37)
+100 bp 16,908 (260) -2% 14.35% (2)
0 bp 17,168 - - 14.38% -
- -100 bp 16,850 (319) -2% 13.97% (40)
First Savings Bank
Interest Rate Risk As of September 30, 2003
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------
+300 bp 14,284 (643) -4% 12.02% (3)
+200 bp 14,904 (22) 0% 12.34% 29
+100 bp 15,101 175 1% 12.33% 28
0 bp 14,927 - - 12.05% -
- -100 bp 14,404 (523) -4% 11.51% (54)
In evaluating the Banks' exposure to interest rate risk, certain
shortcomings, inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, prepayments
and early withdrawal levels could deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ from that presented in the
foregoing tables.
Loans, Non-performing Assets and Summary of Loan Loss Experience
The following table presents the composition of the loan portfolio at
September 30, 2004 and September 30, 2003 (in thousands):
September 30, 2004 September 30, 2003
--------------------------------------------------
TYPE OF LOAN AMOUNT ercent of Total AMOUNT Percent of Total
-------- --------------- -------- ----------------
Residential: (Dollars in thousands)
Single family units $288,452 78.8% $301,265 82.7%
2-4 family units 1,550 0.4% 1,797 0.5%
Over 4 family units 2,401 0.7% 2,593 0.7%
Home Equity Lines of Credit 23,227 6.3% 19,922 5.5%
Commercial real estate 22,447 6.1% 14,750 4.1%
Land acquisition and
development 1,683 0.5% 1,480 0.4%
Consumer and other loans 25,558 7.0% 21,826 6.0%
Loans on deposits 675 0.2% 521 0.1%
-------- --------------- -------- ----------------
365,993 100.0% 364,154 100.0%
-------- --------------- -------- ----------------
Less:
Undisbursed portion
of loans 2,440 3,467
Deferred loan fees and
discounts 1,434 1,623
-------- --------
3,874 5,090
-------- --------
Total loans receivable 362,119 359,064
Allowance for losses
on loans 1,958 2,111
-------- --------
Net loans $360,161 $356,953
======== ========
6
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Non-performing assets at September 30, 2004 and 2003 are as follows (in
thousands):
September 30, 2004 September 30, 2003
Non-accruing loans $ 493 $ 1,127
Loans contractually past due 90 days
or more other than nonaccruing 26 90
Real estate owned (REO) 940 854
Restructured loans 922 640
------------ ------------
$ 2,381 $ 2,711
============ ============
It is the Company's policy to carry REO at net realizable value. After
repossession, appraised value is reduced for estimated repair and selling costs,
and the net amount is the carrying value of the property. Any changes in
estimated realizable value after the initial repossession, are charged to a
specific loss reserve account for REO. The decrease in non-accrual loans since
September 30, 2003 is primarily from the 1 to 4 family portion of the loan
portfolio, and management believes the decrease has been appropriately
considered in determining the adequacy of the allowance for loan losses at
September 30, 2004. There have been no significant changes in potential problem
loans since September 30, 2003. Net charge-offs for the years ended September
30, 2004 and 2003 were $192,751 and $543,635, respectively. Net charge-offs were
above average last year due a large loss on one commercial loan.
The allowances for loan and real estate owned losses represent amounts
available to absorb losses inherent in the portfolio. Such allowances are based
on management's continuing review of the portfolios, historical charge-offs,
current economic conditions, and such other factors, which in management's
judgment deserve recognition in estimating 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, or in
the case of REO, at the time of repossession or when additional impairment is
identified. Overall, the general composition of the loan portfolio has remained
similar to the prior year with no significant shift of risk between components
of the loan portfolio that would impact the calculation of the allowance for
loan losses. Net charge-offs for the last five years have remained consistently
at $100-$200 thousand, with the exception of 2003. The charge-off figure for
2003 was higher than normal due to a large commercial loan that was charged off.
This charge-off had not been identified during the normal loan review process as
a potential loss due to fraud on the part of the borrower. Management believes
that the allowances are adequate to absorb known and inherent losses in the
portfolios. No assurance can be given, however, that economic conditions which
may adversely affect the Company's markets or other circumstances, such as the
aforementioned fraud, will not result in future losses in the portfolios.
Interest Income
Net interest income decreases during periods when the spread is narrowed
between the Company's weighted-average rate at which new loans are originated
and its weighted-average cost of liabilities. In addition, the Company'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
Company's assets and the weighted-average rate paid on deposits and borrowings.
7
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years ended September 30
(Dollars in Thousands)
-----------------------------------------------------------------------------------------
2004 2003 2002
---------------------------- ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
- -------------- ----------- -------- ------- ----------- --------- ------- ----------- --------- ------
Interest-earning assets:
Loans(1) $361,821 $23,313 6.44% $372,071 $26,376 7.09% $384,317 $30,268 7.88%
Investment securities(2) 94,575 3,135 3.31 72,112 2,661 3.69 51,022 2,334 4.57
Other interest-earning assets 16,829 419 2.49 34,942 711 2.03 25,033 763 3.04
----------- -------- ---------- --------- ------------ ---------
Total interest-earning assets 473,225 26,867 5.68 479,125 29,748 6.21 460,372 33,365 7.25
-------- ---------- ---------
Allowance for loan losses (2,045) (2,114) (1,855)
Other assets 27,681 27,679 28,327
----------- ---------- -------------
Total Assets $498,861 $504,690 $486,844
=========== ========== =============
Interest-bearing liabilities:
NOW and savings deposits $167,450 $1,218 0.73 $160,789 $1,377 0.86 $153,733 $2,445 1.59
Certificates of deposit 209,004 6,075 2.91 218,365 7,479 3.42 222,767 10,435 4.68
Borrowings 56,266 3,043 5.41 61,392 3,291 5.36 49,457 2,824 5.71
----------- -------- ---------- --------- ------------- --------
Total interest-bearing liabilitie 432,720 10,336 2.39 440,546 12,147 2.76 425,957 15,704 3.69
-------- --------- --------
Other liabilities 2,217 1,602 1,743
Stockholders' equity 63,924 62,542 59,144
----------- ----------- --------------
Total Liabilities and
Stockholders' equity $498,861 $504,690 $486,844
=========== =========== ==============
Net interest income/spread $16,531 3.29 $17,601 3.45 $17,661 3.56
======= ========= ========
Net yield on interest earning assets 3.49% 3.67% 3.83%
(1) Average balances include nonaccrual balances.
(2) Yield on investment securities is computed based on amortized cost.
The Company has supplemented its interest income through purchases of
investment securities when appropriate. Such investments include U. S.
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 Banks' loan portfolios as a result of the
guarantees of full payment of principal and interest by FHLMC, FNMA, and GNMA;
(c) enables the Banks to use securities as collateral for financings in the
capital markets; and (d) increases the liquidity of the Banks.
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 the Banks' 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. Tax-exempt income was calculated using actual rates and not adjusted for
the tax effects.
8
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Years ended September 30,
---------------------------------------------------
2004 vs 2003 2003 vs 2002
-------------------------- ------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
---------------- Increase -------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- -------- --------- ------ -------- --------
Interest income from:
Loans (708) $(2,355) $(3,063) $(939) $(2,953) $(3,892)
Investment securities 682 (208) 474 525 (198) 327
Other interest-earning assets(658) 365 (293) 71 (123) (52)
------ -------- --------- ------ -------- --------
Total interest income (684) (2,198) (2,882) (343) (3,274) (3,617)
------ -------- --------- ------ -------- --------
Interest expense from:
NOW and savings deposits 60 (220) (160) 118 (1,186) (1,068)
Certificates of deposit (313) (1,091) (1,404) (202) (2,754) (2,956)
Borrowings (280) 32 (248) 626 (159) 467
------ -------- --------- ------ -------- ---------
Total interest expense (533) (1,279) (1,812) 542 (4,099) (3,557)
------ -------- --------- ------ -------- ---------
Net interest income(expense)$(151) $ (919) $(1,070) $(885) $ 825 $ (60)
====== ======== ========= ====== ======== =========
Operating Expense
While operating expenses have increased, the increases have been due in
large part to the expansion of the Company's operations. The increases are
service related and consist of occupancy and equipment expense for remodeling of
branches, and conversion of First Savings to the same service bureau used by
Peoples. Operating expenses, as a percentage of the Company's total assets were
2.32%, 2.19%, and 2.10% for fiscal years ended September 30, 2004, 2003, and
2002, respectively.
