Item 1. Business
Overview
Peoples Bank Corporation of Indianapolis (the "Company") is a one bank holding company which owns Peoples Bank & Trust Company ("Peoples"). Peoples has operated continuously since 1891 and its business activities are concentrated in the greater Indianapolis, Indiana area. Peoples offers a broad range of lending, deposit, loan servicing and trust services to individual, governmental and commercial customers. Peoples conducts its business through its downtown Indianapolis headquarters and through 12 offices located throughout the greater Indianapolis area. Peoples is the largest and oldest locally owned and headquartered commercial bank in Indianapolis.
The Company operates under a conservative management philosophy and is dedicated to providing personal service coupled with competitive products and pricing. Management believes that the acquisition of the three largest Indianapolis-based commercial banks by out-of-state holding companies during the last several years enables the Company to distinguish itself from competitors based on its established reputation, local ownership and local decision making authority.
Focusing on developing strong, primary banking relationships with businesses and individuals in its market area, Peoples generally limits its lending activities to the greater Indianapolis area. Peoples focuses its commercial lending efforts on small and medium-sized independent companies and its real estate lending on owner-occupied commercial properties and one-to-four family residential properties. Peoples' loan underwriting and review functions are centralized to provide consistency and timely asset quality monitoring. Peoples' loan portfolio is diversified, locally oriented and does not include any foreign loans.
The Company's principal office is located at 130 East Market Street, Indianapolis, Indiana, 46204.
Market Area
Peoples' market area is the greater Indianapolis area which includes Marion County, Indiana and certain contiguous townships. Indianapolis has experienced significant employment growth in recent years. According to the 1990 Census, Marion County had a total population of approximately 800,000, representing an increase of over 4% since 1980. Employment in Marion County is concentrated in the following industries: durable and nondurable goods manufacturing, retail, financial and real estate services, health, education and professional services, public administration and transportation.
Peoples' service area is highly competitive. The four largest banks in Marion County, each of which is controlled out-of-state, carry a substantial majority of the total deposits of banks and thrifts in the County. Management estimates that Peoples' market share is currently between 2% and 3% of deposits with financial institutions in Marion County. In addition to competition from commercial banks and savings associations, Peoples also competes with numerous credit unions, finance companies, insurance companies, mortgage companies, securities and brokerage firms, money market mutual funds, loan production offices and other providers of financial services generally. Some of Peoples' competitors, including certain regional bank holding companies which have operations in Peoples' market area, have substantially greater resources than Peoples, may have higher lending limits and may offer other services not available through Peoples. Peoples also faces significant competition, particularly with respect to interest rates paid on deposit accounts, from certain local thrift institutions. Peoples competes on the basis of rates of interest charged on loans, the rates of interest paid for funds, the availability, quality and diversity of services and responsiveness to the needs of its customers.
Lending Activities
Focusing on developing strong, primary banking relationships with businesses and individuals in its market area, Peoples generally limits its lending activities to the greater Indianapolis area. Peoples focuses its commercial lending efforts on small and medium-sized companies and its real estate lending on owner-occupied commercial properties and one-to-four family residential properties.
Loans
Peoples provides loans to both individuals and businesses principally within the greater Indianapolis area. Peoples has no material concentration of loans to any single borrower or industry nor does it have any foreign loans.
The amount of loans outstanding (excluding loans held for sale) and the percent of the total represented by each type on the dates indicated are reflected in the following table.
The loan portfolio, excluding loans held for sale, at December 31, 1997 was comprised of approximately 52.22% commercial loans, 23.17% mortgage loans and 24.61% consumer loans. Peoples had no "highly leveraged transactions," as defined by the banking regulators, and no foreign loans. Peoples generally does not lend outside its market area and historically has not acquired participation interests from other financial institutions. State law restricts the amount Peoples can loan to one borrower, generally to 15% of capital and unimpaired surplus, or $7.1 million at December 31, 1997.
Commercial Loans. Commercial loans account for the largest portion of the loan portfolio. Commercial lending is generally considered to have higher credit risk than other forms of credit because of the higher average dollar amount of individual credits and the risk associated with potential diminution of the value of special purpose collateral (which often serves as security on commercial loans) in economic downturns. Commercial loans are made to a diverse group of professional, industrial, and service business customers. Commercial loans include working capital lines of credit, revolving credit loans, term loans (generally not to exceed 7 years), single payment or short-term loans, Small Business Administration loans (on which the SBA guarantees between 75% and 90% of the principal of the loans made to eligible borrowers) and, occasionally, commercial letters of credit and lease financing. Commercial loans may be secured or unsecured depending on the quality of the credit.
The Company's commercial loan category also includes commercial real estate loans. Such loans are loans to businesses or individuals where the Company relies upon the underlying real estate for collateral and repayment. The basis for these loans includes income-producing properties, such as office buildings, warehouses, shopping centers or apartment buildings and construction loans. The Company will also provide land acquisition and development loans, such as loans to purchase land for the development of a subdivision or condominium project. Interest rates on loans in excess of five years are generally adjustable. Construction loan terms are limited to one year and land development loan terms are limited to two years. Peoples' policy establishes limits on the loan-to-value ratio for loans on improved properties, construction loans and land development loans.
Residential Real Estate Loans. Residential real estate loans consist of loans secured by one-to-four family residential properties. During the twelve months ended December 31, 1997, Peoples originated $56.9 million in real estate mortgage loans. Residential real estate loans do not include loans made to businesses to develop residential real estate, which are considered commercial real estate loans.
Residential real estate loans originated for Peoples' portfolio are generally adjustable rate mortgages and certain fixed rate loans. Peoples offers one-, three- and five-year adjustable rate mortgage loans with initial fixed rate periods of one, three, and five years. Certain fixed rate loans may be considered for the portfolio from time to time. These could include loans with one rate adjustment after seven years (7/23) and 15-year fixed rate loans. Peoples also offers residential construction loans. The construction/permanent loan program offers combined construction and permanent financing through a single closing. Other construction loans are made in which the borrower obtains permanent financing through another lender.
Peoples' residential lending department is responsible for the origination and closing of all of Peoples' residential real estate loans. In addition to the loans described above originated for Peoples' portfolio, the bank originates fixed-rate loans with terms up to 30 years, adjustable rate mortgage loans with terms up to 30 years and, occasionally, seven-year balloon loans for resale into the secondary market, generally to the Federal National Mortgage Association ("FNMA"). Peoples retains servicing rights on substantially all the mortgage loans it sells. At December 31, 1997, Peoples serviced, for both its own portfolio and for others, $196.2 million in residential mortgage loans.
In 1996 and 1997, Peoples' restructured its residential lending department in order to improve profitability within the residential mortgage loan origination process. The staff was reduced from 22 to 6 employees, two offices were closed, and the remaining staff was relocated to existing space at the Operations Center. As a result, originations of residential real estate loans in 1997 were down to $56.9 million as compared to 1995 when originations were $86.2 million.
Consumer Loans. Consumer loans offered by Peoples include home equity line of credit loans, home improvement loans, automobile and motor vehicle loans and other secured and unsecured personal loans. Consumer loans generally involve a higher level of risk than residential mortgage loans, and have correspondingly higher yields. Home equity loans are generally initiated on the same underwriting standards as portfolio real estate mortgage loans. They generally bear interest at adjustable rates and will only be made on the basis of a first or second mortgage. Peoples directly reviews all loan applications and does not engage in indirect lending through auto dealers, building contractors or similar third parties.
Asset Quality and Provision for Loan Losses
Loan Quality. Peoples seeks to maintain a high level of asset quality through careful underwriting and by emphasizing loan originations in its market area. Peoples focuses its commercial lending efforts on small and medium-sized, local, independent, commercial and professional firms, manufacturing companies and individuals who are the owners and principals of such firms. Commercial loans are subjected to a detailed review of the borrower's financial performance, the value of the collateral and guarantees. Appraisals are generally required for all real estate loans including residential mortgages and home equity loans exceeding $10,000. Commercial loans may be approved by Peoples' officers up to their established loan limits. Beyond these limits, the officer responsible for the account will recommend the loan to one or more senior executive officers.
The primary functions of loan portfolio management are assuring loan quality, maintaining portfolio diversification and monitoring potential problem loans. Each of Peoples' commercial loan officers is accountable for the performance of his or her loan accounts. Each loan officer monitors his or her borrowers' performance and compliance and receives a daily report of any loan payment on which payment is past due. On the basis of these reports they proceed to make appropriate contacts with any delinquent borrowers. A weekly report to management is prepared showing the past due loans for which each officer is responsible. The commercial loan department then meets each month to discuss the status of every loan that is more than 15 days past due.
Through a loan rating process monitored by the credit analysis staff, and the loan officers' ongoing monitoring of borrowers, Peoples develops its loan "watch list." A loan may be placed on the watch list for a variety of reasons, including an existing or continuing past due status, a change in the borrower's financial condition, a change in an industry which could adversely affect a borrower, a loan mentioned or classified by a regulatory agency or independent auditor, a loan in which the collateral has been affected or any other loan that management desires to monitor specifically.
Any loan with a rating of five through eight or with any other basis for concern as to security or collectibility, is placed on the watch list, which is updated weekly. Each loan officer with a loan that appears on the watch list is responsible for preparing a plan of action for such loan. The commercial loan department then meets quarterly to review the status of handling the past due loans. Based on this meeting, allowance for loan losses is reviewed to determine its adequacy. The allowance for loan losses is also reviewed by the President monthly and the adequacy of the allowance for loan losses is evaluated quarterly by the Board of Directors. The ongoing evaluation of potential losses includes a review of the current financial status and credit standing of borrowers and their prior history, an evaluation of available collateral, a review of loss experience in relation to outstanding loans and management's judgment as to prevailing and anticipated economic conditions, among other relevant factors.
To provide assurance that the watch list is complete and loan grades assigned are reasonable and consistent, Peoples engages an independent loan review provider to annually review a sample of commercial loans larger than $350,000. During 1997, 42% of commercial loan dollars were subject to such a review (using the 1997 beginning portfolio balance as the denominator).
Peoples' collection department is responsible for past due mortgage and consumer loans. Telephone contact is made once such loans are between 5 and 10 days past due. The senior vice president for loan administration, the manager of consumer lending and the supervisor of collections meet monthly to discuss delinquent real estate and consumer loan accounts. At this meeting they discuss potential foreclosures. Following this meeting the collection department prepares plans of action for all cited problem loan accounts. Recommendations for charge-offs based on collateral value versus loan balance and the likelihood of continued non-payment are prepared and the decision whether to foreclose is made.
In 1997, Peoples recorded net charge-offs of $184,000 (0.05% of average loans) as compared to net charge-offs of $515,000 (0.17% of average loans) in 1996. Peoples' ratio of nonperforming loans to total loans was 0.96% of total loans at December 31, 1997 compared to 0.09% at December 31, 1996. At December 31, 1997 and December 31, 1996, Peoples' allowance for loan losses was 1.35% and 1.17% , respectively, of total loans. The allowance for loan losses as a percentage of nonperforming loans at December 31, 1997 and December 31, 1996 was 141.15% and 1,378.09% , respectively. See "Item 6. Selected Consolidated Financial Data" and "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition" for supplemental information.
Loans. During 1997, total loans (excluding loans held for sale) increased $73.94 million or 22.2%. During that period, commercial loans increased $30.0 million or 16.5%, consumer loans increased $24.95 million or 33.2% and mortgage loans increased $19.03 million or 25.3%. During 1996, total loans increased $61.86 million or 22.8%. During that period, commercial loans increased $50.4 million or 38.16%, mortgage loans increased $2.4 million or 3.29%, and consumer loans increased $9.06 million, or 13.69%.
A classification of amounts due in the periods indicated for commercial and real estate construction loans is indicated in the following table as of December 31, 1997. Amounts due are based on remaining scheduled repayments of principal. Amounts due after one year are also classified according to their sensitivity to changes in interest rates.
Allowance for Loan Losses. The allowance for loan losses is a valuation allowance providing for losses inherent in the loan portfolio. The allowance for loan losses is reduced by the charge-off of loans and increased by the provision for loan losses and by recoveries of loans previously charged-off. The appropriate level of the valuation allowance is determined in an ongoing process involving the credit analysis staff, the loan officers and senior management. Specific loans are monitored on an on-going basis and included on the watch list.
The allowance for loan losses is determined based upon characteristics of particular groups of loans. Those characteristics include past due amounts, historical loss trends and any other determinations made by management, credit analysis and the loan officers. For larger loans, when any reasonable concern exists as to the collectibility of interest or principal, the potential loss exposures are estimated as part of the reserve analysis process. The allowance for loan losses also includes an amount that is not specifically allocated to particular loan categories in the event of unanticipated losses. An evaluation of the adequacy of the level of the allowance for loan losses is performed by the loan review officer at least quarterly. That analysis is reviewed by the Board and senior management and an appropriate level of monthly provision for loan losses is identified. The senior manager of lending reviews delinquent loans with loan officers monthly or more frequently if deemed necessary.
The following table presents information concerning the activity in the allowance for loan losses for the periods indicated.
As part of its evaluation process, management allocates portions of the allowance for loan losses to certain segments of the loan portfolio based upon the specific review of credits and historical loss experience. The following table presents a breakdown of the portions of the allowance for loan losses allocated to each category of loans, the percentage of total loans that the category comprises at the dates indicated, and the percentage of the allowance for loan losses allocated to that category.
Other Real Estate. Other real estate ("ORE") are properties of which Peoples has taken possession. The carrying value of ORE was $209,000 at December 31, 1997, $236,000 at December 31, 1996, and $240,000 at December 31, 1995. ORE is carried at the lower of cost (fair value at foreclosure) or fair value, less expected disposition cost. All carrying costs (e.g., taxes, insurance) are expensed. Peoples generally has annual appraisals performed on all ORE. An amount required to write down the carrying value to appraised value is charged to income. Peoples utilizes the services of an outside manager for ORE properties. That person maintains the properties, provides for repairs and improvements and pursues the disposition.
Nonperforming Loans. Loans on which the Company no longer accrues interest are referred to as "nonaccrual loans." Management places a loan on nonaccrual status when collection of additional interest is unlikely and the loan is not considered to be well secured and in the process of collection. When a loan is placed on nonaccrual status, interest recognized but not received is reversed from interest income to the extent the interest was recognized during the current year. Interest recognized but not received in prior years is charged against the allowance for loan losses.
Nonperforming loans are those loans that are on nonaccrual status, are 90 days or more past due as to principal or interest or those that are restructured. Nonperforming assets consist of nonperforming loans and ORE. The following table shows the principal balance of nonperforming assets at the dates indicated.
As of December 31, 1997, nonperforming loans have increased $3,625,000 to $3,908,000 from $0.3 million at December 31, 1996. The increase in nonaccrual loans is primarily attributable to a large credit totaling aproximately $2.3 million and consists of credit facilities extended to two related companies and their owner. Management is continuing to monitor the status of this loan and, if it deems necessary, may charge-off the loan, and make a significant addition to the provision for loan losses in respect of such loan which may be charged to earnings in the current quarter.
