Item 1. Business
General
The Company is an Indiana corporation organized in October 1990 to become the thrift holding company for Peoples Federal Savings Bank of DeKalb County ("Peoples Federal"). The Company is the sole shareholder of Peoples Federal. Peoples Federal conducts business from its main office in Auburn and its seven full-service offices located in Avilla, Columbia City, Garrett, Kendallville, LaGrange, and Waterloo, Indiana. Peoples Federal offers a full range of retail deposit services and lending services to northeastern Indiana.
Peoples Federal was founded in 1925 and chartered by the Federal Home Loan Bank Board ("FHLBB"), now the Office of Thrift Supervision ("OTS"), in 1937. Since that time, they have been a member of the Federal Home Loan Bank System ("FHLB System") and the Federal Home Loan Bank of Indianapolis ("FHLB of Indianapolis"), and its savings accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF"), as administered by the Federal Deposit Insurance Corporation (the "FDIC").
On February 29, 2000 a merger was completed with Three Rivers Financial Corp. and its subsidiary First Savings Bank ("First Savings") of Three Rivers, Michigan. The Company became the sole shareholder of First Savings. First Savings conducts business from its main office in Three Rivers, Michigan, and its five full service offices in Union, and Schoolcraft, Michigan, and Howe and Middlebury, Indiana.
The Company has no other business activity other than being the holding company for Peoples Federal and First Savings (collectively the "Banks") subject to regulation by the OTS. The Company's securities are registered with the Securities and Exchange Commission ("SEC") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such, the Company is subject to the information, proxy solicitation, insider trading, and other restrictions and requirements of the Exchange Act.
In June 1999, the Board authorized a stock repurchase program. Purchases of up to 300,000 shares of the Company's common stock may be made in open market or in privately negotiated transactions. As of September 30, 2000, the Company had repurchased 290,694 shares.
On a yearly basis, the Company updates its long-term strategic plan. This plan includes, among other things, the Company's commitment to maintaining a strong capital base and continuing to improve the organization's return on assets through asset growth and controlling operating expenses. Continued careful monitoring of the Banks' interest rate risk is also cited as an important goal. As a result, continued origination of short-term consumer and installment loans, prime plus equity loans, adjustable rate mortgage loans, and fixed-rate real estate loans with original terms of 15 years or less will be emphasized.
The Banks offer a wide range of consumer and commercial financial services. These services include: consumer demand deposit accounts; NOW accounts; regular and term savings accounts and savings certificates; residential and commercial real estate loans; and secured and unsecured consumer loans. During 1999, Peoples Federal added agricultural and commercial lending officers to its staff. Since these types of loans pose a higher credit risk than traditional mortgage lending, they typically offer higher yields and are for shorter terms. It is expected that these loans will assist Peoples Federal in managing its interest rate risk, and increase its overall profitability. The Banks provide these services through a branch network comprised of fourteen full-service banking offices. They also provide credit card services, as well as enhancements to its loan and deposit products designed to provide customers with added conveniences. The Company has historically concentrated its business activities in northeastern Indiana. The purchase of First Savings has extended this area to southern Michigan. The Company's current strategy is to maintain its branch office network as well as remain alert to new opportunities.
Over the years, the Company has broadened its product line and enhanced its operations in order to accommodate its growth and to meet the vigorous competition from various financial institutions and other companies or firms that engage in similar activities.
The Thrift Industry
Thrift institutions are financial intermediaries which historically have accepted savings deposits from the general public and, to a lesser extent, borrowed funds from outside sources and invested those deposits and funds primarily in loans secured by first mortgage liens on residential and other types of real estate. Such institutions may also invest their funds in various types of short- and long-term securities. The deposits of thrift institutions are insured by the SAIF as administered by the FDIC, and these institutions are subject to extensive regulations. These regulations govern, among other things, the lending and other investment powers of thrift institutions, including the terms of mortgage instruments these institutions are permitted to utilize, the types of deposits they are permitted to accept, and reserve requirements.
The operations of thrift institutions, including those of the Banks, are significantly affected by general economic conditions and by related monetary and fiscal policies of the federal government and regulations and policies of financial institution regulatory authorities, including the Board of Governors of the Federal Reserve System and the OTS. Lending activities are influenced by a number of factors including the demand for housing, conditions in the construction industry, and availability of funds. Sources of funds for lending activities include savings deposits, loan principal payments, proceeds from sales of loans, and borrowings from the Federal Home Loan Banks and other sources. Savings flows at thrift institutions such as the Banks are influenced by a number of factors including interest rates on competing investments and levels of personal income.