The Company continuously seeks to reduce operating expenses. In this
regard, the budget committee of the Board of Directors monitors the Company'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 Company's various deposit accounts. The Company'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. 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, 2004, Peoples
had liquid assets of $23,910,523. This represents a ratio of liquid assets to
total assets of 6.45%. First Savings had liquid assets of $25,534,782 or a ratio
of 22.03%.
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 Banks can borrow from the FHLB. Under existing board
resolutions, First Savings may borrow an additional $10.5 million, and Peoples
may borrow an additional $8.4 million. If borrowing in excess of these amounts
is ever needed, Board resolution could increase the available credit amounts
significantly. First Savings operates under a blanket collateral agreement with
FHLB, whereby their single family loans act as collateral for the borrowings.
Peoples Federal has pledged specific government agency securities to secure
their borrowings at FHLB. In the opinion of management, the Banks' liquid assets
are adequate to meet outstanding loan commitments and other obligations.
During the year ended September 30, 2004 cash and cash equivalents
decreased $24.2 million, investment securities increased $9.2 million, and net
loans increased $3.2 million. Deposits decreased $9.3 million and Federal Home
Loan Bank advances decreased $4.0 million. Operations provided $5.0 million
During the year ended September 30, 2003, cash and cash equivalents
decreased $0.4 million, investment securities increased $25.6 million, and net
loans (excluding loans held for sale) decreased $28.1 million. Deposits
increased $0.2 million and borrowings from the Federal Home Loan Bank decreased
$5.0 million. Operations provided $7.1 million.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to investors.
Contractual Obligations
In the ordinary course of operations, the Company enters into certain
contractual obligations. The following table summarizes the Company's
significant fixed and determinable contractual obligations, by payment date, at
September 30, 2004.
9
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Contractual Obligations Due by Period
One Three
Within Year to Years to After
One Year Three Years Five Years Five Years Total
-------- ------------ ---------- ---------- --------
(Dollars in thousands)
Borrowings $5,000 $ 9,400 $11,000 $24,700 $50,100
Service Contract (1) 816 1,632 340 - 2,788
Dividends Payable 604 - - - 604
-------- ------------ ---------- ---------- --------
$6,420 $11,032 $11,340 $24,700 $53,492
======== ============ ========== ========== ========
(1) The service contract is with Bisys to provide Peoples Bancorp with service
bureau support for processing of deposit and loan accounts. The contract fees
are based on the number of accounts processed and additional reporting services
provided from time to time. The amount shown is an estimate of cost based on
current account support and reporting fee structures. The contract expires March
1, 2008.
Results of Operations, Fiscal Year Ended September 30, 2004 Compared to Fiscal
Year Ended September 30, 2003
The Company's net interest income decreased $1,070,185 to $16,530,692 for
the fiscal year ended September 30, 2004. Interest earned on loans and
investments and interest paid on deposits both fell during the year. Loan volume
increased slightly, while deposit volume decreased, however interest income
decreased more rapidly than interest expense due to the spread compression
discussed earlier. Interest on long-term debt decreased to $3,001,454 due to
lower volumes of FHLB advances as maturing advances were not renewed.
Provision for loan losses decreased $496,807 to $40,374 reflecting
adjustments due to management's continuing review of its loan portfolio. The
provision for 2003 was higher than normal due to the commercial loan fraud
charge-off mentioned in a previous section of this document. Management's review
of its loan portfolio is based on historical information, concentrations,
delinquency trends, experience of lending personnel, review of specific loans,
and general economic conditions. Historic charge-offs have been very stable with
the exception of 2003 due to the aforementioned commercial loan.
Other income decreased $1,066,578 to $1,646,944 due primarily to the lower
volume of loan sales generating less income. The very active refinancing market
of the previous year slowed considerably as predicted. Since many consumers
already have very low interest mortgage loans, fewer loans are being refinanced,
and so fewer loans are being originated to be resold. Gains on sales of loans
decreased $700,453 from the prior year due to this lower volume of sales. This
trend may continue to have a negative impact on earnings in the future. However,
the merger of the trust departments of Peoples Federal and First Federal of
Huntington, Indiana has increased fiduciary fees to partially offset the
decrease in loan sales income. Fiduciary activities fees increased $108,098 to
$364,661 for the year ended September 30, 2004. Finally, an unrealized loss of
$473,246 was recognized on a mutual fund held by the Bancorp to reflect what
management believes to be an other than temporary impairment of its value.
Total non-interest expense was $11,411,108 for the year ended September 30,
2004. Salaries and benefits increased $234,376 to $6,289,496 due to normal
salary increases for employees. Data processing expense increased $141,815 due
to the addition of internet banking and data warehouse services. Currently
budgeted expenses do not anticipate significant increases in these expenses for
next year.
The effective tax rate for the Company for the years ended September 30,
2004 and 2003 was 29.6% and 34.3%, respectively. Effective tax rates can be
affected by the mix of taxable versus tax-exempt interest income, the level of
non-deductible expenses for the year, and the timing of the deductibility of
certain items. Please see note 11 on pages 27 and 28 for a breakdown of these
differences.
Results of Operations, Fiscal Year Ended September 30, 2003 Compared to Fiscal
Year Ended September 30, 2002
The Company's net interest income decreased $60,229 to $17,600,877 for the
fiscal year ended September 30, 2003. Interest earned on loans and investments
and interest paid on deposits both fell during the year. Loan volume, however,
decreased significantly, while deposit volume remained relatively stable causing
interest income to decrease more that interest expense. Interest on long-term
debt increased to $3,224,134 due to higher volumes of FHLB advances.
Provision for loan losses increased $189,319 to $537,181 reflecting
adjustments due to management's continuing review of its loan portfolio.
Management's review of its loan portfolio is based on historical information,
concentrations, delinquency trends, experience of lending personnel, review of
specific loans, and general economic conditions.
Other income increased $507,780 to $2,713,522 due to the high volume of
loan sales generating additional income. The low interest rate environment
encouraged large amounts of mortgage loan refinancing. As the rates have
increased slightly over the last few months, this trend has slowed
substantially. This may have a negative impact on earnings in the future.
However, the merger of the trust departments of Peoples Federal and First
Federal of Huntington, Indiana should increase fiduciary fees to partially
offset any decrease in loan sales income. The merger with First Federal, which
10
Management's Discussion and Analysis of
Financial Condition and Results of Operations
still needs final regulatory approval, will increase total trust assets by
approximately 50 percent. Income, however, will not increase in the same
proportion, due to the revenue sharing agreement entered into in the merger in
lieu of a cash payment for the assets.
Total non-interest expense was $11,032,427 for the year ended September 30,
2003. Salaries and benefits increased $220,790 to $6,055,120 due to normal
salary increases for employees. Occupancy and equipment expense increased
$89,433 due to the conversion of First Savings to the Bisys service bureau. Data
processing expense decreased $37,487 due partially to this conversion.
The effective tax rate for the Company for the years ended September 30,
2003 and 2002 was 34.3% and 39.0%, respectively. Effective tax rates can be
affected by the mix of taxable versus tax-exempt interest income, the level of
non-deductible expenses for the year, and the timing of the deductibility of
certain items. Please see note 12 on pages 27 and 28 for a breakdown of these
differences.
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 Banks' assets and liabilities are critical to the
maintenance of acceptable performance levels.
Impact of New Accounting Standards
In March 2004, the SEC issued Staff Accounting Bulletin No. 105 (SAB 105),
Application of Accounting Principles to Loan Commitments. Current accounting
guidance requires the commitment to originate mortgage loans to be held for sale
to be recognized on the balance sheet at fair value from inception through
expiration or funding. SAB 105 requires that the fair-value measurement include
only differences between the guaranteed interest rate in the loan commitment and
a market interest rate, excluding any expected future cash flows related to the
customer relationship or loan servicing. SAB 105 was effective for commitments
to originate mortgage loans to be held for sale, that were entered into after
March 31, 2004. Its adoption did not have a material impact on the consolidated
financial position or results of operations of the Company.
Emerging Issues Task Force Issue No. 03-1 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
("EITF 03-1") was issued in late 2003 with an effective date of March 31, 2004.
EITF 03-1 provides guidance for determining the meaning of
"other-than-temporarily impaired" and its application to certain debt and equity
securities within the scope of Statement of Financial Accounting Standards No.