At December 31, 1997, excluding nonaccrual loans, loans which were 60 days or more past due were as follows:
Nonperforming loans have deteriorated to the point that the borrower is no longer paying as agreed and has become 90 days or more past due or where management, as a result of delinquent status or significant concern about the ultimate collectibility of the loan, has ceased recognizing interest income (nonaccrual status) on the loan. Management typically evaluates loss exposure on these credits based on the liquidation value of the underlying collateral.
Impaired Loans. Loans are considered impaired when management determines that it is probable that the customer will not comply with the contractual terms of the note. Peoples evaluates the commercial business and commercial real estate loans considered during its quarterly allowance for loan loss analysis for impairment. Residential mortgage loans and consumer credits are not typically individually considered in that analysis. Impaired loans are carried at the present value of expected cash flows, discounted at the loan's effective interest rate or at the fair value of collateral if such loans are deemed to be collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans and changes in that allowance are elements of People's provision for loan losses. During 1997, Peoples identified loans with an average balance of $4,253,000 million as impaired. At year end, $5,241,000 of loans were so designated and $1,145,000 of the allowance was allocated to such loans. Generally, only income received in cash is recorded as interest income after a loan has been designated as impaired.
Other Loans of Concern. Watch category loans may include loans with loss potential that are still performing and accruing interest and may be current under the terms of the loan agreement. However, management has a significant degree of concern about the borrowers' ability to continue to perform according to the terms of the loan. Loss exposure on these loans is also, typically, evaluated based primarily upon the estimated liquidation value of the collateral securing the loan. Also, watch category loans include credits which, although adequately secured and performing, reflect a past delinquency problem or unfavorable financial trends exhibited by the borrower.
All watch list loans are subject to additional scrutiny and monitoring. The Company's philosophy encourages loan officers to identify borrowers that should be monitored in this fashion and believes that this process ultimately results in the identification of problem loans in a more timely fashion.
At December 31, 1997, the Company had a total of $15.6 million of loans on its commercial loan watch list. Loans may be placed on the watch list as a result of delinquent status, concern about the borrower's financial condition or the value of the collateral securing the loan, substandard classification during regulatory examinations or simply as a result of management's desire to monitor more closely a borrower's financial condition and performance.
Securities
Peoples' securities portfolio is maintained in high quality, liquid, short to medium-term securities. The goal of Peoples' investment policy is to maximize return over the long term in a manner consistent with Peoples' liquidity requirements, its asset and liability management strategies and safety of principal. Peoples seeks to maintain a relatively short overall portfolio maturity to reflect interest-earning characteristics more consistent with its deposit base.
Peoples' securities policy is established by the Board of Directors and monitored by the Investment Policy Committee, which consists of four executive officers and a Board member.
The Company's securities portfolio includes U.S. Treasury securities, obligations of U.S. government agencies, obligations of states and political subdivisions, corporate investments and mortgage-backed investments issued by U.S. government agencies and other intermediaries. Securities are designated as "available-for-sale" because they might be sold in response to liquidity needs or for asset/liability management purposes. Such securities are required to be carried at fair value, with the resultant unrealized gain or loss reflected, net of tax, as a component of shareholders' equity. All other securities are designated as held-to-maturity securities because management has the positive intent and ability to hold such securities until maturity. Such securities are carried at amortized cost. At December 31, 1997, all securities were considered "available for sale."
The maturities of securities are a principal source of funds for loan growth and other liquidity needs. The following table illustrates, based on the date of maturity or repricing, the amortized cost and the weighted average yield of securities held as of December 31, 1997. The maturity classification for mortgage-backed investments is determined by the estimated average life. Refer to Note 2 of the Company's consolidated financial statements for additional information.
The following table presents, by category of investment and designation, the carrying value of securities at the dates indicated.
The Company has no concentration in securities of any single issuer except that a majority of the municipal portfolio consists of issuers of bonds with taxing authority on properties in the State of Indiana. The Company's investment in U.S. Government securities and government agencies exceeds 10% of its shareholders' equity.
Sources of Funds
Deposits. Deposits represent the primary source of funds for Peoples. Deposits are attracted principally from within the greater Indianapolis area through the offering of a broad selection of deposit instruments including non-interest-bearing and interest-bearing checking accounts, money market accounts, fixed and variable rate certificates of deposit, individual retirement accounts and regular savings accounts. Peoples does not actively solicit or advertise for deposits outside the greater Indianapolis area. Deposit account terms vary with principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate, if any. Interest rates are established by Peoples generally on a weekly basis. The determination of rates and other terms (such as maturities, service fees and withdrawal penalties) is predicated on rates paid and terms offered by competitors and Peoples' funds acquisition and liquidity requirements.
The following reflects the noninterest-bearing and interest-bearing components of deposits at the dates indicated.
December 31, 1997 1996 1995 ---- ---- ----
(In thousands) Deposits: Non-interest bearing............ $ 82,132 $ 83,911 $ 67,966 Interest-bearing................ 426,179 327,894 283,796 -------- ------- -------
Total deposits.................. $508,311 $411,805 $351,762 ======== ======== ========
Total deposits/total assets..... 84.93% 87.34% 84.35%
Peoples regularly accepts time deposits issued in denominations of $100,000 or more. Balances of such deposits were $69.5 million at December 31, 1997 and $13.6 million at December 31, 1996. The contractual maturity of such deposits was as follows:
December 31,
1997 1996 ---- ----
(In thousands) Maturity distribution of time certificates in amounts of $100,000 or more: Three months or less............................ $39,571 $ 5,196 Over three months to six months................. 9,281 2,000 Over six months................................. 3,018 2,599 Over twelve months.............................. 17,603 3,811 ------ -----
Total............................... $69,473 $13,606 ======= =======
Short-Term Borrowings. Summary information regarding repurchase agreements, which comprised the majority of Peoples' short-term borrowings during 1997, is presented below. Such agreements provide customers with the opportunity to make short-term investments of sums, usually in excess of $100,000, secured by obligations of the U.S. Treasury or a U.S. government-sponsored agency. These agreements are generally short-term and have been a relatively stable source of funds for Peoples.
December 31, 1997 1996 1995 ---- ---- ----
(In thousands) Repurchase agreements: Average for the year: Amount outstanding................... $11,064 $11,964 $26,413 Weighted average interest rate....... 4.32% 4.69% 5.95% At year-end: Amount outstanding................... $12,180 $10,266 $16,056 Weighted average interest rate....... 4.30% 4.38% 4.95% Maximum amount outstanding at any month-end during the year............ $12,180 $14,052 $46,578
Trust Operations
Peoples' Trust and Investment Management Group offers a variety of fiduciary and trust services and provides a growing source of fee income to Peoples. Trust fees were $1,546,000 in 1997, $1,342,000 in 1996, $1,304,000 in 1995. This reflects increases for 1997 and 1996 of $204,000 (15.2%) and $38,000 (2.9%), respectively. Trust assets were $523.9 million at December 31, 1997, $427.0 million at December 31, 1996 and $376.1 million at December 31, 1995. Peoples' Trust and Investment Management Group serves as trustee or agent for over 200 employee benefit plans, is trustee for over 500 personal trust accounts, estates and guardianships and provides a variety of corporate trust and agency services. The Trust and Investment Management Group obtains referrals from existing customers, attorneys and accountants, and is actively seeking to develop new business, especially among non-profit corporations and employee benefit plans. The Company believes that opportunities exist for growth in Trust and Investment Management activities.
Employees
As of December 31, 1997, the Company and Peoples had approximately 179 full-time and 28 part-time employees. Turnover increased slightly from 28% in 1996 to 34% in 1997. The majority of the turnover was seen in part-time teller positions. Significant effort was spent in 1997 on building the bank's management talent, including three new senior vice-presidents. Additionally, the testing process for officers was enhanced. The bank continued to build toward incentive plans for all staff linked to each unit's performance and profitability. A strong emphasis was also placed on bringing compensation in line with the market, revising the non-exempt performance appraisal system, and revising the process for achieving officer title status. The bank embraced a new Sales and Service culture in 1997. The new culture resulted in sales and product training for all staff. Leadership training and sexual harassment training were also provided this year. Benefit improvements included an increased 401(k) match, expanded educational assistance policy, and a slight change in the vacation policy to bring it in line with the competition. The bank considers its employee relationships to be good.
Electronic Data Processing
In 1990, Peoples purchased two IBM AS400 computers and new banking software when it established its Operations Center on the north side of Indianapolis. These changes have enabled Peoples to achieve substantial efficiencies in electronic data processing ("EDP") and to keep pace with developments in the financial services industry by continuing to offer new competitive financial services and products. An example is Peoples' "Cash Manager" account which offers both checking and investment features through a "sweep" arrangement. Peoples has enhanced this commercial service by adding the first Windows based PC-based cash management service. This product has proven to be attractive to business customers.
The Company has an established technology maximization committee to keep abreast of technological developments and to consider new products and more efficient ways to employ the technological capabilities.
In 1997 Peoples installed an image-based wholesale lockbox processing system to accommodate the growth in this product. The system is designed to significantly increase worker productivity and improve quality.
Peoples offers 24-hour telephone banking that provides balance inquiry and funds transfer. Peoples Bank has 12 ATMs and is affiliated with the MAC network which affords Peoples' customers access to MAC ATMs nationwide as well as all Cirrus ATMs worldwide. Peoples has introduced a check card affording customers the ability to use their ATM cards at all merchants accepting VISA. This capability is expected to increase usage of the ATM card and generate additional fee revenues.
Because computer memory was so expensive on early mainframe computers, some computer programs used only the final two digits for the year in the date field and assumed that the first two digits were "19." As a result, some computer applications may be unable to interpret the change from year 1999 to year 2000. Peoples has identified a number of critical software vendors, and is in the process of communicating with each vendor about their compliance with the Year 2000 issue. Peoples has no internally generated code, and all of its core processing is supplied by FISERV, one of the nation's leading software suppliers for community banks. Management believes that Peoples' core processing systems will be Year 2000 compliant by the middle of 1998, and anticipates completion of testing by the end of 1998. As a result, management does not believe that the Year 2000 issue represents a significant risk to Peoples' operations, and the expense in connection with Year 2000 compliance is not expected to be material to its overall financial condition.
Supervision and Regulation
Bank Holding Company Regulation. The Company is registered as a bank holding company, and is subject to the regulations of the Board of Governors of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company Act of 1956, as amended ("BHCA"). Bank holding companies are required to file periodic reports with and are subject to periodic examination by the Federal Reserve. The Federal Reserve has issued regulations under the BHCA requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. Additionally, under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined in the statute) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan. Under the BHCA, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.
Prior to September 29, 1995, the BHCA prohibited the Federal Reserve from approving any direct or indirect acquisition by a bank holding company of more than 5% of the voting shares, or of all or substantially all of the assets, of a bank located outside of the state in which the operations of the bank holding company's banking subsidiaries are principally located unless the laws of the state in which the bank to be acquired is located specifically authorize such an acquisition. Pursuant to amendments to the BHCA which took effect September 29, 1995, the Federal Reserve may now allow a bank holding company to acquire banks located in any state of the United States without regard to geographic restriction or reciprocity requirements imposed by state law, but subject to certain conditions, including limitations on the aggregate amount of deposits that may be held by the acquiring holding company and all of its insured depository institution affiliates and state law provisions requiring the target bank to have existed for some period of time (not exceeding five years) prior to the date of acquisition.
The BHCA also prohibits the Company, with certain exceptions noted below, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries, except that bank holding companies may engage in, and may own shares of companies engaged in, certain businesses found by the Federal Reserve to be "so closely related to banking . . . as to be a proper incident thereto." Under current regulations of the Federal Reserve, the Company and any non-bank subsidiaries it may control are permitted to engage in, among other activities, such banking-related businesses as the operation of a thrift, the operation of a trust company, sales, and consumer finance, equipment leasing, the operation of a computer service bureau, including software development, and mortgage banking and brokerage. The BHCA does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve is the federal regulatory and examining authority for bank holding companies. The Federal Reserve has adopted capital adequacy guidelines for bank holding companies.
Bank holding companies are required to comply with the Federal Reserve's risk-based capital guidelines which require a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities such as standby letters of credit) of 8%. At least half of the total required capital must be "Tier I capital," consisting principally of common stockholders' equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain goodwill items. The remainder ("Tier II Capital") may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, cumulative perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a Tier I (leverage) capital ratio under which the bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of 3% in the case of bank holding companies which have the highest regulatory examination ratings and are not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a ratio of at least 1% to 2% above the stated minimum.
The Company and Peoples are required to comply with capital requirements promulgated by their primary regulators that affect their ability to pay dividends and can affect their operations. Those regulations require the maintenance of specified levels of capital (as defined) to total assets (the leverage ratio) and to risk weighted assets (the risk-based capital ratio). These regulations require the maintenance of a leverage ratio of at least 3.00% (only for the most sound institutions, others will be required to maintain 4% or 5%) and a total risk-based capital ratio of at least 8.00%.
The Company was in full compliance with all regulatory capital requirements at December 31, 1997. The following table indicates the Company's actual capital levels at the dates indicated:
At December 31, 1997 1996 1995 -------- -------- -------- (Dollars in thousands) Total assets (1) ......................... $597,861 $471,192 $416,781 Risk-based assets ........................ 428,689 346,971 301,426 Tier I capital ........................... 48,192 45,063 41,398 Total capital ............................ 53,553 48,963 44,688 Leverage ratio ........................... 8.26% 9.62% 9.93% Tier I risk-based capital ratio........... 11.24 12.99 13.73 Total risk-based capital ratio............ 12.49 14.11 14.83
(1) Adjusted to exclude net unrealized gain/loss on available-for-sale securities.
Bank Regulation. Peoples is organized under the laws of Indiana and as such is subject to the supervision of the Indiana Department of Financial Institutions ("DFI"), whose examiners conduct periodic examinations of state banks. Peoples is not a member of the Federal Reserve System, so its primary Federal regulator is the FDIC, which also conducts periodic examinations of the bank. Peoples' deposits are insured by the Bank Insurance Fund ("BIF") administered by the FDIC and are subject to FDIC's rules and regulations respecting the insurance of deposits. See "--Deposit Insurance."
Both federal and state law extensively regulate various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosure, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires banks, among other things, to make deposited funds available within specified time periods.
Insured state-chartered banks are prohibited under FDICIA from engaging as principal in activities that are not permitted for national banks, unless: (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund, and (ii) the bank is, and continues to be, in compliance with all applicable capital standards. The Company does not believe that these restrictions will have a material adverse effect on its current operations.
Federal Home Loan Bank System. During 1994, Peoples was approved for membership in the Federal Home Loan Bank ("FHLB") System. FHLB membership will provide Peoples with a ready source from which to borrow short-term funds from time to time. The FHLB System consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member savings and loan associations and savings banks and other member financial institutions. Peoples is required to hold shares of capital stock in the FHLB of Indianapolis in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the end of each calendar year. Peoples is currently in compliance with this requirement. At December 31, 1997, Peoples' investment in stock of the FHLB of Indianapolis was $2.3 million.