Earnings
The Banks' earnings depend primarily on the difference between income from interest-earning assets such as loans and investments, and interest paid on interest-bearing liabilities such as deposits and borrowings. The Banks typically engage in long-term mortgage lending at fixed rates of interest, generally for periods of up to 30 years, while accepting deposits for considerably shorter periods.
Generally, rapidly rising interest rates cause the cost of interest-bearing liabilities to increase more rapidly than yields on interest-earning assets, thereby adversely affecting the earnings of many thrift institutions. While the industry has received expanded lending and borrowing powers in recent years permitting different types of investments and mortgage loans, including those with floating or adjustable rates and those with shorter terms, earnings and operations are still highly influenced by levels of interest rates and financial market conditions and by substantial investments in long-term mortgage loans.
Competition
The Banks experience strong competition both in making real estate loans and in attracting savings deposits. The Banks compete for real estate loans with commercial banks, mortgage banking companies, insurance companies, and other institutional lenders. The most direct competition for savings comes from other thrift institutions, mutual savings banks, commercial banks and credit unions. During periods of generally high interest rates, additional significant competition for savings accounts comes from corporate and government securities as well as money market mutual funds. The principal methods generally used by the Banks to attract deposit accounts include: competitive interest rates, advertising, providing a variety of financial services, convenient office locations, flexible hours for the public, and promotions for opening or adding to deposit accounts.
Net Interest Income
Net interest income increases during periods when the spread is widened between the Banks' weighted average rate at which new loans are originated and the weighted average cost of interest-bearing liabilities. The Banks' ability to originate loans is affected by market factors such as interest rates, competition, consumer preferences, the supply of and demand for housing, and the availability of funds.
The Banks have supplemented their interest income through purchases of investments when appropriate. This activity generates positive interest rate spreads on large principal balances with minimal administrative expense.
Interest Rate and Volume of Interest-Related Assets and Liabilities
Both changes in rate and changes in the composition of the Banks' interest-earning assets and interest-bearing liabilities can have a significant effect on net interest income.
For information regarding the total dollar amount of interest income from interest-earning assets, the average yields, the amount of interest expense from interest-bearing liabilities and the average rate, net interest income, interest rate spread, and the net yield on interest-earning assets, refer to page 13 of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2000 Annual Report to Stockholders, incorporated herein by reference.
For information regarding the combined weighted average effective interest rate earned by the Banks on their loan portfolios and investments, the combined weighted average effective cost of the Banks' deposits and borrowings, the interest rate spread of the Banks, and the net yield on combined monthly weighted average interest-earning assets of the Banks on their loan portfolios and investments for the fiscal years ending September 30, 2000, 1999, and 1998 refer to page 10 of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2000 Annual Report incorporated herein by reference.
For information concerning the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Banks' interest income and expense during the fiscal years ending September 30, 2000, 1999, and 1998 refer to page 14 of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2000 Annual Report incorporated herein by reference.
Market Area
Peoples Federal's market area in northeastern Indiana spans the counties of DeKalb, Whitley, Noble, and LaGrange. This market area has a population of approximately 145,000 and has a diversified industrial economic base with an emphasis on the production sector that includes major manufacturers of international scope. Moreover, the distribution sector, primarily in the wholesale and retail trades, constitutes a substantial portion of the area's economy, both in terms of product mix, sales receipts, and employment. The most rapid growth has occurred in the manufacturing sector, especially in the production of automotive and electronics products, and in the service sector with respect to packaging, warehousing, and distribution services.
With the addition of First Savings Bank to the Company, the market area has expanded into southern Michigan and additional towns of Howe and Middlebury in northeastern Indiana. First Savings serves St. Joseph, southern Kalamazoo, and Cass counties in Michigan and LaGrange and eastern Elkhart counties in Indiana. This expanded market area is contiguous to the Peoples Federal market area and is a natural expansion. This aggregate market area has a population estimate of 489,108 and consists of a diversified economic base that includes manufacturing, wholesale and retail trades, small farming, and service industries. The general area serviced by First Savings would be classified as rural.
Lending Activities
General
The Banks have attempted to emphasize investments in adjustable-rate residential mortgages and consumer loans in their market areas. In order to lessen their risk from interest rate fluctuations, the Banks emphasize the origination of interest rate sensitive loan products, such as one-year adjustable-rate mortgage loans, and prime plus equity loans. However, during the recent low interest rate market, customers preferred fixed rate products. The Banks reacted to this trend by offering a new mortgage product of a seven-year fixed rate loan, which converts to a one-year adjustable product at the end of the seventh year. In this way, the Banks offered a fixed rate product to satisfy the customer demand, but are not locked into low interest rates for a long period of time. For regulatory reporting purposes, these loans are shown as fixed rate product until the period remaining to the next repricing is under five years. Seven year/one year loans originated during the initial implementation of this product are now shown in this Form 10-K as adjustable rate product. More recent originations of these types of loans are shown as fixed rate mortgages. First Savings sells any loans they originate for longer than seven year fixed rate terms on the secondary market.