115 Accounting for Certain Investments in Debt and Equity Securities ("SFAS
115") and investments accounted for under the cost method. The guidance requires
that investments which have declined in value due to credit concerns or solely
due to changes in interest rates must be recorded as other-than-temporarily
impaired unless the Company can assert and demonstrate its intention to hold the
security for a period of time sufficient to allow for a recovery of fair value
up to or beyond the cost of the investment which might mean maturity. This issue
also requires disclosures assessing the ability and intent to hold investments
in instances in which an investor determines that an investment with a fair
value less than cost is not other-than-temporarily impaired.
On September 30, 2004, the FASB delayed indefinitely the effective date for
the measurement and recognition guidance contained in Issue 03-1. This delay
does not suspend the requirement to recognize other-than-temporary impairments
as required by existing authoritative literature or to disclose certain
information on impaired investments.
11
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 managements'
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 recognizes 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.
/s/Roger J. Wertenberger /s/Maurice F. Winkler III /s/Deborah K. Stanger
Chairman of the Board President and Chief Chief Financial Officer
Executive Officer
12
Report of Independent Registered Public Accounting Firm
To the Audit Committee, Stockholders, and
Board of Directors
Peoples Bancorp
Auburn, Indiana
We have audited the accompanying consolidated balance sheets of Peoples Bancorp
as of September 30, 2004 and 2003, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended September 30, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples Bancorp as
of September 30, 2004 and 2003, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
As more fully discussed in Note 1, the Company changed its method of accounting
for goodwill in 2002.
Indianapolis, Indiana
October 29, 2004
13
Peoples Bancorp
Consolidated Balance Sheets
September 30, 2004 and 2003
Assets
2004 2003
------------- ------------
Cash and due from banks $ 6,270,919 $ 8,467,367
Interest-bearing deposits 4,653,901 26,694,454
------------ ------------
Total cash and cash equivalents 10,924,820 35,161,821
Interest-bearing time deposits 3,071,046 3,270,106
Investment securities
Available for sale 95,681,497 85,504,604
Held to maturity (fair value of $1,144,383
and $2,218,264) 1,111,754 2,116,827
------------ ------------
Total investment securities 96,793,251 87,621,431
Loans, net of allowance for loan losses
of $1,958,569 and $2,110,946 360,161,158 356,953,361
Mortgage loans held for sale 293,750 --
Premises and equipment 6,369,290 6,322,532
Federal Home Loan Bank of Indianapolis stock, at cost 4,736,500 4,518,700
Core deposit intangible 470,975 608,822
Goodwill 2,330,198 2,330,198
Other assets 6,294,312 6,133,035
------------ ------------
Total assets $491,445,300 $502,920,006
============ ============
Liabilities
NOW and savings deposits $166,792,843 $163,510,816
Certificates of deposit 204,032,011 216,605,068
------------ ------------
Total deposits 370,824,854 380,115,884
Short-term borrowings 3,321,460 2,649,653
Federal Home Loan Bank advances 50,100,000 54,100,000
Other liabilities 2,207,426 2,129,615
------------ ------------
Total liabilities 426,453,740 438,995,152
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $1 par value
Authorized and unissued - 5,000,000 shares
Common stock, $1 par value
Authorized - 7,000,000 shares
Issued and outstanding - 3,367,803 and
3,421,895 shares 3,367,803 3,421,895
Additional paid-in capital 6,002,637 7,370,513
Retained earnings 55,711,953 53,302,385
Unearned RRP -- (1,522)
Accumulated other comprehensive loss (90,833) (168,417)
------------ ------------
Total stockholders' equity 64,991,560 63,924,854
------------ ------------
Total liabilities and stockholders' equity $491,445,300 $502,920,006
============ ============
See Notes to Financial Statements
14
Peoples Bancorp
Consolidated Statements of Income
Years Ended September 30, 2004, 2003 and 2002
2004 2003 2002
----------- ----------- -----------
Interest Income
Loans $23,312,917 $26,375,695 $30,267,454
Investment securities 3,135,348 2,661,226 2,334,440
Other interest and dividend income 418,369 711,375 763,306
----------- ----------- -----------
26,866,634 29,748,296 33,365,200
----------- ----------- -----------
Interest Expense
Deposits
NOW and savings deposits 1,217,470 1,376,917 2,444,507
Certificates of deposit 6,075,211 7,479,489 10,435,126
Short-term borrowings 41,807 66,879 69,050
Long-term debt 3,001,454 3,224,134 2,755,411
----------- ----------- -----------
10,335,942 12,147,419 15,704,094
----------- ----------- -----------
Net Interest Income 16,530,692 17,600,877 17,661,106
Provision for loan losses 40,374 537,181 347,862
----------- ----------- -----------
Net Interest Income After Provision for Loan
Losses 16,490,318 17,063,696 17,313,244
----------- ----------- -----------
Other Income
Fiduciary activities 364,661 256,563 251,018
Fees and service charges 1,185,345 1,124,040 1,175,862
Net gains (losses) on available-for-sale
securities (465,933) 32,025 62,931
Gain on sale of loans 189,094 889,547 539,554
Other income 373,777 411,347 176,377
----------- ----------- -----------
Total other income 1,646,944 2,713,522 2,205,742
----------- ----------- -----------
Other Expenses
Salaries and employee benefits 6,289,496 6,055,120 5,834,330
Net occupancy expense 880,728 839,491 804,418
Equipment expense 812,939 857,026 802,666
Data processing expense 1,013,150 871,335 833,848
Deposit insurance expense 56,990 62,002 66,208
Other expenses 2,357,805 2,347,453 2,314,910
----------- ----------- -----------
Total other expenses 11,411,108 11,032,427 10,656,380
----------- ----------- -----------
Income Before Income Tax 6,726,154 8,744,791 8,862,606
Income tax expense 1,991,957 2,995,486 3,457,625
----------- ----------- -----------
Net Income $ 4,734,197 $ 5,749,305 $ 5,404,981
=========== =========== ===========
Basic Earnings per Share $ 1.40 $ 1.67 $ 1.56
Diluted Earnings per Share 1.39 1.66 1.56
Weighted-Average Shares Outstanding - Basic 3,382,135 3,435,112 3,456,324
Weighted-Average Shares Outstanding - Diluted 3,415,085 3,462,758 3,473,559
See Notes to Financial Statements
15
Peoples Bancorp
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 2004, 2003 and 2002
Accumulated
Unearned Other
Additional Recognition Comprehensive
Common Stock Paid-in Comprehensive Retained Unearned And Income
Outstanding Amount Capital Income Earnings ESOP Shares Retention Plan (Loss) Total
---------------------------------------------------------------------------------------------------------
Balances October 1, 2001 3,506,348 $3,506,348 $8,498,348 $46,500,707 $(281,450) $(40,719) $(129,683) $58,053,551
Comprehensive income
Net income $5,404,981 5,404,981 5,404,981
Other comprehensive
income, net of tax
Unrealized losses on
securities, net of
reclassification
adjustment (97,415) (97,415) (97,415)
----------
Comprehensive income $5,307,566
==========
Cash dividends ($0.61 per
share) (2,120,534) (2,120,534)
ESOP shares earned 48,777 48,777
Termination of ESOP (18,456) (18,456) (34,534) 281,450 228,460
RRP shares earned 20,929 20,929
Repurchase of common stock (40,706) (40,706) (651,846) (692,552)
-------- -------- ---------- ----------- --------- --------- ---------- -----------
Balances September 30,2002 3,447,186 3,447,186 7,860,745 49,785,154 0 (19,790) (227,098) 60,846,197
Comprehensive income
Net income $5,749,305 5,749,305 5,749,305
Other comprehensive
income, net of tax
Unrealized gains on
securities, net of
reclassification
adjustment 58,681 58,681 58,681
----------
Comprehensive income $5,807,986
==========
Cash dividends ($.65 per
share) 2,232,074) (2,232,074)
RRP shares earned 18,268 18,268
Repurchase of common stock (25,291) (25,291) (490,232) (515,523)
-------- -------- ---------- ----------- --------- --------- ---------- -----------
Balances September 30, 2003 3,421,895 3,421,895 7,370,513 53,302,385 0 (1,522) (168,417) 63,924,854
Comprehensive income
Net income $4,734,197 4,734,197 4,734,197
Other comprehensive
income, net of tax
Unrealized gains on
securities, net of
reclassification
adjustment 77,584 77,584 77,584
----------
Comprehensive income $4,811,781
==========
Cash dividends ($.69 per
share) (2,324,629) (2,324,629)
RRP shares earned 1,522 1,522
Stock options exercised 22,206 22,206 304,073 326,279
Tax benefit on stock options
exercised 56,700 56,700
Repurchase of common stock (76,298) (76,298) (1,728,649) (1,804,947)
-------- -------- ---------- ----------- --------- --------- --------- -----------
Balances September 30, 2004 3,367,803 $3,367,803 $6,002,637 $55,711,953 $ 0 $ 0 $(90,833) $64,991,560
========= ========= ========== =========== ======== ========= ========= ===========
See Notes to Financial Statements
16
Peoples Bancorp
Consolidated Statements of Cash Flows
Years Ended September 30, 2004, 2003 and 2002
2004 2003 2002
------------ ------------ ------------