In past years, Peoples has received dividends on its FHLB stock. All 12 FHLBs are required by law to provide funds for the resolution of troubled savings associations and to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low- and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations could adversely affect the FHLBs' ability to pay dividends and the value of FHLB stock in the future. For the year ended December 31, 1997, dividends paid to Peoples by the FHLB of Indianapolis totaled $137,000 for an annual rate of 7.98%.
The FHLB of Indianapolis serves as a reserve or central bank for member institutions within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. Eligible collateral includes first mortgage loans less than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, FHLB deposits and, to a limited extent, real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as over collateralization or, under certain circumstances, to renew outstanding advances. All long-term advances must be used to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Bank Capital Requirements. The FDIC has adopted risk-based capital ratio guidelines to which Peoples is subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk.
Like the capital guidelines established by the Federal Reserve for the Company, these guidelines divide a bank's capital into two tiers. The first tier ("Tier I") includes common equity, certain non-cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary ("Tier II") capital includes, among other items, cumulative perpetual and long-term limited life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Banks are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier I capital. The FDIC may, however, set higher capital requirements when a bank's particular circumstances warrant. Banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier I leverage ratio (Tier I capital to adjusted total assets as specified in the guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3% for banks that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other banks are required to maintain a Tier I leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points.
Certain regulatory capital ratios under the FDIC's risk-based capital guidelines for Peoples at December 31, 1997 are shown below:
Tier I Capital to Risk-Weighted Assets................ 9.96% Total Risk-Based Capital to Risk-Weighted Assets...... 11.21 Tier I Leverage Ratio................................. 7.33
Dividend Limitations. Under Federal Reserve supervisory policy, a bank holding company generally should not maintain its existing rate of cash dividends on common shares unless (i) the organization's net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. The Company's Board of Directors has adopted a policy consistent with these guidelines. The FDIC also has authority to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the bank.
Under Indiana law, the Company is precluded from paying cash dividends if, after giving effect to such dividends, the Company would be unable to pay its debts as they become due or the Company's total assets would be less than its liabilities and obligations to preferential shareholders. Under Indiana law, Peoples may pay dividends so long as its capital is unimpaired and it has unimpaired retained surplus equal to 25% of capital. Dividends may not exceed undivided profits on hand (less losses, bad debts and expenses). The most stringent capital requirements affecting Peoples, however, are those established by the prompt corrective action provisions of FDICIA, which are discussed below. Peoples' capital levels currently exceed the criteria established to be designated as a "well capitalized" institution. Such institutions are required to have a total risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater. At December 31, 1997, Peoples' total risk-based capital, Tier I risk-based capital and leverage capital exceeded the amounts required to be designated "well capitalized" by $5.2 million, $16.9 million and $13.5 million, respectively.
Lending Limits. Under Indiana law, the total loans and extensions of credit by an Indiana-chartered bank to a borrower outstanding at one time and not fully secured may not exceed 15% of such bank's capital and unimpaired surplus. An additional amount up to 10% of the bank's capital and unimpaired surplus may be loaned to the same borrower if such loan is fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of such additional loans outstanding.
Limitations on Rates Paid for Deposits. Regulations promulgated by the FDIC pursuant to FDICIA place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FDICIA. Peoples does not believe that these regulations will have a materially adverse effect on its current operations.
Safety and Soundness Standards. On August 9, 1995, the federal banking agencies final safety and soundness standards for all insured depository institutions became effective. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. Additional standards on earnings and classified assets are expected to be issued in the near future.
Branching and Acquisitions or Dispositions. Establishment of branches is subject to approval of the DFI and FDIC and geographic limits established by state laws. Indiana branch banking law permits a bank having its principal place of business in the State of Indiana to establish branch offices in any county in Indiana without geographic restrictions. A bank may also merge with any national or state chartered bank located anywhere in the State of Indiana without geographic restrictions.
Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. In addition, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion. The Indiana Branching Law became effective March 15.
Transactions with Affiliates. Peoples is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate.
Prompt Corrective Action. FDICIA requires, among other things, federal bank regulatory authorities to take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.
The FDIC may order a bank that has insufficient capital to take corrective actions. For example, a bank that is categorized as "undercapitalized" would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a bank would be required to guarantee that the bank complies with the restoration plan. "Significantly undercapitalized" banks would be subject to additional restrictions. Banks deemed by the FDIC to be "critically undercapitalized" would be subject to the appointment of a receiver or conservator.
Deposit Insurance. Peoples' deposits are insured up to $100,000 per insured account by the Bank Insurance Fund ("BIF") of the FDIC. As an institution whose deposits are insured by the BIF, Peoples is required to pay deposit insurance premiums to the BIF.
The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the Savings Association Insurance Fund ("SAIF") for savings associations and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. As of December 31, 1997, the reserves of the BIF met the level required by law.
The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk- based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. Such risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Because of the differing reserve levels of the SAIF and the BIF, the deposit insurance assessments paid by healthy BIF-insured institutions were reduced over time so as to be significantly lower than the level paid by healthy SAIF-insured institutions.
On September 30, 1996, President Clinton signed into law legislation which included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, members of SAIF were charged a one-time special assessment based on assessable deposits at March 31, 1995. BIF institutions pay only 20% of the rate being paid by SAIF institutions on their deposits with respect to obligations issued by the federally-chartered corporation which provided financing to resolve the thrift crisis in the 1980's ("FICO"). As a result, BIF institutions such as Peoples pay lower assessments than comparable SAIF institutions.
Federal Securities Law. The Nonvoting Common Shares of the Company are registered with the SEC under the 1934 Act. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder.
Community Reinvestment Act Matters. Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating -- outstanding, satisfactory, needs to improve, and substantial noncompliance -- and a written evaluation of each institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The examiners have determined that Peoples has a satisfactory record of meeting community credit needs.
Limitations on Repurchase of Common Stock of Holding Company. Regulations promulgated by the Federal Reserve provide that a bank holding company must file written notice with the Federal Reserve prior to any repurchase of its equity securities if the gross consideration for the purchase, when aggregated with the net consideration paid by the bank holding company for all repurchases during the preceding 12 months, is equal to 10% or more of the bank holding company's consolidated net worth. This notice requirement is not applicable, however, to a bank holding company that exceeds the thresholds established for a well capitalized state member bank and that satisfies certain other regulatory requirements.
Under Indiana law, the Company will be precluded from repurchasing its equity securities if, after giving effect to such repurchase, the Company would be unable to pay its debts as they become due or the Company's assets would be less than its liabilities and obligations to preferential shareholders.
Additional Matters. In addition to the matters discussed above, the Company and Peoples are subject to additional regulation of their activities, including a variety of consumer protection regulations affecting their lending, deposit and collection activities and regulations affecting secondary mortgage market activities.
The earnings of financial institutions, including the Company and Peoples, are also affected by general economic conditions and prevailing interest rates, both domestic and foreign and by the monetary and fiscal policies of the U.S. Government and its various agencies, particularly the Federal Reserve.
Additional legislation and administrative actions affecting the banking industry may be considered by the United States Congress, the Indiana General Assembly and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislation or administrative action will be enacted or the extent to which the banking industry in general or the Company and Peoples in particular would be affected thereby.
Forward Looking Statements
This Annual Report on Form 10-K ("Form 10-K") contains statements which 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 Form 10-K and include statements regarding the intent, belief, outlook, estimate or expectations of the Company or Peoples or their directors or officers, primarily with respect to future events and the future financial performance of the Company. The Company may also make other written or oral forward looking statements from time to time. Any such forward looking statements are not guarantees of future events or performance, involve risks and uncertainties and are subject to important factors that may cause actual results to differ materially from those projected or suggested in the forward looking statements. The accompanying information contained in this Form 10-K identifies important factors that could cause such differences. These factors include changes in interest rates; competition, including the risk of 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; or unanticipated results in pending legal proceedings.
Item 2.
Item 2. Properties.
The Company's executive offices are located at Peoples' main office building. Peoples owns the main office building through a wholly-owned subsidiary. The main office building is a twelve story building located in downtown Indianapolis. The main office branch is located on the first level of the building and, in addition, Peoples occupies the second, third, fourth, fifth and part of the sixth floors. The Board Room and training area are located on the twelfth floor. All other areas are leased to other tenants.
At December 31, 1997, Peoples operated 13 customer service offices, 8 of which are owned (including the main office) and 5 of which are leased under lease agreements with remaining terms (including renewal options) ranging from 1.6 to 22.2 years. The Company will develop plans and analyze opportunities to expand its number of locations if the expansion appears to represent a profitable opportunity. Peoples operations center on the north side of Indianapolis is leased for a term (including renewal options) ending 2010. In January 1997, Peoples closed its northside mortgage office and moved the staff to the operations center.
The following table provides certain information with respect to Peoples' properties as of December 31, 1997. All offices listed are located in Indianapolis, Indiana.
Approximate Year Opened "ART" ATM Square Description and Address or Acquired Location Footage - - ----------------------- ----------- -------- ------- Main Office 130 East Market Street 1905 ATM 3,500 Castleton Office 6071 East 82nd Street 1983 ATM 3,400 Chapel Hill Office (1) 7365 West 10th Street 1965 ATM 3,200 College Park Office (2) 8910 Wesleyan Road 1985 ATM 6,647 Lafayette Road Office (1) 2802 Lafayette Road 1956 ATM 3,200 Greenwood Place Office 7921 South U.S. Hwy. 31 1986 ATM 3,520 Lawrence Office 6909 East 38th Street 1951 ATM 3,275 Madison/Thompson Office 4940 Madison Avenue 1963 ATM 2,800 71st & Keystone Office 2411 East 71st Street 1967 ATM 2,000 West 86th Street Office 1851 West 86th Street 1970 ATM 3,525 Winona Office (1) 3266 North Meridian 1970 2,000 Washington Square Office (1) 10001 East Washington Street 1995 ATM 2,801 Operations Center (1) 5840 West 74th Street 1990 21,905
(1) Leased facility. (2) Includes 2,927 square feet leased to a tenant through July 1998
Peoples has 24-hour automatic teller machines ("ATMs") at eleven of its branches as indicated above. The automatic teller machines operate under the trade name "ART". Peoples' ATMs participate in the nationwide CIRRUS and MAC ATM networks. See "Item 1. Business--Electronic Data Processing."
Peoples owns substantially all of its computer and data processing equipment used for transaction processing, accounting, financial forecasting, loan documentation and all other data processing and reporting services. The main data processing facility is at the Operations Center.
Item 3.
Item 3. Legal Proceedings.
From time to time the Company or Peoples is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from such litigation or threat thereof will not have a material effect on the financial position or results of operations of the Company or Peoples.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Nonvoting Common Shares are quoted on the Nasdaq National Market under the symbol "PPLS." The following table sets forth the high and low bid prices per Nonvoting Common Share between January 1, 1995 and March 9, 1997.
Trading Period High Low - - ------------------- -------- ------ 01/01/95 - 03/27/95 10 15/16 9.5 04/01/95 - 06/30/95 10 1/4 9.5 07/01/95 - 09/30/95 12 9.5 10/01/95 - 12/31/95 12 5/8 11 5/8 01/01/96 - 03/31/96 14 3/4 12 1/8 04/01/96 - 06/30/96 15 1/8 12 3/8 07/01/96 - 09/30/96 17 1/8 14 1/4 10/01/96 - 12/31/96 18 3/8 16 1/2 01/01/97 - 03/31/97 22 1/4 17 1/2 04/01/97 - 06/30/97 26 1/4 21 3/4 07/01/97 - 09/30/97 35 1/4 25 1/2 10/01/97 - 12/31/97 37 3/4 29 3/4 01/01/98 - 03/09/98 40 3/4 35 1/4
As of March 9, 1998, there were 220 holders of record of the Company's Nonvoting Common Shares, of which 2,812,834 were issued and outstanding. As of such date, there were 37 holders of record of the Company's Voting Common Shares, of which 264,096 were issued and outstanding. The market for Voting Common Shares is inactive and management has no plans to list the Voting Common Shares on Nasdaq or any exchange.
The Company has paid cash dividends on its Common Shares every year since it was formed in 1986 and Peoples paid regular dividends for many years prior thereto. The per share amount of cash dividends declared for each quarter since the first quarter of 1995 are as follows:
Cash Dividends Per Common Share Calandar Quarter First Quarter....................... $0.085 Second Quarter......................... 0.085 Third Quarter.......................... 0.09 Fourth Quarter......................... 0.09
First Quarter....................... $0.09 Second Quarter......................... 0.09 Third Quarter.......................... 0.095 Fourth Quarter......................... 0.10
First Quarter....................... $0.105 Second Quarter......................... 0.11 Third Quarter.......................... 0.115 Fourth Quarter......................... 0.12
On March 19, 1998, the Company declared a dividend of $0.125 per share payable to shareholders of record March 31, 1998. The Company currently anticipates paying quarterly cash dividends at the rate indicated above, although the payment of dividends is subject to the discretion of the Board of Directors. The declaration of future dividends will depend on, among other things, the earnings, financial condition and cash requirements of the Company at the time such payment is considered, and on the ability of the Company to receive dividends from Peoples the amount of which is subject to regulatory limitations.
On June 19, 1997, the Board of Directors of the Company approved a split of the Company's Voting Common Shares and Nonvoting Common Shares, on the basis of two shares for each one of the issued and outstanding shares of each class, as of the close of business on June 30, 1997. The foregoing data give retroactive effect to such 2-for-1 share split.
Item 6.
Item 6. Selected Consolidated Financial Data.
The following table sets forth certain selected financial information reflecting the operations and financial condition of the Company for each year in the five year period ended December 31, 1997. This data should be read in conjunction with the Company's consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Results of Operations and Financial Condition" included elsewhere herein.
(1) Effective January 1, 1993, the Company adopted Financial Accounting Standard No, 109, Accounting for Income Taxes.
(2) Based on Common Shares outstanding at the end of the period.
(3) Net interest income as a percentage of average interest-earning assets, on a fully tax equivalent basis.
(4) The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income, on a fully tax equivalent basis, and recurring non-interest income.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
The business of Peoples Bank Corporation ("the Company") consists of holding and administering its interest in Peoples Bank & Trust Company ("Peoples"). The principal business of Peoples consists of attracting deposits from consumer and commercial customers and making loans to individuals and businesses. Peoples offers various products for depositors, including checking and savings accounts, certificates of deposit and safe deposit boxes. Loans consist principally of loans to individuals secured by mortgage liens on residential properties, consumer loans generally secured by liens on personal property, and loans to businesses generally secured by liens on business assets such as inventory, accounts receivable, commercial real estate and other property. Peoples also offers trust services to individuals, businesses and institutions. Peoples operates 12 banking offices in Indianapolis, and an operations center on the north side of Indianapolis. The Company will develop plans and analyze opportunities to expand its number of locations if the expansion appears to represent a profitable opportunity.
Earnings Summary
The Company's net income for 1997 was $6,278,000 compared with net income for 1996 of $5,409,000, an increase of $869,000 or 16.1%. Net income for 1995 was $3,886,000. Earnings per share assuming full dilution were $1.99 in 1997, $1.70 for 1996 and $1.22 for 1995.