Residential Mortgage Loans
A substantial portion of the Banks' lending activity involves the origination of loans secured by residential real estate, consisting of single-family dwelling units. The Banks also lend on the security of mid-size multifamily dwelling units. The residential mortgage loans included in the Banks' portfolio are primarily conventional fixed-rate loans with a maturity of up to 30 years.
The Banks also offer adjustable-rate mortgage loans. Currently, these loans generally have interest rates that adjust (up or down) every year. Generally, these loans provide for a maximum adjustment of 6% over the life of the loans with a maximum adjustment of 2% during any given year. Adjustments are based upon an index established at the time the commitments are issued by the Banks. The index used for most loans is tied to the applicable United States Treasury security index. While adjustable-rate mortgage loans assist the Banks in maintaining a positive spread during periods of high interest rates, it is not expected that adjustments in interest rates on adjustable-rate mortgages will match precisely changes in the Banks' cost of funds. The majority of the adjustable rate mortgages originated by the Banks have limitations on the amount (generally 6%) and frequency of interest rate changes.
During the fiscal year ended September 30, 2000, the Banks originated $127,435,000 of residential loans of which $79,917,000 was five- to 30-year fixed-rate mortgages and $47,518,000 was adjustable-rate loans. The rates offered on the Banks' adjustable-rate residential mortgage loans are generally competitive with the rates offered by other thrift institutions in the Banks' market areas and are based upon the Banks' cost of funds and the rate of return the Banks can receive on comparable investments. Fixed-rate loans are originated only under terms and conditions and using documentation which would permit their sale in the secondary market and at rates which are generally competitive with rates offered by other financial institutions in the Banks' market areas.
Set forth below is the amounts and percentages of fixed-rate and adjustable-rate loans (which include consumer loans) in the Banks' portfolios at September 30, 2000, 1999, and 1998 (Dollars in thousands).
September 30, - -------------------------------------------------------------- 2000 1999 1998 - -------------------- -------------------- ------------------- Fixed Adjustable Fixed Adjustable Fixed Adjustable - --------- ---------- -------- ---------- -------- ---------- $291,488 $106,941 $259,133 $42,443 $225,270 $46,740 73.2% 26.8% 85.9% 14.1% 82.8% 17.2%
The terms of the residential loans originated by the Banks range from one to 30 years. Experience during recent years reveals that as a result of prepayments in connection with refinancings and sales of the underlying properties, residential loans generally remain outstanding for periods substantially shorter than maturity of the loan contracts. At September 30, 2000, the average contractual maturity of the Banks' portfolios of fixed-rate loans was 9 years and 9 months, and 19 years and 0 months with respect to its portfolio of adjustable-rate loans.
Substantially all of the Banks' residential mortgages include so-called "due on sale" clauses, which are provisions giving the Banks the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage, and the loan is not repaid.
Generally, the Banks will not lend more than 80% of the appraised value of a residential property which is owner occupied unless the borrower obtains private mortgage insurance reducing the uninsured portion of the loan to 72% of the appraised value. If private mortgage insurance is obtained, the Banks' policy is to lend up to 90% of the appraised value of the property securing the loan. The Banks apply the same standards to residential loans purchased in the secondary market.
Commercial Real Estate Loans
The Banks also originate commercial real estate loans. From September 30, 1999, to September 30, 2000, commercial real estate loans generated by the Banks increased from $10,411,049 to $13,167,996, with the percentage of commercial real estate loans to total loans increasing from 3.80% to 4.30%. These loans consisted of construction and permanent loans secured by mortgages on mid-size commercial real estate and farms. Of these loans, approximately $5.1 million are secured by agricultural real estate. The terms of commercial real estate loans vary from loan to loan but are usually five-year adjustable-rate loans with terms of 20 to 25 years. The loan-to-value ratio of commercial real estate loans is generally 75% or less.
Generally, commercial real estate loans involve greater risk to the Banks than do residential loans but usually provide for a higher rate of interest and increased fee income than do residential loans. Commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of the related project and thus may be subject to a great extent to adverse conditions in the real estate market or in the economy generally.