Operating Activities
Net income $ 4,734,197 $ 5,749,305 $ 5,404,981
Items not requiring (providing) cash
Provision for loan losses 40,374 537,181 347,862
Depreciation and amortization 805,109 831,897 778,898
Investment securities amortization, net 480,200 800,769 175,692
Loans originated for sale (9,687,269) (35,283,710) (23,389,439)
Proceeds from sale of loans held for sale 9,497,637 37,157,478 22,765,618
Gain on sale of loans (189,094) (889,547) (539,554)
Amortization of deferred loan fees (505,838) (758,718) (679,971)
Net gains (losses) on investment securities 465,933 (32,025) (62,931)
Gain on sale of premises and equipment -- -- (17,318)
ESOP shares earned -- -- 208,036
RRP compensation expense 1,522 18,268 20,929
Change in
Deferred income tax (518,493) 6,909 (108,526)
Interest receivable 235,923 102,643 (10,542)
Interest payable (24,511) (67,188) (121,904)
Other adjustments (379,270) (1,111,851) 169,591
----------- ----------- ------------
Net cash provided by operating activities 4,956,420 7,061,411 4,941,422
----------- ----------- ------------
Investing Activities
Net change in interest-bearing deposits 199,060 549,941 (364,249)
Purchases of securities available for sale (49,323,461) (73,599,501) (42,562,911)
Purchases of securities held to maturity -- (1,374,930) (3,891,807)
Proceeds from maturities and paydowns of securities 6,301,518
held to maturity 1,015,484 3,051,158
Proceeds from maturities and paydowns of securities 40,870,498
available for sale 32,177,342 12,576,525
Proceeds from sale of securities available for sale 6,139,750 1,587,115 4,370,107
Net change in loans (3,889,712) 27,028,594 18,607,047
Purchases of premises and equipment (851,867) (1,034,422) (1,145,057)
Proceeds from sales of premises and equipment -- -- 40,565
Purchases of Federal Home Loan Bank of Indianapolis -- --
stock (13,500)
Proceeds from sale of foreclosed real estate 1,738,662 274,811 --
----------- ----------- ------------
Net cash provided by(used in) investing activities (12,794,742) 603,624 (9,332,122)
----------- ----------- -----------
Financing Activities
Net change in
NOW and savings deposits 3,282,027 6,002,121 15,962,631
Certificates of deposit (12,573,057) (5,822,708) (4,505,749)
Short-term borrowings 671,807 (543,121) (1,190,949)
Proceeds from Federal Home Loan Bank advances -- 3,000,000 17,000,000
Repayment of Federal Home Loan Bank advances (4,000,000) (8,000,000) (2,992,965)
Cash dividends (2,300,788) (2,201,904) (2,094,402)
Stock options exercised 326,279 -- --
Repurchase of common stock (1,804,947) (515,523) (692,552)
----------- ----------- ------------
Net cash provided by(used in) financing activities (16,398,679) (8,081,135) 21,486,014
----------- ----------- ------------
Net Change in Cash and Cash Equivalents (24,237,001) (416,100) 17,095,314
Cash and Cash Equivalents, Beginning of Year 35,161,821 35,577,921 18,482,607
----------- ----------- ------------
Cash and Cash Equivalents, End of Year $10,924,820 $35,161,821 $35,577,921
=========== =========== ============
Additional Cash Flows and Supplementary Information
Interest paid $10,360,453 $12,214,607 $15,826,808
Income tax paid 2,563,767 3,552,078 2,997,665
See Notes to Financial Statements
17
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Note 1: Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Peoples Bancorp (Company), its wholly
owned subsidiaries, Peoples Federal Savings Bank of DeKalb County (Peoples),
First Savings Bank (First Savings) (collectively, the Banks), Peoples' wholly
owned subsidiary, Peoples Financial Services, Inc. (Peoples Financial) and First
Savings' wholly owned subsidiary, Alpha Financial, Inc. (Alpha) conform to
accounting principles generally accepted in the United States of America 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 accounting principles
generally accepted in the United States of America 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 Banks. The Banks operate under federal thrift
charters and provide full banking services, including trust services. As
federally-chartered thrifts, the Banks are subject to the regulation of the
Office of Thrift Supervision (OTS) and the Federal Deposit Insurance
Corporation.
The Company generates commercial, mortgage and consumer loans and receives
deposits from customers located primarily in north central and north eastern
Indiana and south central Michigan. The Company'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 Banks, Alpha and Peoples Financial after elimination of all
material intercompany transactions.
Cash Equivalents - The Company considers all liquid investments with original
maturities of three months or less to be cash equivalents.
Investment Securities - Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity and marketable equity securities
are classified as available for sale. Securities available for sale are carried
at fair value with unrealized gains and losses reported separately, net of tax,
in accumulated other comprehensive income. The Company holds no securities for
trading.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
18
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Mortgage loans held for sale are carried at the lower of cost or fair value,
determined using an aggregate basis. Write-downs to fair value are recognized as
a charge to earnings at the time the decline in value occurs. Forward
commitments to sell mortgage loans are acquired to reduce market risk on
mortgage loans in the process of origination and mortgage loans held for sale.
Gains and losses resulting from sales of mortgage loans are recognized when the
respective loans are sold to investors. Gains and losses are determined by the
difference between the selling price and the carrying amount of the loans sold,
net of discounts collected or paid and considering a normal servicing rate.
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. Generally, loans are placed on
non-accrual status at ninety days past due. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans.
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
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. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any are credited to the
allowance.
The determination of the adequacy of the allowance for loan losses 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, 2004, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Company 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 which range from five
years to thirty-nine years. 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 assets are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are acquired, any required adjustment is
charged to the allowance for loan losses. All subsequent activity is included in
current operations.
19
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Goodwill is annually tested for impairment as the Company changed its method of
accounting and financial reporting for goodwill and other intangible assets by
adopting the provisions of Statement of Financial Accounting Standard No. 142
during 2002. If the implied fair value of goodwill is lower than its carrying
amount, a goodwill impairment is indicated and goodwill is written down to its
implied fair value. Subsequent increases in goodwill value are not recognized in
the financial statements.
Core deposit intangible is being amortized on an accelerated method over eight
years until such time that straight-line amortization exceeds the accelerated
method, and is periodically evaluated as to the recoverability of its carrying
value.
Investments in limited partnerships are included in other assets. The Company
utilizes the equity method of accounting for these investments. At September 30,
2004 and 2003, these investments totaled $310,000 and $400,000.
Pension plan costs are based on actuarial computations and charged to current
operations. The funding policy is to pay at least the minimum amounts required
by ERISA.
Stock Options - The Company has a stock-based employee compensation plan, which
is described more fully in Note 18. The Company accounts for stock option grants
in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, and, accordingly, recognizes no compensation
expense for the stock option grants as all options granted under the plan had an
exercise price equal to or greater than the market value of the underlying
common stock at the date of grant. The following table illustrates the effect on
net income and earnings per share if the Company had applied the fair value
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
2004 2003 2002
----------- ---------- ---------
Net income, as reported $4,734,197 $5,749,305 $5,404,981
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes 11,560 64,362 77,874
--------- --------- ---------
Pro forma net income $4,722,637 $5,684,943 $5,327,107
========= ========= =========
Earnings per share
Basic - as reported $ 1.40 $ 1.67 $ 1.56
Basic - pro forma 1.40 1.65 1.54
Diluted - as reported 1.39 1.66 1.56
Diluted - pro forma 1.38 1.64 1.53
Income tax in the consolidated statements of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiaries.