Net Interest Income
Net interest income is the principal component of net income for the Company and is determined by the relative size and characteristics of interest-earnings assets and interest-bearing liabilities. For the years ended December 31, 1997, 1996 and 1995, net interest income was $21,610,000, $18,207,000 and $16,165,000, respectively. This represents an increase in 1997 of $3,403,000 (18.7%), and an increase in 1996 of $2,042,000 (12.6%). Increased net interest income contributed significantly to the net income growth during the period.
Average earning assets increased to $502,486,000 in 1997 from $411,118,000 in 1996, an increase of $91,368,000 (22.2%). Average loans increased $69,845,000 (23.6%) to $366,155,000 in 1996. Increasing loan balances were a primary driver for the increase in net interest income during 1997. Increases in security balances were also a source of growth in net interest income. As part of its efforts to manage interest rate risk, the Company increased its balances of fixed rate securities.
As interest rates declined, this contributed to an increase in the unrealized gain on securities (net of tax) to $615,000 at December 31, 1997 from $286,000 at December 31, 1996. Increases in loans and securities were funded through significant increases in time deposits. Average deposits increased $82,121,000 (21.1%) to $470,611,000 in 1997 from $388,490,000 in 1996. The following table sets forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities, the dollar amount of interest income and interest expense, and the resulting yield on average earning assets and rates on average interest-bearing liabilities. Average balances are also provided for non-earning assets, non-interest-bearing liabilities and shareholders' equity.
Net interest income also depends on the rates earned on assets and paid on liabilities. The net interest margin represents net interest income as a percent of average earning assets. The net interest margin decreased to 4.30% in 1997 from 4.43% in 1996, but was still up from 4.00% in 1995. The most significant reason for the decrease in the net interest margin in 1997 was the increase in security balances. While this strategy reduced interest rate risk, enhanced net interest income, and resulted in significant unrealized gains, it also reduced the net interest margin. Had the Company not initiated this transaction during 1997, the net interest margin would have increased between 1996 and 1997. In addition, during 1997, the Company repositioned much of its securities portfolio to be longer term as part of a strategy to balance interest rate risk, further contributing to the increase in the unrealized gain on securities, and locking in a higher rate of return on that portfolio. The following table presents the change in interest income or interest expense which is attributable to the change in the average balance (volume) and the change in interest income or interest expense which is related to change in rates. Changes in balances were responsible for an increase in net interest income of $2,814,000 during 1997 as both securities and loans grew and were funded by growth in time deposits and, to some extent, savings deposits. The most significant change due to rate was the increase in the yield on securities, more than offsetting declines in net interest income resulting from lower loan rates. Also, deposit rates were generally lower in 1997 as compared to 1996, despite the significant growth in balances.
Non-Interest Income
Non-interest income was $5,953,000 in 1997, $5,437,000 in 1996 and $4,868,000 in 1995. The increase in 1997 of $516,000 (9.5%) followed an increase of $569,000 (11.7%) in 1996. Trust fees increased both in 1997 and 1996, $204,000 (15.2%) and $38,000 (2.9%), respectively.
The increase in revenue from the Trust & Investment Management Group in 1997 is reflective of the continuing sales effort and the increased focus on growth. Management believes that the Trust & Investment Management Group possesses a competitive advantage by offering customers local trust and funds management services. Service charges on deposit accounts and other retail related fees increased $452,000 to $2,963,000 during 1997 following an increase of $463,000 in 1996. Fee income increased for a variety of services. Fees charged to customers for overdrawn accounts were up in 1997, as were fees charged to business customers who did not maintain significant balances but utilized a variety of cash management related services. Peoples provides free access to automated teller machines to customers who maintain checking accounts with the bank, but implemented a fee for non-customers who use Peoples Bank automated teller machines. This new fee produced $230,000 during 1997, an increase from $105,000 in 1996 when the fee was only in place for six months.
Mortgage banking revenue includes net gains and losses realized when mortgage loans are sold into the secondary market, service fee revenue earned from servicing those loans after they are sold and, in 1995, a gain on the sale of loan servicing rights. Mortgage banking revenue, as reflected in the Company's financial statements, has not been reduced by the associated costs, such as compensation expense, which is shown elsewhere within non-interest expense. Mortgage banking revenue was $430,000 in 1997, $713,000 in 1996 and $843,000 in 1995. This reflects a decrease in 1997 of $283,000 (39.7%) against a decrease in 1996 of $130,000 (15.4%). The sale of loan servicing rights during 1995 generated $380,000. The decrease in mortgage banking revenue can be attributed to a change in strategy which focused Peoples on generating less volume, with an emphasis on loans which would not be sold into the secondary market but would remain on the balance sheet. At December 31, 1997 the Company serviced mortgage loans with an aggregate outstanding principal balance of approximately $101 million.
The Company does not engage in the purchase and sale of securities with the intent to generate gains. The Company may sell available-for-sale securities for liquidity or to manage its asset/liability position. During 1997, such sales, as well as gains and losses realized when securities were called prior to their maturity, generated net losses of $50,000 compared to net losses of $63,000 during 1996.
Non-Interest Expense
Non-interest expense, or overhead, includes the costs of personnel, occupancy, equipment, insurance, and other costs of sustaining operations. Overhead for the years ended December 1997, 1996 and 1995 was $16,469,000, $14,794,000 and $15,316,000, respectively. This reflects an increase of $1,675,000 (11.3%) in 1997 compared to a decrease of $522,000 (3.4%) in 1996. More than half of total non-interest expense is comprised of salaries and employee benefits. Salaries and employee benefit expense increased $965,000 (12.0%) compared to a decrease of $564,000 (6.6%) in 1996. During 1997, Peoples added staff in critical areas to enhance its sales and service capacity and to accommodate the bank's strong growth. The decrease in salary and benefit expense during 1996 resulted from the reorganization of certain operations to improve process efficiency. Advertising expense increased $147,000 in 1997, following a decrease of $106,000 in 1996. FDIC insurance expense was $52,000 during 1997, up from $2,000 in 1996, but down from $386,000 during 1995 as a result of changes in the FDIC's assessment rate. Other expenses increased $501,000 due to increases in training and professional services aimed at improving the bank's ability to increase market share, retain existing relationships, and improve profitability.
Income Taxes
The Company's income tax expense was affected primarily by the level of pre-tax income. As income increased, tax expense did as well. Tax expense for 1997 increased $700,000 following an increase of $1,021,000 during 1996. The Company can and does purchase tax-free securities and originates tax-free loans as a means of generating tax-free income, effectively mitigating tax expense. The Company also has invested in several low income housing tax partnerships with the intent of generating lower income tax expense in future years, in addition to serving the community by providing subsidized housing for lower income families. Another measure of the Company's tax expense is the effective tax rate. It increased from 25.0% in 1995 to 30.0% in 1996 to 32.5% in 1997. Without tax favored and tax credit producing investments, the Company's maximum effective tax rate would be approximately 40.0%.
Net deferred tax assets at December 31, 1997 and 1996 were $1,963,000 and $1,346,000. Deferred tax assets result, primarily, from book bad debt deductions in excess of those deductible for tax purposes. The asset will be realized as loans are charged off in future periods. Based on the Company's historical levels of taxable income and the relatively small size of the deferred tax assets recorded, management does not believe a valuation allowance for those assets was needed at December 31, 1997.
Asset and Liability Management
The Company engages in a formal process of measuring and defining the amount of interest rate risk. Interest rate risk is the effect on net interest income resulting from changes in interest rates. The goal of the asset and liability management process is to maintain a high, yet stable, net interest margin by identifying the degree of interest rate risk and developing tactics and strategies to mitigate the extent to which net interest income will be affected by changes in interest rates.
The following tables illustrate the repricing opportunities, or "rate sensitivity," of interest-earning assets and interest-bearing liabilities. A repricing may occur if the rate on the asset or liability changes as interest rates change, or, when the rate is fixed, at the time they mature. The "gap" is the difference between rate sensitive assets and rate sensitive liabilities within a specific time frame. Gap is considered an indicator of the effect a change in interest rates may have on net interest income.
As of December 31, 1997, the Company's rate sensitive liabilities exceeded rate sensitive assets through one year. This would indicate that when rates increase, net interest income may decline. In order to accurately determine the effect of changes in interest rates, the repricing effect of each type of interest-earning asset and interest-bearing liability must be measured. Assets and liabilities have different characteristics and the magnitude of change differs for each. Management continually monitors the changes to net interest income which may result from changing interest rates.
A significant assumption that creates the large negative gap in the 0 to 3 month category is that all interest-bearing demand and savings accounts are subject to immediate repricing. While it is true that contractually, those accounts are subject to immediate repricing, the rates paid on those accounts are not generally tied to specific indices and are influenced by market conditions and other factors. Accordingly, a general movement in interest rates, either up or down, may not have any immediate effect on the rates paid on these deposit accounts. The foregoing table illustrates only one source of information about sensitivity to interest rate movements. The core of the Company's asset and liability management process consists of simulations that take into account the time that various assets and liabilities may reprice and the degree to which various categories of such assets and liabilities will respond to general interest rate movements. Interest rate risk can only be represented by a measurement of the effects of changing interest rates given the capacity for and magnitude of change on specific assets and liabilities.
Liquidity
Liquidity refers to the availability of funds to meet deposit withdrawals, fund loan commitments and pay expenses. The Company's loan portfolio, excluding loans held for sale, increased to $406,893,000 at December 31, 1997 from $332,953,000 at December 31, 1996, an increase of $73,940,000 (22.2%). Increases in deposits provided funding for loan growth in 1997. Total deposits at December 31, 1997 were $508,311,000, an increase of $96,506,000 from balances of $411,805,000 at December 31, 1996.
A measure of liquidity is the loan to deposit ratio. As of December 31, the net loan to deposit ratio was 80.1% in 1997, and 80.9% in 1996. At these levels, management believes that Peoples had adequate liquidity to meet its current and future needs.
Loan commitments include unfunded portions of lines of credit and commercial letters of credit. These unfunded commitments may or may not require funding. At December 31, 1997 and 1996, such commitments totaled $114,769,000 and $106,546,000, respectively. Loan commitments generate fee income for the Company.
Loan Quality
The Company has maintained a high level of quality in the loan portfolio. Non-performing loans are those loans which are past due more than 90 days and still accruing interest, and those loans on which the Company no longer accrues interest. As of December 31, 1997 and 1996, non-performing loans totaled $3,908,000 and $283,000, respectively. As a percent of total loans, non-performing loans were .96% at December 31, 1997 and .09% at December 31, 1996. Loans are considered impaired if full principal or interest payments are not anticipated. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans. The Company's average investment in impaired loans during 1997 and 1996 was $4,253,000 and $1,068,000 respectively. At December 31, 1997, $5,241,000 of loans were deemed to be impaired and $1,145,000 of the allowance for loan losses was allocated to those loans. The loans that are classified as impaired and are still accruing interest are generally collateralized and currently making payments. However, based on past experience with the customer and their analysis of the situation, management believes that it is not probable that these loans will be repaid in accordance with the contractual terms of the loan agreement. As a result, management classifies these loan relationships as impaired.
The provision for loan losses is a charge to earnings to provide for potential loan losses. The provision for loan losses was $1,800,000 in 1997, $1,125,000 in 1996 and $536,000 in 1995. The increase in the provision for loan losses in 1997 and 1996 was considered necessary by management to maintain the allowance at a desirable level and provide for the substantial loan growth during the years. The adequacy of the allowance for loan losses is evaluated at least quarterly by management based upon a review of identified loans with more than a normal degree of risk, historical loss percentages, and present and forecast economic conditions affecting borrowers. At December 31, the allowance for loan losses was $5,516,000 for 1997 and $3,900,000 for 1996. As a percent of total loans, the allowance for loan losses was 1.35% at December 31, 1997 and 1.17% at December 31, 1996. Management's analysis indicates that the allowance for loan losses at December 31, 1997 was adequate to cover potential losses on identified loans with credit problems and on the remaining portfolio based on historical percentages. See also, "Item 1. Business - Asset Quality and Provision for Loan Losses," above.
Gross loan charge-offs in 1997, 1996 and 1997 were $488,000, $607,000 and $125,000, respectively. As a percentage of average loans, gross loan charge-offs were .13%, .21% and .05% for those periods.
Capital Position
Both the Company and Peoples are required to comply with capital requirements promulgated by their primary regulators. Those regulations require the maintenance of specified levels of capital to total assets (the leverage ratio) and to risk-weighted assets (the risk-based capital ratio). These regulations require maintaining a leverage ratio of 3% for sound entities and a total risk-based capital ratio of at least 8%.
The Company and Peoples were in full compliance with all regulatory capital requirements at December 31, 1997.
The table indicates the Company's actual capital levels at the dates indicated.
New Accounting Pronouncements
Financial Accounting Standard No. 130, "Reporting Comprehensive Income," is effective for both interim and year-end financial statements for fiscal years beginning after December 15, 1997 and establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Comprehensive income is defined as all changes in equity other than those resulting from investments by owners or distributions to owners. Net income is, therefore, a component of comprehensive income. While full disclosure for each reported period is required in year-end financial statements, interim financial statements need only disclose total comprehensive income for each reported period. The Standard does not mandate a specific format for reporting comprehensive income, but does require that all items that are required to be recognized as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Implementation of this Standard will require additional disclosures in future financial reports but will not otherwise affect the Company.
Financial Accounting Standard No. 131, "Disclosures About Segments of an Enterprise and Related Information," is effective for reported periods included in year-end financial statements for fiscal years beginning after December 15, 1997 and for all reported periods in interim financial statements for reporting periods following the first required full fiscal year disclosures. FAS No. 131 establishes new guidance for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about reportable operating segments in interim financial reports issued to shareholders. FAS No. 131 supersedes the industry approach to segment disclosures previously required by FAS No. 14, "Financial Reporting for Segments of Business Enterprise," replacing it with a method of segment reporting which is based on the structure of an enterprise's internal organization reporting. The Statement also establishes standards for related disclosures about products and services, geographic areas and major customers. Management expects that implementation of this Standard may result in the identification of other reportable business segments.