Construction Loans
The Banks offer residential construction loans both to owner-occupants and to persons building residential property. Construction loans are usually offered with fixed rates of interest during construction. Generally, construction loans have terms ranging from six to 12 months at fixed rates over the construction period. Practically all residential construction loans are written so as to become permanent loans at the end of the construction period.
Construction loans involve greater underwriting and default risks to the Banks than do loans secured by mortgages on existing properties. Loan funds are advanced upon the security of the project under construction, which is more difficult to value prior to the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is relatively difficult to evaluate accurately the total loan funds required to complete a project and the related loan-to-value ratios. Should a default occur which results in foreclosure, the Banks could be negatively impacted in that they would have to take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project.
The Banks' underwriting criteria are designed to evaluate and minimize the risks of each construction loan. The Banks carefully consider a wide variety of factors before originating a construction loan, including the availability of permanent financing or a takeout commitment to the borrower (which may be provided by the Banks at market rates); the reputation of the borrower and the contractor; independent valuations and reviews of cost estimates; pre-construction sale information; and cash flow projections of the borrower. Inspections of construction sites are made by the Banks on a timely basis to verify progress made to date as a further reinforcement of its conservative lending policy. To reduce the risks inherent in construction lending, the Banks limit the number of properties that can be constructed on a "speculative" or unsold basis by a developer at any one time and generally require the borrower or its principals to personally guarantee repayment of the loan.
Consumer and Other Loans
Federal laws and regulations permit a federally-chartered savings institution to make secured and unsecured consumer loans including home equity loans (loans secured by the equity in the borrower's residence, but not necessarily for the purpose of improvement), home improvement loans (loans secured by a residential second mortgage), loans secured by deposit accounts, and credit card loans (unsecured). The Banks offer all of these types of loans and are currently emphasizing home equity loans to take advantage of the adjustable interest rate feature of this type of loan versus the mortgage product. These loans also carry a higher rate of interest than conventional mortgages, thereby increasing the profit potential while reducing the interest rate risk.
Loan Portfolio Cash Flows
The following table sets forth the estimated maturity of the Banks' loan portfolios by type of loan at September 30, 2000. The estimated maturity reflects contractual terms at September 30, 2000. Contractual principal repayments of loans do not necessarily reflect the actual term of the Banks' loan portfolios. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of "due on sale" clauses. The average life of mortgage loans tends to increase, however, when current mortgage loan rates substantially exceed rates on existing mortgage loans.
Due in One Year Due After One Year Through Five or Less Five Years Years Total --------- ---------- ---------- ---------- (In thousands) Type of Loan: Construction loans -- Residential real estate $ 9,630 $ - $ - $ 9,630 Commercial 110 - - 110 Real estate loans: Mortgage-residential 29,761 69,803 231,861 331,425 Commercial 2,006 9,274 5,275 16,555 Installment loans -- consumer 17,010 13,382 5,760 36,152 commercial 3,503 969 85 4,557 --------- ---------- ---------- ---------- Total $62,020 $93,428 $242,981 $398,429 ========= ========== ========== ==========
The following table sets forth the total amount of loans due after one year from September 30, 2000, which have a fixed rate or an adjustable rate. (Dollars in thousands)
Loans Due October 1, 2001 and thereafter - ---------------------------------- Fixed Adjustable Total at September 30, 2000 - ----------------- ---------------- --------------------------- $176,238 $160,171 $336,409
Loan Portfolio Composition
The following table sets forth the composition of the Banks' loan portfolios by type of loan at the dates indicated. The table includes a reconciliation of total net loans receivable, after consideration of undisbursed portion of loans, deferred loan fees and discounts, and allowance for losses on loans.
Origination, Purchase and Sale of Loans and Loan Concentrations
The Banks originate residential loans in conformity with standard underwriting criteria to assure maximum eligibility for possible resale in the secondary market. Although the Banks have authority to lend anywhere in the United States, they have confined their loan origination activities primarily in the Banks' service areas.
Loan originations are developed from a number of sources, primarily from referrals from real estate brokers, builders, and existing and walk-in customers. Peoples Federal also utilizes the services of a loan broker located in Fort Wayne, Indiana, who is paid on a commission basis (generally 1% of the loan amount) to originate loans for Peoples Federal.
The Banks' mortgage loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan, and the adequacy of the value of the property that will secure the loan. The loan committees of the Banks can approve residential and commercial loans ranging up to $200,000. The Banks' Boards of Directors must approve loans exceeding $200,000. The Banks utilize independent qualified appraisers approved by the Board of Directors to appraise the properties securing its loans and require title insurance or title opinions so as to insure that the Banks have a valid lien on the mortgaged real estate. The Banks require borrowers to maintain fire and casualty insurance on its secured properties.