20
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Earnings per share have been computed based upon the weighted-average common
shares outstanding during each year.
Reclassifications of certain amounts in the 2003 and 2002 financial statements
have been made to conform with the current year presentation.
Note 2: Restriction on Cash
The Banks are required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserves required at September 30, 2004 totaled
$2,497,000.
Note 3: Investment Securities
2004
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------
Available for sale
Federal agencies $72,050,336 $166,146 $ 230,753 $71,985,729
State and municipal
obligations 9,010,084 65,092 101,130 8,974,046
Mortgage-backed securities 10,773,294 78,963 110,477 10,741,780
Marketable equity securities 3,979,942 -- -- 3,979,942
---------- -------- ---------- ---------
Total available for sale 95,813,656 310,201 442,360 95,681,497
Held to maturity
Mortgage-backed securities 1,111,754 37,855 5,226 1,144,383
---------- ------- --------- ----------
Total investment
securities $96,925,410 $348,056 $ 447,586 $96,825,880
========== ======= ========= ===========
2003
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------
Available for sale
Federal agencies $60,813,138 $620,111 $ 80,846 $61,352,403
State and municipal
obligations 6,508,524 91,010 95,555 6,503,979
Mortgage-backed securities 13,989,719 134,810 171,512 13,953,017
Marketable equity securities 4,453,187 -- 757,982 3,695,205
---------- -------- ---------- ----------
Total available for sale 85,764,568 845,931 1,105,895 85,504,604
Held to maturity
Mortgage-backed securities 2,116,827 103,527 2,090 2,218,264
---------- ------- --------- ----------
Total investment
securities $87,881,395 $949,458 $1,107,985 $87,722,868
=========== ======== ========== ===========
21
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
The amortized cost and fair value of securities held to maturity and available
for sale at September 30, 2004, 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.
2004
Available for Sale Held to Maturity
Maturity Distributions Amortized Fair Amortized Fair
at September 30 Cost Value Cost Value
- --------------------------------------------------------------------------------
Within one year $ 591,107 $ 595,775 $ -- $ --
One to five years 53,712,799 53,683,465 -- --
Five to ten years 24,264,780 24,251,210 -- --
After ten years 2,491,734 2,429,325 -- --
---------- ---------- ---------- ---------
81,060,420 80,959,775 -- --
Mortgage-backed securities 10,773,294 10,741,780 1,111,754 1,144,383
Marketable equity securities 3,979,942 3,979,942 -- --
---------- ---------- ---------- ---------
$95,813,656 $95,681,497 $1,111,754 $1,144,383
========== ========== ========= ==========
Securities with a carrying value of $6,221,000 and $12,642,000 were pledged at
September 30, 2004 and 2003 to secure repurchase agreements. Securities with a
carrying value of $55,384,000 were pledged at September 30, 2004 to secure FHLB
advances. Securities with a carrying value of $4,512,000 were pledged at
September 30, 2004 to secure certain deposits.
Proceeds from sales of securities available for sale during 2004, 2003 and 2002
were $6,140,000, $1,587,000 and $4,370,000, respectively. Gross gains of $7,000,
$32,000 and $63,000 were realized on those sales during 2004, 2003 and 2002,
respectively. Gross losses of $473,000 were recognized in 2004 on marketable
equity securities due to unrealized losses considered to be
other-than-temporary. The income tax expense (benefit) on the security
gains/losses for the years ended September 30, 2004, 2003 and 2002 were
$(185,000), $13,000 and $25,000, respectively.
Certain investments in debt securities are reported in the financial statements
at an amount less than their historical cost. Total fair value of these
investments at September 30, 2004, was $43,568,000, which is approximately 45%
of the Company's available-for-sale and held-to-maturity investment portfolio.
These declines primarily resulted from recent increases in market interest rates
and failure of certain investments to maintain consistent credit quality ratings
or meet projected earnings targets.
Based on evaluation of available evidence, including recent changes in market
interest rates, credit rating information and information obtained from
regulatory filings, management believes the declines in fair value for these
securities are temporary.
Should the impairment of any of these securities become other than temporary,
the cost basis of the investment will be reduced and the resulting loss
recognized in net income in the period the other-than-temporary impairment is
identified.
22
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
The following table shows our investments' gross unrealized losses and fair
value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at September 30,
2004:
Less than 12 Months 12 Months or More Total
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
- -------------------------------------------------------------------------------------------
Federal agencies $26,399,331 $181,810 $ 4,496,867 $ 48,943 $30,896,198 $230,753
State and municipal
obligations 2,548,825 24,493 1,729,846 76,637 4,278,671 101,130
Mortgage-backed securities 3,217,485 45,826 5,175,544 69,877 8,393,029 115,703
---------- ------- ---------- ------- ---------- -------
Total temporarily
impaired securities $32,165,641 $252,129 $11,402,257 $195,457 $43,567,898 $447,586
=========== ======== =========== ======== =========== ========
Note 4: Loans and Allowance
2004 2003
--------------------------
Commercial and commercial mortgage loans $ 32,132,322 $ 29,972,078
Real estate loans 315,473,869 318,240,818
Construction loans 5,861,164 6,126,007
Individuals' loans for household and other personal
expenditures 12,526,326 9,815,123
----------- -----------
365,993,681 364,154,026
----------- -----------
Less:
Undisbursed portion of loans 2,439,829 3,466,536
Deferred loan fees and discounts 1,434,125 1,623,183
Allowance for loan losses 1,958,569 2,110,946
----------- -----------
5,832,523 7,200,665
----------- -----------
Total loans $360,161,158 $356,953,361
============ ============
2004 2003 2002
----------------------------------------
Allowance for loan losses
Balances, October 1 $ 2,110,946 $2,117,400 $1,894,787
Provision for losses 40,374 537,181 347,862
Recoveries on loans 49,496 15,005 28,500
Loans charged off (242,247) (558,640) (153,749)
---------- --------- ---------
Balances, September 30 $ 1,958,569 $2,110,946 $2,117,400
========== ========= =========
There were no impaired loans at September 30, 2004 or 2003. The Company
considers its investment in one-to-four family residential loans and consumer
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment.
23
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Interest of $35,000 and $276,000 was recognized on the average impaired loan
balances of $1,756,000 and $4,504,000 during 2003 and 2002. Interest of $7,000
and $288,000 was recognized on a cash basis during 2003 and 2002.
At September 30, 2004 and 2003, accruing loans delinquent 90 days or more
totaled $26,000 and $90,000, respectively. Nonaccruing loans at September 30,
2004 and 2003 were $493,000 and $1,127,000, respectively. Loans delinquent 90
days or more at September 30, 2004 and 2003 consisted of homogeneous pools of
residential and consumer loans.
Note 5: Premises and Equipment
2004 2003
-----------------------------
Land $ 1,333,537 $ 1,335,338
Buildings 8,961,152 8,537,301
Equipment 5,642,499 5,191,610
---------- ----------
Total cost 15,937,188 15,064,249
Accumulated depreciation (9,567,898) (8,741,717)
---------- ----------
Net $ 6,369,290 $ 6,322,532
========== ==========
Depreciation and amortization expense for 2004, 2003 and 2002 was $805,000,
$832,000 and $779,000, respectively.
Note 6: Deposits
2004 2003
--------------------------
Demand deposits $109,357,641 $109,206,539
Savings deposits 57,435,202 54,304,277
Certificates and other time deposits
of $100,000 or more 33,429,756 36,343,484
Other certificates and time deposits 170,602,255 180,261,584
----------- -----------
$370,824,854 $380,115,884
============= ===========
24
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Certificates and other time deposits maturing in years ending September 30:
2005 $103,958,248
2006 55,484,761
2007 28,553,199
2008 10,482,579
2009 5,553,224
-----------
$204,032,011
Note 7: Short-Term Borrowings
Short-term borrowings at September 30, 2004 and 2003 consist of securities sold
under agreements to repurchase totaling $3,321,000 and $2,650,000. The
obligations were secured by investment securities and such collateral is held by
a safekeeping agent. The maximum amount of outstanding agreements at any
month-end during 2004 and 2003 totaled $5,166,000 and $7,136,000 and the average
of such agreements for the years ended September 30, 2004 and 2003 totaled
$3,328,000 and $4,294,000, respectively.