Year 2000 Compliance
Because computer memory was so expensive on early mainframe computers, some computer programs used only the final two digits for the year in the date field and assumed that the first two digits were "19." As a result, some computer applications may be unable to interpret the change from year 1999 to year 2000. Peoples has identified a number of critical software vendors, and is in the process of communicating with each vendor about their compliance with the Year 2000 issue. Peoples has no internally generated code, and all of its core processing is supplied by FISERV, one of the nation's leading software suppliers for community banks. Management believes that Peoples' core processing systems will be Year 2000 compliant by the middle of 1998, and anticipates completion of testing by the end of 1998. As a result, management does not believe that the Year 2000 issue represents a significant risk to Peoples' operations, and the expense in connection with Year 2000 compliance is not expected to be material to its overall financial condition.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
A derivative financial instrument includes futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. Peoples has entered into variable pay interest rate swaps in the notional amount of $20 million with other financial institutions. This means that Peoples receives a fixed rate of interest calculated on $20 million and pays a variable rate of interest calculated on $20 million. These swaps were purchased to hedge risk because Peoples had funded growth in variable rate assets with fixed rate CD's. If interest rates declined, bank earnings would have decreased on variable rate loans, which would have been offset with earnings on the swaps. The Board of Directors has approved a policy regarding derivative financial instruments, and has included limits on the use of these instruments tied to the term of the swap and the credit risk of the other financial institution. Peoples is also a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. 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 and may require collateral from the borrower if deemed necessary by Peoples. Standby letters of credit are conditional commitments issued by Peoples to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised. Peoples' exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income. Management realizes that certain risks are inherent and the goal is to identify and minimize the risks. Tools used by management include the standard GAP report and a recently instituted interest rate shock simulation report. Peoples has no market risk-sensitive instruments held for trading purposes. It appears that Peoples' market risk is reasonable at this time. The condensed GAP report summarizing the Company's interest rate sensitivity is as follows:
TABLE OF MARKET RISK SENSITIVE INSTRUMENTS
The following table presents (dollars in thousands) the scheduled maturity of market risk sensitive instruments at December 31, 1997:
Item 8.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Auditors
Board of Directors and Shareholders Peoples Bank Corporation of Indianapolis Indianapolis, Indiana
We have audited the consolidated balance sheets of Peoples Bank Corporation of Indianapolis as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe 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 Bank Corporation of Indianapolis as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana February 12, 1998
See accompanying notes.
Consolidated Statements of Income Years ended December 31, 1997, 1996 and 1995 (Dollar amounts in thousands, except per share amounts)
See accompanying notes.
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995 (Dollar amounts in thousands, except per share amounts)
See accompanying notes.
Consolidated Statements of Cash Flows December 31, 1997, 1996 and 1995 (Dollar amounts in thousands)
See accompanying notes.
Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (Dollar amounts in thousands, except per share amounts) Note 1 - Summary of Significant Accounting Policies
Basis of Reporting
The consolidated financial statements include Peoples Bank Corporation of Indianapolis ("the Company"), its wholly-owned subsidiary, Peoples Bank & Trust Company ("Peoples") and Peoples' wholly-owned subsidiaries, Peoples Building Corporation and Peoples Investment Services, Inc. Intercompany transactions are eliminated in consolidation.
Description of Business
The Company operates primarily in the banking industry which accounts for more than 90% of its revenues, operating income and assets. Peoples provides commercial and retail banking and trust services to its customers from its main office and branches located in Marion County, Indiana. The majority of Peoples' income is derived from commercial and retail business lending activities and investments. The loan portfolio is diversified and the ability of debtors to repay loans is not dependent upon any single industry. The majority of Peoples' loans are secured by specific items of collateral including business assets, real property and consumer assets.
Use of Estimates
Management makes estimates and assumptions in preparing financial statements that affect the amounts reported therein and the disclosures provided. These estimates and assumptions may change in the future, and future results could differ. Significant areas involving the use of management's estimates and assumptions that are more susceptible to change in the near term include the allowance for loan losses, the fair values of certain securities, and the deter-mination and carrying value of impaired loans.
Securities
The Company has designated all of its securities as available-for-sale securities. Available-for-sale securities are those securities which might be sold before maturity, and they are carried at fair value with the net unrealized holding gain or loss reflected, net of tax, as an adjustment to shareholders' equity.
Securities are written down to fair value when a decline in fair value is not temporary. Premium amortization is deducted from and discount accretion is added to interest income using the level yield method. The cost of securities sold is computed on the identified securities method.
Mortgage Banking Activities
Peoples sells certain fixed rate first mortgage loans on the secondary market. Loans held for sale are carried at the lower of cost or estimated fair value determined on an aggregate basis. At December 31, 1997 and 1996, the estimated fair value of loans held for sale exceeded their cost. Mortgage banking revenue includes gains/losses realized when such loans are sold and service fee revenue earned after the sale, offset by the amortization of capitalized loan servicing rights.
Servicing rights represent the allocated value of servicing rights retained on loans sold in 1996 and 1997. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.
Interest Income on Loans
Interest income is accrued over the term of the loans based on the principal outstanding. Loans are placed on nonaccrual status when the collection of interest becomes doubtful. Loan fees, net of certain direct loan origination costs, are deferred and recognized as an element of interest income over the term of the loan using the level yield method.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations, and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated collectively for smaller-balance loans of similar nature such as residential mortgage, consumer and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate. Management evaluates all loans selected for specific review during their analysis of the allowance for loan losses for impairment. In general, loans classified as doubtful or loss are considered impaired, while loans classified as substandard are individually evaluated for impairment. Depending on the relative size of the credit relationship, late or insufficient payments of 30 to 90 days will cause management to reevaluate the credit under its normal evaluation procedures.
The carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are included in the provision for loan losses expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Premises and equipment are depreciated on the straight-line and declining-balance methods over the estimated useful lives of the assets. Maintenance and repairs are expensed and major improvements are capitalized.
Other Real Estate
Other real estate acquired through foreclosure is carried at the lower of cost (fair value at foreclosure) or fair value less estimated selling costs. Expenses incurred in carrying other real estate are charged to operations as incurred.
Income Taxes
Income tax expense is the sum of the current year income tax due, plus or minus the change in deferred taxes. Deferred tax liabilities and assets are the expected future tax consequences of temporary differences between the carrying values and tax bases of assets and liabilities computed using enacted rates. Recognition of deferred tax assets is limited by the establishment of a valuation reserve unless management concludes that they are more likely than not going to result in future tax benefits to the Company.
Pension Plan
Peoples maintains a defined benefit pension plan for all qualified employees. The benefits are based primarily on years of service and employees' pay near retirement. Peoples' funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes.
Stock Options
No expense for stock options is recorded, as the grant price equals the market price of the stock at grant date. Pro forma disclosures show the effect on income and earnings per share had the options' fair value been recorded using an option pricing model. The pro-forma effect is expected to increase in the future.
Derivatives
The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. The Company enters into interest rate swap agreements as a means of managing the interest rate exposure on certain variable rate second mortgage loans. The interest rate swaps are accounted for under the accrual method. Under this method, the differential to be paid or received on the swap agreements is recognized over the lives of the agreements in interest income. Changes in fair value of interest rate swaps accounted for under the accrual method are not reflected in the accompanying financial statements. Realized gains and losses on terminated interest rate swaps are deferred as an adjustment to the carrying amount of the designated instruments and amortized over the remaining original life of the agreements.
If the designated instruments are disposed of, the fair values of the interest rate swap or unamortized deferred gains or losses are included in the determination of such instruments. To qualify for such accounting, the interest rate swap is designated to the second mortgage loans and alters their interest rate characteristics.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Cash Flow Reporting
Cash and cash equivalents include cash on hand, amounts due from banks, and daily federal funds sold. The Company reports net cash flows for customer loan and deposit transactions, interest-bearing balances with banks, and short-term borrowings with maturities of 90 days or less.
Dividend Restriction
Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends which may be paid by the bank to the holding company or by the holding company to shareholders.
Earnings Per Share
Earnings per share is based on weighted average common shares outstanding. Diluted earnings per share further assumes issue of any dilutive potential common shares. The accounting standard for computing earnings per share was revised for 1997, and all earnings per share previously reported are restated to follow the new standard. Earnings per share are restated for all subsequent stock dividends and splits.
Future Accounting Changes
New accounting standards have been issued which will require future reporting of comprehensive income (net income plus unrealized gains and losses on available-for-sale securities) and may require redetermination of industry segment financial information.
Note 2 - Securities
The amortized cost and fair value of available-for-sale securities at year-end are as follows:
The amortized cost and fair value of available-for-sale securities at December 31, 1997 are shown below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair Cost Value
Due in one year or less $ 8,585 $ 8,604 Due after one year through five years 27,999 28,513 Due after five years through ten years 12,813 13,006 Due after ten years 2,815 2,815 ----------- ----------- Subtotal 52,212 52,938 Mortgage-backed investments 100,640 100,932 --------- --------- $152,852 $153,870 ======== ========
The securities portfolio includes mortgage-backed investments which are collateralized by residential mortgage loans and are repaid as the underlying loans are repaid. The majority of the mortgage-backed investments consist of Collateralized Mortgage Obligations (CMOs) with projected average lives between one and five years and underlying mortgages which are guaranteed by U.S. Government agencies or government sponsored entities.
Sales of available-for-sale securities during 1997, 1996 and 1995 resulted in gross gains of $7, $0 and $130 and gross losses of $52, $63 and $246. During 1997 and 1995, securities were called resulting in net losses of $5 and net gains of $4, respectively.
Securities with a carrying value of $29,013 and $26,193 at December 31, 1997 and 1996, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes required or permitted by law.
Note 3 - Loans
Year-end loans, excluding loans held for sale, are comprised of the following:
December 31, 1997 1996
Commercial $185,089 $156,755 Real estate 94,276 75,247 Construction 25,364 23,644 Consumer 100,139 75,187 Tax-exempt 2,025 2,120 ----------- ----------- $406,893 $332,953 ======== ========
The Bank services mortgage loans sold to the Federal National Mortgage Association. These loans are not included in the accompanying consolidated balance sheets. The unpaid principal balance of these loans at December 31, 1997 and 1996 was $101,168 and $104,084.
Activity for loan servicing rights and the related valuation allowance was as follows:
1997 1996
Balance as of January 1 $ 177 $ - Additions 104 193 Amortization (28) (16) Valuation allowance - - -------------- -------------- Balance as of December 31 $ 253 $ 177 == =========== ===========
Certain of the Company's directors were loan customers of Peoples. A schedule of the aggregate activity in these loans follows:
Balance as of January 1 $ 1,660 New loans 1,500 Loan reductions (346) ---------- Balance as of December 31 $ 2,814 ==========
Note 4 - Allowances for Loan Losses
Activity in the allowance for loan losses is as follows:
Year ended December 31 1997 1996 1995
Beginning balance $ 3,900 $ 3,290 $ 2,704 Provision charged to operations 1,800 1,125 536 Loans charged off (488) (607) (125) Recoveries 304 92 175 ------------ ---------- ------------- Ending balance $ 5,516 $ 3,900 $ 3,290 =========== ========== ===========
Information regarding impaired loans is as follows:
Note 5 - Premises and Equipment
Year-end premises and equipment are as follows:
December 31, 1997 1996
Land $ 1,103 $ 1,103 Buildings and improvements 11,109 10,991 Furniture and equipment 7,788 7,410 ----------- ---------- Total 20,000 19,504 Accumulated depreciation (12,518) (11,581) --------- --------- Net premises and equipment $ 7,482 $ 7,923 ========== ==========
Note 6 - Interest-Bearing Deposits
Time deposits issued in denominations of $100 or greater totaled $69,473 and $13,606 at December 31, 1997 and 1996. Interest expense in 1997, 1996 and 1995 for such deposits totaled $2,840, $965 and $2,243, respectively.
At December 31, 1997, stated maturities of time deposits were:
Year Amount
1998 $ 99,986 1999 77,965 2000 26,860 2001 3,013 2002 2,753 Thereafter 307 -------- $210,884 ========
Note 7 - Short-Term Borrowing
Short-term borrowings are comprised of retail repurchase agreements and short-term Federal Home Loan Bank (FHLB) advances. Repurchase agreements, essentially, represent borrowings by Peoples from its customers and are accounted for as such. Peoples pledges certain of its securities as collateral for those borrowings but maintains control over all such securities. Repurchase agreements outstanding as of December 31, 1997 had maturities ranging from one day to two months. FHLB advances are secured by a blanket pledge of the Bank's assets and mature during January 1998.
1997 1996
Balance of repurchase agreements at year-end $ 12,180 $ 10,266 Average balance during the year 11,064 11,964 Weighted average interest rate during the year 4.32% 4.69% Maximum month-end balance during the year $ 12,180 $ 14,052
Balance of FHLB borrowings at year end 22,200 - Weighted average interest rate 6.17% -
Note 8 - Retirement Plans
Peoples has a defined benefit pension plan which covers a majority of its employees.
The following sets forth the Plan's funded status and the amount recognized in the balance sheet at year-end.
Net pension expense for the year included the following:
Significant assumptions made in computing pension liability and expense were as follows:
1997 1996 1995
Weighted average discount rate 6.50% 7.00% 6.50% Increase in future compensation 5.00 5.50 5.50 Long-term rate of return 8.50 8.50 8.50
Peoples also maintains a voluntary 401(k) plan in which substantially all employees may participate. Peoples matches employees' contributions at up to 50 percent (25% in 1996) of each participant's contributions subject to certain limits. Expense for the plan was $108, $46 and $45 for 1997, 1996 and 1995.
Note 9 - Income Tax Expense
Income tax expense consists of the following components:
1997 1996 1995
Income tax/(benefit) Current $ 3,848 $ 2,715 $ 1,641 Deferred (832) (399) (346) ------------ ------------ ----------- Total $ 3,016 $ 2,316 $ 1,295 ========== ========== ==========
The following is a reconciliation of income tax expense and the amount computed by applying the effective federal income tax rate of 34% to income before income taxes:
The net deferred tax asset at year-end is comprised of the following components:
Note 10 - Earnings Per Share
The following table presents share data used to compute earnings per share:
Note 11 - Commitments and Contingencies
Peoples is committed under various non-cancelable lease contracts for certain facilities which expire at various dates through the year 2005. Most of the leases contain renewal provisions at Peoples' option and contain no restrictive provisions of consequence.
Expense for leased premises was $387, $489 and $488 for 1997, 1996 and 1995. Minimum lease payments at December 31, 1997 for all non-cancelable leases are as follows:
Year Amount
1998 $ 390 1999 360 2000 204 2001 97 2002 87 Thereafter 214 ---------- Total minimum lease payments $ 1,352 ==========
In the ordinary course of business, Peoples has loans, commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the accompanying consolidated balance sheets. Peoples' exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans, standby letters of credit, and financial guarantees is represented by the contractual amount of those instruments. Peoples uses the same credit policy to make such commitments as it used for on-balance-sheet items. At year-end, these financial instruments are summarized as follows:
The unused home equity and commercial lines of credit are predominantly variable rate agreements. Loan commitments are agreements to lend to a customer, provided they accept the terms and conditions offered by Peoples. These commitments are generally extended for terms of up to 60 days and, in many cases, allow the customer to select from one of several financing options offered. At December 31, 1997, these commitments included $10,406 of fixed rate loan commitments at a weighted average rate of 8.25%. Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items.
During 1997, the Company entered into interest rate swap agreements with a notional principal balance of $20,000. The agreements require the Company to make variable rate payments, based on the prime rate, and entitle it to receive fixed rate payments, and serve to manage the Company's interest rate exposure on variable rate second mortgage loans tied to the prime rate. The agreements are for two to three years. At December 31, 1997, the rate payable under the agreements was 8.50% and the weighted average fixed rate being received was 8.67%. The Company is exposed to credit loss in the event that the counterparty does not perform under the agreement in an amount equal to the interest rate differential when the fixed rate exceeds the variable rate.
At December 31, 1997, Peoples was required to have $5,563 on deposit with the Federal Reserve or as cash on hand as reserve.