Note 8: Federal Home Loan Bank Advances
Federal Home Loan Bank advances at September 30, 2004 and 2003 totaled
$50,100,000 and $54,100,000 and were at various rates ranging from 3.55 to 7.21%
maturing at various dates through March 2013. The Federal Home Loan Bank
advances are secured by first mortgage loans and investment securities totaling
$98,352,000. Advances are subject to restrictions or penalties in the event of
prepayment.
Weighted
Maturities in years ending September 30 Amount Average Rate
- -----------------------------------------------------------------------------
2005 $ 5,000,000 6.36%
2006 1,150,000 6.16
2007 8,250,000 5.22
2008 7,000,000 5.79
2009 4,000,000 4.43
Thereafter 24,700,000 5.51
-----------
$50,100,000 5.51
===========
25
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Amounts advanced totaling $15,500,000 are subject to an option for the FHLB to
convert the entire advance to a periodic adjustable rate five years after the
date of the advance. The adjustable rate would be for the remaining term at the
predetermined rate of three-month LIBOR or three-month LIBOR plus .0002 (.02
basis points), varying by advance. If the FHLB exercises its option to convert
the advance to an adjustable rate, the advance will be prepayable at the Banks'
option, at par without a penalty fee.
At September 30, 2004 and 2003, the Banks had a $1,000,000 overdraft line of
credit agreement with the Federal Home Loan Bank. The Banks had not borrowed
against this line of credit at September 30, 2004 or 2003. The line of credit
expires March 15, 2005.
Note 9: Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of loans serviced for others
totaled $52,099,000 and $51,385,000 at September 30, 2004 and 2003. The amount
of mortgage servicing rights capitalized is immaterial to the financial
statements.
Note 10: Core Deposit Intangible
The carrying basis and accumulated amortization of recognized core deposit
intangibles at September 30, 2004 and 2003, were:
2004 2003
--------------------------
Gross carrying amount $1,154,000 $1,154,000
Accumulated amortization (683,024) (545,178)
----------- -----------
$ 470,976 $ 608,822
=========== ===========
Amortization expense for the years ended September 30, 2004, 2003 and 2002 was
$138,000, $138,000 and $138,000, respectively. Estimated amortization expense
for each of the following four years is:
2005 $138,000
2006 138,000
2007 138,000
2008 57,000
26
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Note 11: Income Tax
2004 2003 2002
-----------------------------------
Income tax expense
Currently payable
Federal $2,125,983 $2,655,707 $2,918,857
State 384,467 332,870 647,294
Deferred
Federal (451,253) (55,482) (132,507)
State (67,240) 62,391 23,981
---------- ---------- ----------
Total income tax expense $1,991,957 $2,995,486 $3,457,625
========== ========== ==========
Reconciliation of federal statutory to
actual tax expense
Federal statutory income tax at 34% $2,286,892 $2,973,229 $3,013,286
Tax exempt interest (69,450) (48,554) (31,550)
Nondeductible expenses 4,943 12,149 9,224
Effect of state income taxes 209,370 260,872 443,042
Effect of low income housing credits (139,023) (141,348) (152,845)
Change in valuation allowance (290,305) (152,958) 297,386
Other (10,470) 92,096 (120,918)
--------- --------- ---------
Actual tax expense $1,991,957 $2,995,486 $3,457,625
========== ========== ==========
27
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
2004 2003
------------------------
Assets
Allowance for loan losses $ 795,072 $ 814,671
Loan fees 389,183 436,807
Net unrealized losses on securities available for sale 56,396 108,103
Impairment losses on securities available for sale 188,377 --
Other 181,512 156,441
--------- ---------
Total assets 1,610,540 1,516,022
--------- ---------
Liabilities
Depreciation 129,685 156,696
State income tax 56,228 56,860
Tax bad debt reserves in excess of base year -- 166,711
FHLB of Indianapolis stock dividend 210,889 124,869
Prepaid expenses 38,961 --
Other 328,039 340,630
--------- ---------
Total liabilities 763,802 845,766
--------- ---------
Subtotal 846,738 670,256
--------- ---------
Valuation Allowance
Beginning balance (290,305) (443,263)
Decrease during the year 290,305 152,958
--------- ---------
Ending balance -- (290,305)
---------- ----------
$ 846,738 $ 379,951
============ ===========
The valuation allowance at September 30, 2003 was a result of unrealized losses
on equity securities. Management believes no valuation allowance is necessary at
September 30, 2004.
Retained earnings at September 30, 2004 include approximately $8,102,000 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 $2,755,000 at September 30,
2004.
28
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Note 12: Other Comprehensive Income
2004
Tax
Before-Tax Expense Net-of-Tax
Amount (Benefit) Amount
---------------------------------
Unrealized losses on securities
Unrealized holding losses arising during the
year $(337,461) $(133,668) $(203,793)
Less: reclassification adjustment for losses
realized in net income (465,933) (184,556) (281,377)
--------- --------- ---------
Net unrealized gains $ 128,472 $ 50,888 $ 77,584
========= ========= =========
2003
Before-Tax Tax Net-of-Tax
Amount Expense Amount
--------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the
year $ 129,195 $ 51,174 $ 78,021
Less: reclassification adjustment for gains
realized in net income 32,025 12,685 19,340
-------- -------- --------
Net unrealized gains $ 97,170 $ 38,489 $ 58,681
======== ======== =========
2002
Tax
Before-Tax Expense Net-of-Tax
Amount (Benefit) Amount
----------------------------------
Unrealized losses on securities
Unrealized holding losses arising during the
year $ (98,379) $(38,968) $(59,411)
Less: reclassification adjustment for gains
realized in net income 62,931 24,927 38,004
--------- -------- --------
Net unrealized loss $(161,310) $(63,895) $(97,415)
========= ======== ========
Note 13: 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 Company'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 Company uses the same
credit policies in making such commitments as it does for instruments that are
included in the consolidated balance sheet.
29
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Financial instruments whose contract amount represents credit risk at September
30, 2004 and 2003 consisted of commitments to extend credit totaling $36,212,000
and $42,359,000.
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 Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company 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 Company 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 subsidiaries are also subject to possible claims and lawsuits
which arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate determination of such possible
claims or lawsuits will not have a material adverse effect on the consolidated
financial position of the Company.
Note 14: Dividends and Capital Restrictions
Without prior approval, current regulations allow Peoples and First Savings to
pay dividends to the Company not exceeding net profits (as defined) for the
current calendar year to date plus those for the previous two years. At
September 30, 2004, such limitations totaled $3,213,000. The Banks normally
restrict dividends to a lesser amount because of the need to maintain an
adequate capital structure.
Note 15: Regulatory Capital
The Banks are subject to various regulatory capital requirements administered by
the federal banking agencies and are assigned to a capital category. The
assigned capital category is largely determined by ratios that are calculated
according to the regulations. The ratios are intended to measure capital
relative to assets and credit risk associated with those assets and off-balance
sheet exposures of the entity. The capital category assigned to an entity can
also be affected by qualitative judgments made by regulatory agencies about the
risk inherent in the entity's activities that are not part of the calculated
ratios.
30
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At September 30, 2004, the Banks
are categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since September 30, 2004 that
management believes have changed the Banks' classification.
Peoples' actual and required capital amounts and ratios are as follows:
2004
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) $42,423,000 22.21% $15,283,000 8.0% $19,104,000 10.0%
Tier 1 risk-based
capital(1) (to
risk-weighted assets) 41,046,000 21.49 7,641,000 4.0 11,462,000 6.0
Core capital(1) (to
adjusted total
assets) 41,046,000 11.06 14,851,000 4.0 18,564,000 5.0
Core capital(1) (to
adjusted tangible
assets) 41,046,000 11.06 7,425,000 2.0 NA NA
Tangible capital(1) (to
adjusted total
assets) 41,046,000 11.06 5,569,000 1.5 NA NA
2003
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) $42,391,000 21.23% $15,977,000 8.0% $19,972,000 10.0%
Tier 1 risk-based
capital(1) (to
risk-weighted assets) 40,946,000 20.50 7,989,000 4.0 11,983,000 6.0
Core capital(1) (to
adjusted total
assets) 40,946,000 10.83 15,118,000 4.0 18,898,000 5.0
Core capital(1) (to
adjusted tangible
assets) 40,946,000 10.83 7,559,000 2.0 NA NA
Tangible capital(1) (to
adjusted total
assets) 40,946,000 10.83 5,669,000 1.5 NA NA
31
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
First Savings' actual and required capital amounts and ratios are as
follows:
2004
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) $13,592,000 22.46% $4,841,000 8.0% $6,051,000 10.0%
Tier 1 risk-based capital
(1)(to risk-weighted
assets) 13,028,000 21.53 2,421,000 4.0 3,631,000 6.0
Core capital(1) (to
adjusted total assets) 13,028,000 11.49 4,536,000 4.0 5,670,000 5.0
Core capital(1) (to
adjusted tangible
assets) 13,028,000 11.49 2,268,000 2.0 NA NA
Tangible capital(1) (to
adjusted total assets) 13,028,000 11.49 1,701,000 1.5 NA NA
2003
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) $12,880,000 21.2% $4,879,000 8.0% $6,098,000 10.0%
Tier 1 risk-based capital
(1)(to risk-weighted
assets) 12,289,000 20.2 2,439,000 4.0 3,659,000 6.0
Core capital(1) (to
adjusted total assets) 12,289,000 10.5 4,697,000 4.0 5,871,000 5.0
Core capital(1) (to
adjusted tangible
assets) 12,289,000 10.5 2,349,000 2.0 NA NA
Tangible capital(1) (to
adjusted total assets) 12,289,000 10.5 1,761,000 1.5 NA NA
(1)As defined by Regulatory Agencies
Note 16: Employee Benefit Plans
The Banks are participants 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. This plan
provides pension benefits for substantially all of the Company's employees.
According to FIRF administrators, the value of the vested benefits exceeded the
market value of the fund's assets and accordingly the Banks had approximately
$6,000 and $341,000 accrued at September 30, 2004 and 2003. Pension expense was
$583,000, $521,000 and $592,000 for 2004, 2003 and 2002.
A profit-sharing plan is maintained for the benefit of substantially all of the
Company's employees and allows for both employee and Company contributions. The
Company contribution consists of a matching contribution of 50 percent of
employee contributions, up to 6 percent of eligible employee compensation. The
Company contribution to the plan was $107,000, $108,000 and $99,000 for 2004,
2003 and 2002.
32
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
In connection with the acquisition of Three Rivers Financial Corporation (Three
Rivers) in 2000, the Company assumed both the Employee Stock Ownership Plan
(ESOP) and Recognition and Retention Plan (RRP) of Three Rivers. At the date of
the merger, the ESOP had debt payable to Three Rivers of $422,000 and unearned
shares totaling 50,082. With the merger, the ESOP was obligated to repay the
outstanding debt to the Company. Accordingly, the balance of shares that were
collateral for the debt had been reflected as a reduction to stockholders'
equity. Unearned ESOP shares totaled 31,367 at September 30, 2001 and had a fair
value of $470,500. Shares were released to participants proportionately as the
loan was repaid. Dividends on allocated shares were recorded as dividends and
charged to retained earnings. Dividends on unallocated shares were applied to
the principal and interest due on the loan. During 2002, the ESOP plan was
terminated. A portion of the shares held in the ESOP was sold and the proceeds
from that sale were used to pay off the loan. The remaining shares were
distributed to the participants and expensed based upon the fair market value at
the date the ESOP was terminated.
Compensation expense was recorded in an amount equal to the fair market value of
the stock at the time shares were committed to be released. The expense under
the ESOP was $208,000 for 2002.
Effective with the merger, the Company continued the RRP under which Three
Rivers had previously granted awards to various directors, officers and
employees of the Three Rivers and First Savings. These awards generally vest at
a rate of 20 percent per year on the anniversary dates of each grant. The
expense under the RRP was $2,000 for 2004, $18,000 for 2003 and $21,000 for
2002.
Note 17: Stock Option Plan
Under the Company's incentive stock option plan approved in 1998, which is
accounted for in accordance with Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees, and related interpretations, the
Company grants selected executives and other key employees stock option awards
which vest and become fully exercisable at the end of five years of continued
employment. During 1999, the Company authorized the grant of options for up to
200,000 shares of the Company's common stock. The exercise price of each option,
which has a ten-year life, was equal to or greater than the market price of the
Company's stock on the date of grant; therefore, no compensation expense was
recognized. The Company has not granted any options during the three year period
ended September 30, 2004. The pro forma effect on net income is disclosed in
Note 1.
33
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the years ended September 30, 2004, 2003 and
2002.
2004 2003 2002
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------
Outstanding, beginning
of year 110,249 $14.43 110,249 $14.43 110,249 $ 14.43
Exercised 22,206 14.70 -- -- -- --
------- ----- -------- ------- -------- --------
Outstanding, end of year 88,043 $14.40 110,249 $14.43 110,249 $ 14.43
======= ===== ======= ===== ======= =======
Options exercisable at
year end 88,043 101,327 90,028
As of September 30, 2004, other information by exercise price for options
outstanding is as follows:
Weighted-
Number Average
of Remaining
Exercise Price Shares Contractual Life Exercisable
- ----------------------------------------------------------------------
$11.16 41,818 1.5 years 41,818
$13.05 18,473 3.0 years 18,473
$13.78 4,752 4.0 years 4,752
$21.50 23,000 4.5 years 23,000
------- -------
88,043 88,043
======= =======
34
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Note 18: Earnings Per Share
Earnings per share (EPS) were computed as follows:
2004
Weighted-
Averag Per-Share
Income Shares Amount
-----------------------------
Basic Earnings Per Share
Net income available to common stockholders $4,734,197 3,382,135 $1.40
Effect of Dilutive Securities
Stock options and RRP awards -- 32,950
---------- -----------
Diluted Earnings Per Share
Income available to common stockholders and
assumed conversions $4,734,197 3,415,085 $1.39
========== ==========
2003
Weighted-
Average Per-Share
Income Shares Amount
-----------------------------
Basic Earnings Per Share
Net income available to common stockholders $5,749,305 3,435,112 $1.67
Effect of Dilutive Securities
Stock options and RRP awards -- 27,646
---------- ----------
Diluted Earnings Per Share
Income available to common stockholders and
assumed conversions $5,749,305 3,462,758 $1.66
========== =========
2002
Weighted-
Average Per-Share
Income Shares Amount
-----------------------------
Basic Earnings Per Share
Net income available to common stockholders $5,404,981 3,456,324 $1.56
Effect of Dilutive Securities
Stock options and RRP awards -- 17,235
---------- ----------
Diluted Earnings Per Share
Income available to common stockholders and
assumed conversions $5,404,981 3,473,559 $1.56
========== =========
Options to purchase 30,000 shares of common stock at $21.50 per share were
outstanding at September 30, 2002, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
35
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Note 19: Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents - The fair value of cash and cash equivalents
approximates carrying value.
Interest-bearing Deposits - The fair value of interest-bearing time deposits
approximates carrying value.
Securities and Mortgage-backed Securities - Fair values are based on quoted
market prices.
Loans and Loans Held for Sale - For both short-term loans and variable-rate
loans that reprice frequently and with no significant change in credit risk,
fair values are based on carrying values. The fair value for other loans is
estimated using discounted cash flow analyses using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality.
Interest Receivable/Payable - The fair values of interest receivable/payable
approximate carrying values.
FHLB Stock - Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Deposits - The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
Short-term Borrowings - The fair value of short-term borrowings approximates
carrying value.
Federal Home Loan Bank advances - The fair value of these borrowings is
estimated using a discounted cash flow calculation, based on current rates for
similar advances.