During 1997, the Company entered into an employment contract with its Chief Executive Officer. The agreement has an initial term of three years and an additional year is added at each anniversary date, subject to certain conditions. The contract provides for severance payments and other benefits, the amount of which depend upon the nature of the separation. No amount is accrued at December 31, 1997 under this agreement.
The Company is also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the financial position of the Company.
Note 12 - Stock Based Compensation Plans
The Company has granted stock options to directors and key members of management. A total of 220,000 shares was made available for grant at a price equal to the market price of the stock at the date of grant. The specific terms of each agreement are determined by the Compensation Committee at the date of the grant. Generally, options granted have a ten-year term and vest and become exercisable based either on the passage of time or the achievement of specified performance targets.
A summary of the Company's stock option activity, and related per share information follows: (restated for stock splits)
Information about the Company's stock options at year-end is as follows:
December 31, 1997 1996
Options exercisable 85,028 45,592 Weighted average price of options exercisable $ 15.30 $ 12.76 Weighted average remaining life (years) of options outstanding 8.5 9.0 Range of exercise price (per share) of options outstanding: High $ 26.06 $ 15.13 Low 12.44 12.44
During 1997, the Company entered into a cash award agreement with its Chief Operating Officer. The amount payable under the agreement is based upon the value of the Company's stock at the time of payment and the award vests and becomes payable only after the achievement of specified performance targets. The term of the award is ten years and the timing of the payment is at the executive's discretion. The Company accrues its current obligation under the plan. During 1997, the Company accrued and expensed $161 related to this award.
The fair value of options granted is estimated based upon assumptions about a stock's dividend yield, the expected time until exercise, the volatility of a company's stock price and the risk-free interest rate. Fair values are determined at the date of grant and estimates are not subsequently changed. The fair value estimates used the following weighted-average assumptions:
1997 1996
Risk free interest rate 7.03% 6.74% Dividend yield 1.82% 2.62% Expected volatility of stock price .21 .22 Expected life (years) 10.0 9.7
The following pro forma information presents net income and earnings per share had the fair value method been used to measure compensation cost for stock option plans.
1997 1996
Net income as reported $ 6,278 $ 5,409 Pro forma net income 6,055 5,157 Diluted earnings per share as reported 1.99 1.70 Pro forma diluted earnings per share 1.93 1.63
Note 13 - Capital Requirements
The Company and Peoples are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. These guidelines and the regulatory framework for prompt corrective action involve quantitative measures of capital, assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices, as well as qualitative judgments by the regulators about components, risk weightings and other factors.
Compliance with these regulations can limit dividends paid by either entity. Both entities must comply with regulations that establish minimum levels of capital adequacy. Peoples must also comply with capital requirements promulgated by the FDIC under its "prompt corrective action" rules. Peoples' deposit insurance assessment rate is based, in part, on these requirements. At December 31, 1997 and 1996, Peoples' capital level results in it being designated as "well capitalized."
The Company's consolidated and Peoples' (bank only) capital amounts and ratios at December 31, 1997 are presented below:
Note 14 - Disclosures About Fair Value of Financial Instruments
The following table presents the carrying value and the fair value of the Company's financial instruments at year-end. Items which are not financial instruments are not included.
The estimated fair value approximates carrying amount for all items except those described below. Estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. Estimated fair value for loans is based on the rates charged at year end for new loans with similar maturities, applied until the loan is assumed to reprice or be paid. Estimated fair value for time deposits is based on the rates paid at year-end for new deposits or borrowings, applied until maturity. Estimated fair value of the interest rate swaps is based on the amount the Company would have to pay to enter into an equivalent agreement at year-end. Estimated fair value for other off-balance-sheet loan commitments is considered nominal.
Note 15 - Parent Company Financial Statements
Presented below are condensed balance sheets and the related condensed statements of income and cash flows for the parent company:
Consolidated Balance Sheets - December 31, 1997 1996
Assets Cash on deposit $ 2,604 $ 3,285 Investment in Peoples 43,099 38,084 Available-for-sale securities 2,884 3,994 Other assets 1,037 530 ---------- ---------- Total assets $ 49,624 $ 45,893 ========= ========= Liabilities $ 807 $ 544
Shareholders' equity 48,817 45,349 ---------- ---------- Total liabilities and shareholders' equity $ 49,624 $ 45,893 ========= =========
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company, their respective ages at March 1, 1997 and their respective positions with the Company and Peoples are listed below:
Name Age Position William E. "Mac" McWhirter 47 Director, Chairman of the Board and Chief Executive Officer of the Company and Peoples Gerald R. Francis 54 Director, President and Chief Operating Officer of the Company and Peoples Charles R. Farber 48 Director, Executive Vice President of the Company and Peoples Elbert L. Bradshaw 70 Director, Retiring in 1998 Robert B. Hirschman, D.D.S. 63 Director Ethan Jackson Director Nominee David W. Knall 53 Director Mary Ellen Rodgers 45 Director
Henry C. Ryder 70 Director, Retiring in 1998 Stephen R. West 66 Director Darrell E. Zink, Jr. 51 Director Nominee William L. Butcher 33 Senior Vice President, Retail Banking for Peoples Stephen J. Beck 53 Senior Vice President, Senior Commercial Lender of Peoples Robert R. Connors 48 Senior Vice President, Director of Operations and Cashier of Peoples Thomas J. Flynn 51 Senior Vice President, Senior Commercial Real Estate Lender for Peoples Charles R. Hageboeck 35 Senior Vice President and CFO of the Company and Peoples Elliott R. Lese 64 Senior Vice President, Director of Loan Administration of Peoples Craig G. Stilwell 42 Senior Vice President, Director of Sales & Marketing of Peoples Terry L. Young 51 Senior Vice President, Senior Trust Officer of Peoples
Mr. Mac McWhirter became Chairman of the Board of the Company and Peoples in April 1997. He has been Chief Executive Officer of the Company since its formation in 1986. He has served Peoples in various capacities since 1969, including the position of President from 1985 to 1997. Mr. McWhirter is also Chairman of Peoples Building Corporation and Peoples Investment Services, Inc. In addition to serving on the Board of Directors of Peoples and the Company, Mr. McWhirter serves on all committees of the Board, except the Board Related Affairs Committee and the Audit Committee, described below. He is Chairman of the Investment Committee. Mr. McWhirter serves as a director of the United Way of Central Indiana, the Salvation Army, St. Vincent Hospital Foundation, Crossroads Rehabilitation Center, the Kiwanis Club of Indianapolis Foundation and the Greater Indianapolis Progress Committee. Mr. McWhirter is Past President of the Kiwanis Club of Indianapolis, Past Treasurer of the United Way of Central Indiana and Past Director and Treasurer of the Community Bankers Association of Indiana. Mr. McWhirter is currently a member of the Indiana Bankers Association Government Relations Committee and the Young Presidents Organization.
Mr. Francis was elected President of the Company and Peoples in April 1997. He joined the Company in February of 1996 as an Executive Vice-President. He also serves as the Chief Operating Officer for the Company and Peoples. Prior to joining the Company, Mr. Francis was employed by Bank One, Cincinnati N.A., where he was the Chairman of the Board and Chief Executive Officer between 1992 and 1995. Between 1989 and 1992, Mr. Francis served as Regional President for Bank One Ohio Corporation. Between 1982 and 1989, Mr. Francis was President of Metropolitan Bank in Lima, Ohio. Before joining Metropolitan Bank, Mr. Francis was Senior Vice President and Senior Loan Officer with the First National Bank of Dayton, Ohio, having joined the bank in 1971.
Mr. Farber joined Peoples in 1972. He is Executive Vice President in charge of the Commercial Services of the Company. He is a member of the Board of Directors and serves on the Loan Committee and the Asset/Liability Management Committee.
Mr. Bradshaw, now semi-retired, owns and operates E. Bradshaw Enterprises, Inc., a consulting firm serving primarily small businesses. He has been a member of the Board of Directors since 1967. Mr. Bradshaw will retire from the Board effective April 16, 1998.
Dr. Hirschman has served on the Board of Directors since 1967. In 1991, he retired from a thirty-year practice as an orthodontist in the Indianapolis area.
Mr. Jackson will be nominated for election to the Board of Directors of Peoples Bank Corporation at the April 16, 1998 Shareholders Meeting. Mr. Jackson is Chairman and CEO of Basic American Financial, Inc. He is the founder and Chairman of Indiana Sports Outreach, Inc., and Chairman of the Ethan and Joyce Jackson Foundation. He is a member of the International Public Affairs Center in Brussels, Belgium. He serves on the Board of Directors for Unisurge Holdings, Inc. of Atlanta, Georgia; Tier 4 Partners of Bloomington, Indiana; and Master Golf, Inc. of Scottsdale, Arizona.
Mr. Knall is Senior Managing Director of McDonald & Company Securities, Inc. ("McDonald"), a leading regional investment banking brokerage and investment advisory company. He joined McDonald in 1969; in 1975 was elected a General Partner; and in 1983, upon that firm's initial public offering, became a Managing Director and was appointed to the Board of Directors. Prior to joining McDonald, Mr. Knall was a First Lieutenant in the United States Army. He is a member of the Indianapolis Society of Securities Analysts and serves as a director of Indianapolis Zoological Foundation, T.M. Englehart, Regenstrief Institute, Goodwill Industries Foundation and the Indianapolis Public Library Foundation. He is also a trustee of the Indianapolis Museum of Art, Wabash College, the Christian Theological Seminary and is a member of the Board of Arbitrators of the National Association of Securities Dealers (NASD). Mr. Knall joined People's Board of Directors in 1991.
Ms. Rodgers has served as Senior Vice President, Chief Financial Officer and Secretary of American Home Patient, a diversified home health care company based in Brentwood, Tennessee, since April, 1996. From 1981 through 1995 Ms. Rodgers was employed with Eli Lilly in various financial capacities. She had been Controller of Lilly Research Laboratories, Assistant Treasurer of Eli Lilly and Company, and Treasurer of Lilly International Corporation and was Controllor for the Information Technology Division just prior to departure from Lilly. She joined the Board of Directors in 1991 and currently chairs the Asset/Liability Management Committee and the Investment Policy Committee of Peoples.
Mr. Ryder joined the Board of Directors in 1986 and currently chairs the Pension and Retirement Committee. He founded the firm of Roberts & Ryder in 1960, and came to the law firm of Barnes & Thornburg as a partner in 1987 as a result of the merger of the two firms. Since January 1, 1996, Mr. Ryder has been of counsel at Barnes & Thornburg. Mr. Ryder is involved in numerous professional, civic, philanthropic, and social organizations throughout Indiana. Mr. Ryder will retire from the Board effective April 16, 1998.
Mr. West has been on the Board of Directors since 1984 and currently chairs the Corporation's Audit Committee. During the past ten years, he has served as the President and Treasurer of West Baking, Inc., Indianapolis, Indiana. From 1957 to 1987, he was an officer of West Baking Company, Inc., and served as vice president and treasurer from 1960 until its sale in 1987. He continued with this company's subsidiary, Dunes Transport, Inc., as vice president and treasurer until its liquidation in 1990. In addition, from 1972 to 1995, he was a six-term elected member of the Indianapolis City-County Council. Since 1996, Mr. West has served as trustee of Indiana Health and Hospital Corporation of Marion County.
Mr. Zink will be nominated for election to the Board of Directors of Peoples Bank Corporation at the April 16, 1998 Shareholders Meeting. Mr. Zink is currently Executive Vice-President and Chief Financial Officer of Duke Realty Investments, Inc. where he is also a Director. In addition, Mr. Zink is a director of the Indianapolis Chamber of Commerce and the Corporate Community Council, and the CICOA Operating Board. He is Chairman of the Pleasant Run Foundation, the CICOA Foundation, and the Park Tudor Endowment. In addition, he is past President of the Park Tudor School Board of Trust. Mr. Zink holds an MBA from the University of Hawaii and a J.D. from Indiana University.
Mr. Beck joined Peoples Bank Corporation in September 1997 as Senior Vice President of Commercial Lending. Prior to joining Peoples, Mr. Beck served as Senior Vice President-Marketing for First of America Bank from April 1996 to September 1997, and as Senior Vice President-Commercial Banking for Huntington Bank from April 1986 to April 1996. He is a founder of the Indiana Statewide Certified Development Corp., where he is currently on the Board of Directors. He is also a founder and member of the Board of the Venture Club of Indiana, Inc. Mr. Beck is a member of the Board of Directors for the Indiana State Chamber of Commerce - Small Business Board of Directors and a Board Member and Chairman of the U.S. Small Business Administration - Indiana Advisory Council.
Mr. Butcher joined Peoples Bank Corporation in February 1998 as Senior Vice-President of Retail Banking. Prior to joining Peoples, Mr. Butcher served as a Vice-President of Retail Banking with Bank One of Cincinnati from November 1988 until January 1998. He holds an M.B.A. from Indiana University. He serves Peoples Bank Corporation as a member of the Asset/Liability Management Committee and the Product Pricing Committee.
Mr. Connors has served as Senior Vice President and Director of Operations since he came to Peoples in 1984. He has 27 years of banking experience which includes 13 years with the Federal Reserve. His last position with the Federal Reserve was that of Regional Manager for the Indianapolis office. Mr. Connors is Chairman of the Research and Development Committee and the Technology Maximization Group. Mr. Connors is currently on the Strategic Direction Committee of the Comprehensive Banking System Users Group, a computer software users group which consists of over 100 financial institutions around the country.
Mr. Flynn joined Peoples Bank Corporation in September 1997 as Senior Vice President of Commercial Real Estate Lending. Prior to joining Peoples, Mr. Flynn was Senior Vice-President and Manager of the Commercial Real Estate Division for Bank One Cincinnati from September 1991 until August 1997. He is a member of the advisory Board, College of Real Estate, University of Cincinnati.
Mr. Hageboeck joined the Company in August of 1995 as Chief Financial Officer and Director of Finance. He also serves as Secretary to the Board of Directors for the Company and Peoples. Mr. Hageboeck was employed by NBD Bank, N.A. in Indiana from 1989 to 1995, and for a portion of his tenure at NBD, he served as the Chairman of the Asset/Liability Committee as well as manager of that bank's funding and ALCO departments. Mr. Hageboeck also serves the Company on the Asset/Liability Management Committee, Investment Committee, Product and Pricing Committee, Audit Committee, and the Board of Directors of Peoples Building Corporation and Peoples Investment Services, Inc. Mr. Hageboeck holds a Ph.D. in Economics from Indiana University.
Mr. Lese came to Peoples from Marquette National Bank in Chicago, Illinois, where he served as a Senior Vice President from 1985 to 1989. Since December, 1989, Mr. Lese has served as Senior Vice President in charge of Loan Administration for Peoples. Mr. Lese has over 30 years of banking experience including the areas of loan administration, executive management, finance, operations and planning. Mr. Lese serves on the Loan Committee, the Asset and Liability Management Committee, and the ORE Committee. Mr. Lese has served as the Vice President of the Notre Dame Club of Indianapolis and is a member of the Indiana CPA Society and the Rotary Club of Indianapolis.