36
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
The estimated fair values of the Company's financial instruments are as
follows:
2004 2003
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------- ----------------------
Assets
Cash and cash equivalents $ 10,924,820 $ 10,924,820 $ 35,161,821 $ 35,161,821
Interest-bearing time
deposits 3,071,046 3,071,046 3,270,106 3,270,106
Investment securities
available for sale 95,681,497 95,681,497 85,504,604 85,504,604
Investment securities held
to maturity 1,111,754 1,144,383 2,116,827 2,218,264
Loans, including loans
held for sale 360,454,908 367,834,000 356,953,361 368,992,000
Stock in FHLB 4,736,500 4,736,500 4,518,700 4,518,700
Liabilities
Deposits 370,824,854 372,390,000 380,115,884 385,690,000
Short-term borrowings 3,321,460 3,321,460 2,649,653 2,649,653
Federal Home Loan Bank
advances 50,100,000 53,447,000 54,100,000 59,316,000
Note 20: Quarterly Results of Operations (Unaudited)
Basic
rovision Average Earnings
Quarter Interest Interest Net Interest For Net Shares Per
Ending Income Expense Income Loan Losses Income Outstanding Share
- -----------------------------------------------------------------------------------------
Dec 03 $ 6,844,042 $ 2,656,575 $ 4,187,467 $ 41,196 $1,276,439 3,402,938 $ .38
Mar 04 6,714,082 2,584,346 4,129,736 41,801 1,108,833 3,385,104 .33
Jun 04 6,592,868 2,542,286 4,050,582 21,121 1,135,804 3,371,266 .34
Sep 04(a) 6,715,642 2,552,735 4,162,907 (63,744) 1,213,121 3,369,147 .36
---------- ---------- ---------- ------- ---------
$26,866,634 $10,335,942 $16,530,692 $ 40,374 $4,734,197
========== ========== ========== ======= =========
Dec 02 $ 8,033,234 $ 3,423,588 $ 4,609,646 $206,805 $1,501,293 3,446,883 $0.44
Mar 03 7,484,943 3,093,705 4,391,238 178,721 1,387,403 3,441,328 0.40
Jun 03 7,240,986 2,874,364 4,366,622 71,973 1,502,968 3,428,544 0.44
Sep 03 6,989,133 2,755,762 4,233,371 79,682 1,357,641 3,422,181 0.40
---------- ---------- ---------- ------- ---------
$29,748,296 $12,147,419 $17,600,877 $537,181 $5,749,305
=========== =========== =========== ======== ==========
(a) Net income and earnings per share in the fourth quarter of 2004 were
affected by an adjustment to the provision for loan losses based on management's
quarterly evaluation of the loan portfolio and the related allowance for loan
losses.
37
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Note 21: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company.
Condensed Balance Sheets
2004 2003
---------------------------
Assets
Cash $ 3,929,051 $ 3,452,717
Investment in subsidiaries 56,714,406 56,376,711
Securities available for sale 4,655,545 4,610,463
Other assets 352,734 124,247
----------- -----------
Total assets $65,651,736 $64,564,138
=========== ===========
Liabilities
Dividends payable on common stock $ 603,725 $ 579,884
Other 56,451 59,400
----------- -----------
Total liabilities 660,176 639,284
----------- -----------
Stockholders' Equity
Common stock 3,367,803 3,421,895
Additional paid-in capital 6,002,637 7,370,513
Retained earnings 55,711,953 53,302,385
Unearned RRP -- (1,522)
Accumulated other comprehensive income (90,833) (168,417)
----------- -----------
64,991,560 63,924,854
----------- -----------
Total liabilities and stockholders' equity $65,651,736 $64,564,138
=========== ===========
38
Peoples Bancorp
Notes to Consolidated Financial Statements
September 30, 2004, 2003 and 2002
Condensed Statements of Income
2004 2003 2002
---------------------------------
Income
Dividends from subsidiaries $4,000,000 $4,000,000 $3,200,000
Interest on investments 171,220 196,705 176,047
Net losses on available-for-sale
securities (471,946) -- --
---------- ----------------------
3,699,274 4,196,705 3,376,047
Expenses (144,775) (144,012) (175,163)
---------- ---------- ----------
Income before equity in undistributed income
of subsidiaries and income tax expense 3,554,499 4,052,693 3,200,884
Equity in undistributed income of subsidiaries 705,950 1,703,737 2,223,747
---------- ---------- ----------
Income before income tax 4,260,449 5,756,430 5,424,631
Income tax expense (benefit) (473,748) 7,125 19,650
---------- ---------- ----------
Net income $4,734,197 $5,749,305 $5,404,981
========== ========== ==========
Condensed Statements of Cash Flows
2004 2003 2002
-----------------------------------
Net cash provided by operating activities $ 4,032,062 $ 4,046,297 $ 3,571,079
----------- ----------- -----------
Cash flows from investing activities
Proceeds from maturities of securities
held to maturity -- 40,000 40,000
Proceeds from maturities and calls of
securities available for sale 223,728 198,238 280,000
---------- ----------- -----------
Net cash provided by investing
activities 223,728 238,238 320,000
----------- ----------- -----------
Cash flows from financing activities
Stock repurchased (1,804,947) (513,523) (692,552)
Stock options exercised 326,279 -- --
Cash dividends (2,300,788) (2,201,904) (2,094,402)
----------- ----------- -----------
Net cash used in financing activities (3,779,456) (2,715,427) (2,786,954)
----------- ----------- -----------
Net change in cash 476,334 1,569,108 1,104,125
Cash at beginning of year 3,452,717 1,883,609 779,484
----------- ----------- -----------
Cash at end of year $ 3,929,051 $ 3,452,717 $ 1,883,609
=========== =========== ===========
39
Exhibit 14
Code of Ethical Conduct for Financial Managers
In my role as a finance manager of the Peoples Bancorp Corporation,
I recognize that financial managers hold an important and elevated role in
corporate governance. I am uniquely capable and empowered to ensure that
stakeholders' interests are appropriately balanced, protected and preserved.
Accordingly, this Code provides principles to which financial managers are
expected to adhere and advocate. The Code embodies rules regarding individual
and peer responsibilities, as well as responsibilities to the company, the
public and other stakeholders.
I certify to you that I adhere to and advocate the following principles and
responsibilities governing my professional and ethical conduct.
To the best of my knowledge and ability:
1. I act with honesty and integrity, avoiding actual or apparent conflicts of
interest in personal and professional relationships.
2. I provide constituents with information that is accurate, complete,
objective, relevant, timely and understandable.
3. I comply with rules and regulations of federal, state, provincial and local
governments, and other appropriate private and public regulatory agencies.
4. I act in good faith, responsibly, with due care, competence and diligence,
without misrepresenting material facts or allowing my independent judgment
to be subordinated.
5. I respect the confidentiality of information acquired in the course of my
work except when authorized or otherwise legally obligated to disclose.
Confidential information acquired in the course of my work is not used for
personal advantage.
6. I share knowledge and maintain skills important and relevant to my
constituents' needs.
7. I proactively promote ethical behavior as a responsible partner among peers
in my work environment and community.
8. I achieve responsible use of and control over all assets and resources
employed or entrusted to me.
46
Exhibit 21
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
First Savings Bank
Federal Savings Bank United States of America
And its subsidiary
Alpha Financial, Inc. Michigan
47
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-120950) relating to the Employees' Savings &
Profit Sharing Plan and Trust of Peoples Bancorp ) and the Registration
Statement on Form S-8 (File No. 333-45164) relating to the Three Rivers
Financial Corporation Stock Option and Incentive Plan (as assumed by Peoples
Bancorp) and the 1998 Peoples Bancorp Stock Option and Incentive Plan of our
report dated October 29, 2004, with respect to the consolidated financial
statements of Peoples Bancorp included in its Annual Report to Stockholders for
the year ended September 30, 2004, filed with the Securities and Exchange
Commission on December 10, 2004 (incorporated by reference into its Annual
Report on Form 10-K for the year ended September 30, 2004).
/s/BKD, LLP
Indianapolis, Indiana
December 22, 2004
48
Exhibit 31.1
CERTIFICATION
I, Maurice F. Winkler III, President-Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Peoples Bancorp,
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all material
respects the financial condition, results or operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) [intentionally omitted].
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
December 14, 2004
/s/Maurice F. Winkler III
President-Chief Executive Officer
49
Exhibit 31.1
CERTIFICATION
I Deborah K. Stanger, Vice President-Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Peoples Bancorp,
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all material
respects the financial condition, results or operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) [intentionally omitted].
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 14, 2004 /s/Deborah K. Stanger
Vice President-Chief Financial Officer
50
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of
Chapter 63 of Title 18 of the United States Code), each of the undersigned
officers of Peoples Bancorp (the "Company") does hereby certify with respect to
the annual report on Form 10-K for the period ended September 30, 2004, as filed
with the Securities and Exchange Commission (the "Report"), that:
1. The Report fully complies with the requirements of section 13(a) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: December 14, 2004 /s/Maurice F. Winkler III
Chief Executive Officer
Date: December 14, 2004 /s/Deborah K. Stanger
Chief Financial Officer
51