Mr. Stilwell has been Senior Vice President, Director of Marketing for Peoples since 1988. He first came to Peoples in September, 1978. During his 19 years with Peoples, Mr. Stilwell has been the Assistant Cashier, a branch manager and the Director of Marketing, a position he has held since 1984. Mr. Stilwell currently serves as Chairman of the Product and Pricing Committee and the CRA Committee and as Secretary of the Compliance Council. He also serves as a member of the Asset/Liability Management Committee and as a director and secretary of Peoples Investment Services, Inc. Mr. Stilwell is a member of the Indiana Chapter of the Bank Marketing Association and is a board member of the Community Bankers Association Insurance Agency and the Indiana Chapter for Drug Free Youth.
Mr. Young joined Peoples in 1980 and has had more than 20 years of banking experience, primarily in the areas of lending and trust. He currently serves on the Trust Policy Committee. Mr. Young is the past Chairman of the Indiana Bankers Association Trust Committee and Past President of the Central Indiana Corporate Fiduciaries Association.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), requires the Company's directors and executive officers and beneficial owners of more than 10% of the Company's equity securities to file with the SEC certain reports regarding the ownership of the Company's securities or any changes in such ownership. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it, and/or written representations from certain reporting persons that no Forms 5 were required for such persons, the Company believes that, during the fiscal year ended December 31, 1997, all filing requirements applicable to its officers, directors and greater than 10% beneficial owners with respect to Section 16(a) of the 1934 Act were complied with.
Item 11.
Item 11. Executive Compensation.
The following table sets forth, for the years ended December 31, 1997, 1996, and 1995, information with respect to William E. ("Mac") McWhirter, the Chief Executive Officer, Gerald R. Francis, the President, and Charles R. Farber, Elliot R. Lese, and Terry L. Young, who were the five highest paid executive officers of the Company whose aggregate compensation and bonus from Peoples exceeded $100,000:
(1) Salary figures shown above include directors' fees of $4,000 for each of Mr. McWhirter, Mr. Farber, and Mr. Francis, and amounts deferred at the election of the respective officers pursuant to Peoples' Deferred Compensation Plan, more fully described below, for the year in which earned. For fiscal year 1997, Mr. McWhirter deferred neither directors fees nor regular salary, Mr. Francis deferred neither directors fees nor regular salary, Mr. Farber deferred none of his directors fees and $7,000 of his regular salary, Mr. Young deferred $1,000 of his salary, and Mr. Lese $15,000 of his salary.
(2) Bonuses are based on discretionary guidelines established by the Board Related Affairs Committee and are contingent upon, among other things, individual performance reviews and the attainment of strategic financial goals. The bonus figures shown were awarded in the fiscal year shown for performance in the prior fiscal year pursuant to the Board and Senior Management Profit Sharing Plan.
(3) Mr. McWhirter's incentive stock option for 7,308 shares and his non-qualified stock option for 24,952 shares were granted in March 1996 and became exercisable in September 1996.
(4) Mr. Farber and Mr. Francis were granted stock options for an aggregate of 20,000 shares each in January 1996, which options become exercisable in three installments. The first installment for 6,666 shares became exercisable on December 1, 1996, the second installment for 6,666 shares became exercisable on December 1, 1997, and the third installment for 6,668 shares became exercisable on January 1, 1998.
(5) 401(k) matching contributions for Messrs. McWhirter, Farber, Francis, Lese, and Young.
(6) In April, 1997, Mr. Francis was granted stock options for 66,000 shares vesting in three installments. The first installment for 20,000 shares became exercisable in October 1997 upon the attainment of a $30 share price for 20 consecutive days. The second installment for 22,000 shares became exercisable in January 1998 upon the attainment of a $35 share price for 20 consecutive days. The third installment for 24,000 shares will become exercisable only upon the attainment of a $40 share price for 20 consecutive days. As of March 9, 1998 the third installment has not become exercisable. In 1997, the Company granted to Mr. Francis a free-standing stock appreciation award, the value of which is based on 60% of the value of the difference between the fair market value of the shares subject to the award at the time of exercise and a base price of $22.63 per share. The stock appreciation award is granted in three separate installments which vest and become exercisable upon the achievement of certain stock price appreciation levels that correspond to the exercisability triggers for Mr. Francis' non-qualified stock option installments awarded in April, 1997. The term of the award is 10 years. The first installment became exercisable in October, 1997 upon the attainment of a $30 per share price for 20 consecutive days.
(7) The incentive stock options held by Mr. Lese and Mr. Young for 632 shares and 624 shares, respectively, were granted in March 1997 and become exercisable in two equal installments. The first installment is exercisable on June 11, 2000 and the second installment is exercisable on June 11, 2002.
(8) The incentive stock options held by Mr. Lese and Mr. Young for 7,380 shares and 7,280 shares, respectively, were granted in June 1996 and become exercisable in three equal installments. The first installment is exercisable on June 11, 1998, the second installment is exercisable on June 11, 2000, and the last installment is exercisable on June 11, 2002.
Stock Option/SAR Grants in Fiscal Year Ended December 31, 1997
(1) In April, 1997 Mr. Francis was granted stock options for 66,000 shares vesting in three installments. The first installment became exercisable in October 1997 upon the attainment of a $30 share price for 20 consecutive days. The second installment became exercisable in January 1998 upon the attainment of a $35 share price for 20 consecutive days. The third installment will become exercisable only upon the attainment of a $40 share price for 20 consecutive days. As of March 9, 1998 the third installment has not become exercisable.
(2) In 1997, the Company granted to Mr. Francis a free-standing stock appreciation award, the value of which is based on 60% of the value of the difference between the fair market value of the shares subject to the award at the time of exercise and a base price of $22.63 per share. The stock appreciation award is granted in three separate installments which vest and become exercisable upon the achievement of certain stock price appreciation levels that correspond to the exercisability triggers for Mr. Francis' non-qualified stock option installments awarded in April, 1997. The term of the award is 10 years. The first installment became exercisable in October, 1997 upon the attainment of a $30 per share price for 20 consecutive days.
(3) The incentive stock options held by Mr. Lese and Mr. Young for 632 shares and 624 shares, respectively, were granted in March 1997 and become exercisable in two equal installments. The first installment is exercisable on June 11, 2000 and the second installment is exercisable on June 11, 2002.
(4) Options and the SAR award are valued at the date of grant using a standard option pricing model. The value of the options and the SAR award represent the value on the date of grant based on the underlying stock price, its expected volatility, the length of the options or the award, the dividend rate, and the risk-free rate of return at the time of the grant. The value of the options and the SAR were computed using volatility of .21225, a dividend yield of 1.84%, a term of ten years, and a risk-free rate of return of 7.09%.
The following table sets forth certain information regarding the total number of stock options held by each of the Named Executive Officers, and the aggregate value of such stock options, as of December 31, 1997. None of such stock options had been exercised as of such date.
Aggregated Option/SAR Exercises in Fiscal Year Ended December 31, 1997 and Fiscal Year-End Option/SAR Values
(1) Mr. McWhirter's incentive stock option for 7,308 shares and his non-qualified stock option for 24,952 shares were granted in March 1996 and became exercisable in September 1996.
(2) Mr. Farber and Mr. Francis were granted stock options in January 1996. Which become exercisable in three installments. The first installment for 6,666 shares became exercisable on December 1, 1996, the second installment for 6,666 on December 1, 1997, and the third installment for 6,668 shares January 1, 1998.
(3) In April Mr. Francis was granted stock options for 66,000 shares vesting in three installments. The first installment became exercisable in October 1997 upon the attainment of a $30 share price for 20 consecutive days. The second installment became exercisable in January 1998 upon the attainment of a $35 share price for 20 consecutive days. The third installment will become exercisable only upon the attainment of a $40 share price for 20 consecutive days. As of March 9, 1998 the third installment has not become exercisable.
(4) Incentive stock options held by Mr. Lese and Mr. Young were granted in June 1996 and became exercisable in three equal installments. The first installment is exercisable on June 11, 1998, the second installment is exercisable on June 11, 2000, and the last installment is exercisable on June 11, 2002. Additional options were granted Mr. Lese and Mr. Young in April of 1997 which are exercisable equally in two installments on June 11, 2000 and June 11, 2002.
(5) Based on the fair market value for the Nonvoting Common Shares on the last business day of the fiscal year ended December 31, 1997, which was $36 per share.
(6) Second number in these columns represent number and value attributed to Mr. Francis' SAR award.
Stock Appreciation Award. In 1997, the Company granted to Mr. Francis a free-standing stock appreciation award, the value of which is based on 60% of the value of the difference between the fair market value of the shares subject to the award at the time of exercise and a base price of $22.63 per share. The stock appreciation award is granted in three separate installments which vest and become exercisable upon the achievement of certain stock price appreciation levels that correspond to the exercisability triggers for Mr. Francis' non-qualified stock option installments awarded in April, 1997. The term of the award is 10 years, and the timing of exercise is generally at Mr. Francis' discretion once an installment has become exercisable. Upon a Change of Control, as defined in the Plan, the stock appreciation award becomes immediately exercisable in its entirety. In addition, the first installment becomes immediately exercisable in its entirety if Mr. Francis' employment with Peoples is terminated either without Cause or with Good Reason, as defined in Peoples' employment agreement with Mr. Francis dated as of April 17, 1997. The first installment expires and is terminated on the date thirty days following termination of Mr. Francis' employment for any reason other than retirement, disability or death. In the event of retirement, disability or death, there are various periods of exercisability for the first installment that are triggered by the event causing termination. The second and third installments expire immediately upon Mr. Francis' termination of employment for any reason or cause if those installments are not then exercisable. The Company accrues its current obligation with respect to the award for accounting purposes. During 1997, the Company accrued and expensed $161,000 related to the award. During the first quarter of 1998, the Company anticipates expensing an additional $174,000 related to the award.
Stock Option Plan. The Company's Board of Directors has adopted the Peoples Bank Corporation of Indianapolis Stock Option Plan (the "Plan") effective January 1, 1996. The Plan was approved by the shareholders of the Company at the annual meeting in April, 1996. The purpose of the Plan is to provide to officers and other key employees of the Company and Peoples a favorable opportunity to acquire Nonvoting Common Shares, thereby providing them with an increased incentive to work for the success of the Company and Peoples and better enabling each such entity to attract and retain capable executive personnel.
The Plan authorizes the granting of both incentive stock options and non-qualified stock options to officers and other key employees of the Company and its subsidiaries by a committee of disinterested directors, which is currently the Board Related Affairs Committee ("BRAC"). Stock options granted under the Plan will be exercisable at such times (not after ten years and one day from the date of grant) and at such exercise prices (not less than 85% of the fair market value per share of the Nonvoting Common Shares at date of grant) as the BRAC determines and will, except in limited circumstances, terminate if the grantee's employment terminates prior to exercise. A total of 200,000 Nonvoting Common Shares have been reserved for issuance under the Plan, of which options for 188,597 Nonvoting Common Shares have been granted to officers and key employees to date.
During 1997, the BRAC granted an aggregate of 77,722 options to purchase Nonvoting Common Shares to members of the senior management team, with expiration dates ranging from March 20, 2007 through September 8, 2007, and at exercise prices ranging from $21.75 to $26.06 per share. Gerald R. Francis was awarded incentive stock options for 66,000 shares. Mr. Lese and Mr. Young were awarded incentive stock options for 632 and 624 shares, respectively. Other senior officers received options totaling 10,466, collectively, all of which are incentive stock options. Such options generally become exercisable in installments over a period of years ranging from 1999 to 2003.
Peoples Bank Corporation of Indianapolis 1998 Stock Option Plan. The Board of Directors of the Company has adopted the Peoples Bank Corporation of Indianapolis 1998 Stock Option Plan (the "1998 Plan") effective March 19, 1998. The purpose of the 1998 Plan is substantially similar to that of the Plan, with officers and other key employees of the Company and Peoples being eligible to receive both incentive stock options and non-qualified stock options thereunder. The terms and conditions of the 1998 Plan are also substantially similar to those of the Plan, but they incorporate several provisions that make administration of the 1998 Plan more flexible as a result of certain recent changes to the rules under Section 16 of the Securities Exchange Act of 1934. Like the Plan, the 1998 Plan will generally be administered by the BRAC. However, the 1998 Plan contains special provisions authorizing the full Board of Directors to make grants on certain occasions and for a special committee to grant options of less than 1,000 shares to officers who are not subject to Section 16. The 1998 Plan is subject to approval by the shareholders of the Company at the annual meeting to be held in April, 1998. To date, no options have been awarded under the 1998 Plan.
Consulting Agreement. Felix T. McWhirter entered into a consulting agreement with Peoples on January 15, 1987 for a ten- year term to allow him to serve as a consultant upon the termination of his full-time active employment on that date. Mr. Felix T. McWhirter's obligations with Peoples were completed as of January 15, 1997. The terms of his consulting agreement called for payments during the remainder of his life. Mr. McWhirter currently receives $8,260 monthly, subject to the following adjustments: (i) a ten percent reduction every five years, and (ii) an annual adjustment to reflect cost-of-living increases. In the event of his death, Mr. McWhirter's surviving spouse is entitled to the payments for the remainder of her life.
Compensation of Directors. All directors of the Company receive a retainer fee of $4,500 per year. Additionally, outside directors receive a fee of $450 per board or committee meeting. Board members are also eligible to receive bonuses pursuant to the Board and Senior Management Profit Sharing Plan, further discussed below.
Directors Stock Option Plan. The Company's Board of Directors has adopted the Peoples Bank Corporation of Indianapolis 1996 Directors Stock Option Plan (the "Directors Plan") effective June 20, 1996. The Directors Plan was approved at the annual meeting of shareholders held in April, 1997. The purpose of the Directors Plan is to provide directors of the Company who are not employed by the Company ("Outside Directors") a favorable opportunity to acquire Nonvoting Common Shares, thereby better enabling the Company to attract and retain capable Outside Directors.
The Directors Plan provides for the granting of non-qualified stock options to Outside Directors. A total of 20,000 Nonvoting Common Shares have been reserved for issuance under the Directors Plan, of which options for 6,104 Nonvoting Common Shares have been granted to seven Outside Directors to date. Stock options granted under the Plan are exercisable for a period beginning on the date of grant and ending on the day immediately following the tenth year anniversary of the date of grant, and at an exercise price equal to the fair market value per share of the Nonvoting Common Shares on the date of grant. The Directors Plan provides that, on each April 1 thereafter while there are still shares reserved under the Directors Plan for which options have not been granted, the Company will grant to each Outside Director who is serving as a director of the Company on such grant date a non-qualified option to purchase a number of Nonvoting Common Shares pursuant to a formula based on directors' fees.
Deferred Compensation Plan. Pursuant to Peoples' Deferred Compensation Plan, selected employees are given the opportunity to defer irrevocably the receipt of income in anticipation of future benefits to be received at least 5 years in the future. The benefits payable under the plan are to be paid from Peoples' general assets. Peoples maintains insurance policies on the lives of Mac McWhirter, Charles R. Farber, Gerald R. Francis, Elliot R. Lese, Terry L. Young and all other plan participants to provide for eventual payment of their deferred benefits. Peoples is the sole owner and beneficiary of these policies. Peoples has the right to amend or terminate the plan at any time.
Employment Agreement With Mr. Francis. The Company entered into an employment agreement with Mr. Francis dated as of April 17, 1997. The term of the agreement is for an initial term of three years, but may be extended for an additional one year on each annual anniversary of the effective date unless either party gives written notice to the other not to extend the term within ninety days prior to the anniversary. In such a case, no further extension occurs and the agreement ends two years subsequent to the annual anniversary that immediately follows the date on which notice not to extend is given. The agreement provides that Mr. Francis is to receive an annual salary of $185,000, subject to increase from time to time at the discretion of Peoples. In addition, Mr. Francis is entitled to participate in all present and future employee benefit, retirement and compensation plans generally available to employees of Peoples, consistent with his base compensation and his position as President and Chief Operating Officer of Peoples. If Mr. Francis is involuntarily separated from Peoples without cause, he is entitled to receive a severance benefit of one year's salary and benefits for one year, and the first installment of options granted to him in April, 1997 becomes immediately exercisable. The agreement provides that in the event Mr. Francis is terminated following a Change of Control (as defined in the Plan), he is entitled to receive a severance benefit equal to 299% of his annual compensation, with such severance benefit calculated in a manner intended to comply with Section 280G of the Internal Revenue Code of 1986, as amended. Mr. Francis is entitled to additional perquisites, including vacation benefits, reimbursement of reasonable business expenses and office space on terms no less favorable than those in effect prior to the effectiveness of the agreement. The agreement also provides that, for a period of one year following termination, Mr. Francis will not compete with Peoples in the financial services industry. Peoples' obligations under the employment agreement are guaranteed by the company pursuant to a certain Guaranty Agreement dated as of April 17, 1997.
Profit Sharing Plan. Peoples has adopted the Board and Senior Management Profit Sharing Plan. Pursuant to the plan, members of senior management and the Board of Directors are eligible to receive discretionary bonuses based on, among other factors, profits achieved by Peoples in excess of those budgeted for a given fiscal year. The schedule serves only as a discretionary guideline and does not represent a contractual obligation.
401(k) Plan. Employees who have attained age 21 are entitled to participate in the 401(k) Profit Sharing Plan. The Plan was initiated in 1993. Under the plan, Peoples makes a matching contribution on behalf of each participating employee up to 50% of the first 3% and 25% of the next 3%. Vested portions of the benefits under the 401(k) Plan are payable upon the employee's retirement, death, disability or other termination of employment. In late 1995, Peoples amended the 401(k) Plan to permit participants to direct the investment of their plan account balances in Nonvoting Common Shares.
Pension Plan. The "Peoples Bank & Trust Company Employees' Pension Plan" is a tax-qualified defined benefit pension plan. People's employees are eligible to participate in the plan once they have completed one year of service and are 21 years of age. Continued eligibility requires completion of 1,000 hours of service in a calendar year. Participants are not required or permitted to make contributions under the plan. An employee's pension benefits are 100% vested after five years of service.
The plan provides for monthly retirement benefits determined on the basis of the employee's highest five-year average salary and years of service. Early retirement, disability and death benefits are also payable under the plan. The estimated base annual retirement benefits presented on a straight-line annuity basis payable at normal retirement age (65) under the plan to a person in specified remuneration and years of service classifications are as follows:
Years of Service 10 20 30 40 50 -- -- -- -- --
Remuneration $100,000......... $20,000 $40,000 $60,000 $80,000 $100,000 120,000.......... 24,000 48,000 72,000 96,000 120,000 140,000.......... 28,000 56,000 84,000 112,000 140,000 160,000.......... 32,000 64,000 96,000 128,000 160,000 180,000.......... 36,000 72,000 108,000 144,000 180,000 200,000.......... 40,000 80,000 120,000 160,000 200,000
Annual compensation of Mr. McWhirter, Mr. Francis, Mr. Farber, Mr. Lese, and Mr. Young covered by the Pension Plan is the same as their salary compensation illustrated in the Annual Compensation Table (excluding directors fees). Benefits are payable as a monthly life annuity and are not subject to deduction for Social Security or other offset. The years of service credited to Mr. McWhirter, Mr. Francis, Mr. Farber, Mr. Lese, and Mr. Young under the Pension Plan as of December 31, 1997 were 24.50, 1.92, 25.33, 8.01, and 17.58, respectively.
SERP. Peoples has adopted a Supplemental Executive Retirement Plan ("SERP") which supplements the amount of benefits otherwise available to Mr. McWhirter, Mr. Farber, and Mr. Francis under the Pension Plan upon their retirement. Annual SERP benefits equal 2% of pay per year subject to the maximum of 75% of the executive's average annual compensation in the three highest years with Peoples, less the executive's annual benefit payable (i) on a single life basis under the Pension Plan and (ii) under Social Security. Only Mac McWhirter, Mr. Farber, and Mr. Francis are SERP participants at this time, but additional key executives may be added by the Board of Directors. In September, 1997, the Board of Directors of Peoples approved the Second Amendment and Complete Restatement of the Peoples Bank & Trust Company Unfunded Supplemental Retirement Plan For a Select Group of Management Employees in order to clarify certain terms and conditions of the SERP.
Split-Dollar Insurance Arrangements. Peoples has entered into a Split-Dollar Insurance Agreement with each of Mr. McWhirter, Mr. Francis and Mr. Farber as an inducement to each of them to continue his employment with Peoples by assisting him with personal life insurance needs. Each of these agreements provides that Peoples is the owner of the life insurance policy subject to agreement and pays all premiums with respect thereto. Each agreement provides that the death benefits payable under the terms of the policy entitle the employee to the lesser of a certain dollar threshold or the total death benefits then available under the policy, and entitle the bank to receive the death benefits, if any, in excess of the designated threshold. The threshold amount of benefits in each case is $250,000 for each of Mr. Francis and Mr. Farber, and $600,000 for Mr. McWhirter.
Compensation Committee Interlocks and Insider Participation. The Board Related Affairs Committee of the Board of Directors served as the board's compensation committee during fiscal 1997. There are no interlocks between the Company's or Peoples' boards of directors or compensation committee on the one hand and those of any other company on the other hand.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding beneficial ownership of the Company's Common Shares by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding Voting Common Shares (ii) each director and executive officer named in the executive compensation table, and (iii) all executive officers and directors of the Company as a group as of March 9, 1998. Except as otherwise indicated, based on information furnished by such owners, the beneficial owners of the Common Shares listed below have sole investment and voting power with respect to such Common Shares, subject to community property laws where applicable.
(1) Includes 872 shares exerciseable under the 1996 Directors Stock Option Plan.
(2) Includes 20,000 shares subject to an incentive stock option granted under the Company's Stock Option Plan all of which are currently exercisable.
(3) Includes 62,000 shares subject to an incentive stock option granted under the Company's Stock Option Plan which are currently exercisable. Also includes 844 shares held in trusts for the benefit of Mr. Francis' three children, of which Mr. Francis serves as trustee.
(4) Includes eighty (80) Voting Common Shares and 69,128 shares Non-Voting Common Shares held by Peoples as trustee for Luella M. Martin. Also includes 38,470 Non-Voting Common Shares held in trustee by Welsey P. Martin, husband of Luella M. Martin, as trustee.
(5) Of the Voting Common Shares, 21,148 shares are held by Susan McWhirter, wife of William E. McWhirter. Of the Nonvoting Common Shares, 530 shares are held by Elizabeth McWhirter, daughter of William E. McWhirter, 535 shares are held by Julia McWhirter, daughter of William E. McWhirter, and 530 shares are held by Mark McWhirter, son of William E. McWhirter. Also includes 7,308 Shares subject to an incentive stock option and 24,952 Shares subject to a non-qualified stock option granted under the Company's Stock Option Plan, which options are currently exercisable in accordance with their terms.
(6) Includes 364,000 shares held by Peoples as trustee of the Felix M. McWhirter Trust for Children and Grandchildren. Pursuant to such trust, Felix T. McWhirter holds voting power and shares with Peoples dispositive power with respect to the shares. Also includes 98,434 shares held by Margaret J. McWhirter, Mr. McWhirter's spouse.
(7) Held jointly with spouse.
(8) All Voting Common Shares and 257,128 Nonvoting Common Shares are held in trust by Evans McWhirter Rust as trustee. Also includes 81,200 Shares held by Peoples as trustee as to which Mr. Rust disclaims beneficial ownership.
(9) Includes 10,800 shares held by Society National Bank as trustee of Mr. Ryder's 401 (k) Plan. Also includes 200 shares held in a Charitable Remainder Trust. Includes 672 shares exerciseable under the 1996 Directors Stock Option plan.
(10) Less than 0.1%.
Item 13.
Item 13. Certain Relationships and Related Transactions.
From time to time Peoples makes loans to its directors and significant shareholders. At December 31, 1997, such loans and extensions of credit amounted to approximately $2,814,000. Such loans and all similar loans or advances outstanding during any of the three prior years, were made (i) in the ordinary course of business, (ii) on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (iii) did not involve more than the normal risk of collectibility or present other unfavorable features. Peoples does not generally make any loans to executive officers.
David W. Knall, one of the Company's directors, is a Senior Managing Director of McDonald & Company Securities, Inc., one of the underwriters in the Company's initial public offering. From time to time, the Company and Peoples utilize investment advisory and brokerage services provided by McDonald & Company Securities, Inc.
Henry C. Ryder, one of the Company's directors, is a partner in the law firm of Barnes & Thornburg. Such firm provides legal services to the Company and Peoples on a regular basis. Mr. Ryder will retire from the Board of Directors on April 16, 1998.
Felix T. McWhirter entered into a consulting agreement with Peoples on January 15, 1987 for a ten- year term to allow him to serve as a consultant upon the termination of his full-time active employment on that date. Mr. Felix T. McWhirter's obligations with Peoples were completed as of January 15, 1997. The terms of his consulting agreement called for payments during the remainder of his life. Mr. McWhirter currently receives $8,260 monthly, subject to the following adjustments: (i) a ten percent reduction every five years, and (ii) an annual adjustment to reflect cost-of-living increases. In the event of his death, Mr. McWhirter's surviving spouse is entitled to the payments for the remainder of her life.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Financial Statements -- Included Under Item 8:
Report of Crowe, Chizek and Company LLP, Independent Auditors
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the quarter ending December 31, 1997.
(c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page 38.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
PEOPLES BANK CORPORATION OF INDIANAPOLIS
By: /s/ William E. McWhirter ------------------------------------ William E. McWhirter Chairman President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date
(1) Principal Executive Officer:
By: /s/ William E. McWhirter Chairman, Chief ) William E. McWhirter Executive Officer ) )
(2) Principal Financial/ ) Accounting Officer: ) ) By: /s/ Charles R. Hageboeck Senior Vice President, ) _____________________________ Chief Financial Officer ) Charles R. Hageboeck ) ) ) (3) A Majority of the ) Board of Directors:) ) /s/ Felix T. McWhirter Director ) - - ----------------------------- ) Felix T. McWhirter) ) /s/ Elbert L. Bradshaw Director ) - - ----------------------------- ) Elbert L. Bradshaw ) ) /s/ Charles R. Farber Director ) - - ----------------------------- ) Charles R. Farber ) March 31, 1997 ) /s/ Robert B. Hirschman Director ) - - ----------------------------- ) Robert B. Hirschman ) ) /s/ David W. Knall Director ) - - ----------------------------- ) David W. Knall ) ) /s/ William E. McWhirter Director ) - - ----------------------------- ) William E. McWhirter ) ) /s/ Mary Ellen Rodgers Director ) - - ----------------------------- ) Mary Ellen Rodgers ) ) /s/ Henry C. Ryder Director ) - - ----------------------------- ) Henry C. Ryder ) )
/s/ Stephen R. West Director ) - - ----------------------------- ) Stephen R. West )
EXHIBIT INDEX
Exhibit No. Description Page
3.1 Registrant's Articles of Incorporation, as amended *
3.2 Registrant's Code of By-Laws, as amended *
3.3 Form of Share Certificate *
4.1 Articles V, VI, and VII and Sections 1,2, and 4 of Article IX of the Registrant's Articles of Incorporation respecting the terms of Common Shares, are incorporated by reference to the Registrant's Articles of Incorporation filed as Exhibit 3.1 *
4.2 Articles I and VII of the Registrant's Code of By-Laws respecting the terms of Common Shares, are incorporated by reference to the Registrant's Code of By-Laws filed as Exhibit 3.2 *
10.1 Employment Agreement between Registrant and Gerald R. Francis, dated April 17, 1997 (10.1)
10.2 Guaranty Agreement between Registrant and Gerald R. Francis, dated April 17, 1997 (10.2)
10.3 Incentive Stock Option Agreement between Registrant and Gerald R. Francis, dated April 17, 1997 (10.3)
10.4 Stock Appreciation Award for Gerald R. Francis (10.4(a))
10.5 Second amendment and complete restatement of the Registrant's Unfunded Supplemental Executive Retirement Plan (10.4(b))
10.6 Split Dollar Insurance Agreement between Registrant and Gerald R. Francis (10.6)
10.7 Split Dollar Insurance Agreement between Registrant and William E. McWhirter (10.7)
10.8 Split Dollar Insurance Agreement between Registrant and Charles R. Farber
10.9 Lease Agreement by and between Park 100 Joint Venture and Peoples Bank & Trust Company dated November 17, 1989, as amended * (10.1)
10.10 Property Management Agreement between Peoples Building Corporation and F.C. Tucker Company, Inc. dated September 30, 1986 *(10.2)
10.11 Consulting Agreement between F. T. McWhirter and Peoples Bank & Trust Company dated January 15, 1987 *(10.3)
10.12(a) Peoples Bank & Trust Company Executives Deferred Compensation Plan *(10.4(a))
10.12(b) Peoples Bank & Trust Company Directors Deferred Fees Plan *(10.4(b))
10.13 Peoples Bank & Trust Company Board and Senior Management Profit Sharing Plan *(10.6)
10.14 Peoples Bank Corporation of Indianapolis Stock Option Plan **(10.7)
10.15 Peoples Bank Corporation of Indianapolis Directors Stock Option Plan ***
21 Subsidiaries of the Registrant
23 Consent of Crowe Chizek
27(a) Financial Data Schedule
27(b) Financial Data Schedule (restating earnings per share for fiscal year ended December 31, 1996)
* Incorporated by reference to the corresponding exhibit number (or the exhibit number indicated above in the right hand column) of the Registrant's registration statement on Form S-1, effective January 18, 1994, under the Securities Act of 1933, Reg. No. 33- 71988.
** Incorporated by reference to the corresponding exhibit number (or the exhibit number indicated above in the right hand column) of the Registrant's quarterly report on Form 10-Q for the fiscal quarter ended September 30, 1997.
*** Incorporated by reference to the corresponding exhibit number (or the exhibit number indicated above in the right hand column) of the Registrant's annual report on Form 10-K for the fiscal quarter ended December 31, 1996.