The procedure for approval of construction loans is the same as for residential mortgage loans, except that the appraiser evaluates the building plans, construction specifications, and estimates of construction costs. The Banks also evaluate the feasibility of the proposed construction project and the experience and track record of the developer. In addition, all construction loans generally require a commitment from a third-party lender or from the Banks for a permanent long-term loan to replace the construction loan upon completion of construction.
Consumer loans are underwritten on the basis of the borrower's credit history and an analysis of the borrower's income and expenses, ability to repay the loan, and the value of the collateral, if any. A consumer loan officer must approve consumer loans. Consumer loan originations currently are being generated primarily through advertising.
Currently, it is the Banks' policy to originate both fixed-rate and adjustable-rate loans, providing all such loans are eligible for sale in the secondary market. It is Peoples Federal's intention to hold all originated and purchased loans in its portfolio and not for sale. First Savings is currently active in the secondary market and sells the majority of its fixed rate loan products.
The following table shows mortgage and other loan origination, purchase, and repayment activity for the Banks during the periods indicated:
Years Ended September 30 ----------------------------- 2000 1999 1998 -------- ---------- --------- (Dollars in thousands) Mortgage loans originated for the purpose of: Construction-commercial 90 $ - $ 1,425 Construction-residential 13,096 10,080 8,386 Purchase/refinance-commercial 4,278 2,325 2,324 Purchase/refinance-residential 72,772 92,772 82,553 Consumer and other loans originated 28,989 22,258 14,463 --------- --------- --------- Total loans originated 119,225 127,435 109,151 --------- --------- --------- Loans acquired in merger with First Savings 73,381 - - --------- --------- --------- 192,606 127,435 109,151 --------- --------- --------- Loan credits: Principal repayments 98,962 97,440 77,980 --------- --------- --------- Other: Provision for losses on loans 160 89 75 Amortization of loan fees (337) (426) (380) Loan foreclosures, net 256 121 73 --------- --------- --------- 79 (216) (232) --------- --------- ---------
Total credits, net 99,041 97,224 77,748 --------- --------- --------- Net increases in mortgage and other loans receivable, net $ 93,565 $ 30,211 $ 31,403 ========= ========= =========
Interest Rates, Points and Fees
The Banks realize interest, point, and fee income from its lending activities. The Banks also realize income from commitment fees for making commitments to originate loans, from prepayment and late charges, loan fees, application fees, and fees for other miscellaneous services.
The Banks account for loan origination fees in accordance with the Statement of Financial Accounting Standards on Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans ("SFAS No. 91") issued by the Financial Accounting Standards Board (the "FASB"). SFAS No. 91 prohibits the immediate recognition of loan origination fees as revenues and requires that such income (net of certain direct loan origination costs) for each loan be amortized, generally by the interest method, over the estimated life of the loan as an adjustment of yield.
First Savings also realizes income from gains on sales of loans, and servicing fees for loans sold with servicing retained.
Nonperforming Assets
Loans are reviewed on a regular basis and are generally placed on nonaccrual status when the loans become 90 days or more past due, or when, in the judgment of management, the probability of collection is deemed to be insufficient to warrant further accrual. When a loan is placed on a nonaccrual status, previously accrued but unpaid interest is deducted from interest income. When the Banks are unable to resolve a delinquency satisfactorily within 45 days after the loan is past due, they will undertake foreclosure or other proceedings, as necessary, to minimize any potential loss.
Real estate acquired by the Banks as a result of foreclosure or by deed in lieu of foreclosure is classified as "real estate owned" until it is sold. When property is so acquired, it is recorded at the lower of loan balance or fair market value at the date of acquisition. Periodically, real estate owned is reviewed to ensure that net realizable value is not less than carrying value, and any allowance resulting there from is charged to operations as a provision for loss on real estate owned. All costs incurred in maintaining the property from the date of acquisition are expensed.
The following table reflects the amount of loans in delinquent status as of the dates indicated:
The following table sets forth the Banks' nonperforming assets at the dates indicated:
At September 30, ----------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------- (Dollars in thousands) Nonaccrual loans $587 $474 $729 $658 $ 814 Loans past due 90 days and still accruing 7 64 23 64 88 ------ ------ ------ ------ -------- 594 538 752 722 902 Real estate owned, net of allowance 165 - - - 110 ------ ------ ------ ------ -------- Total nonperforming assets $759 $538 $752 $722 $1,012 ====== ====== ====== ====== ========
Consumer loans are placed on nonaccrual generally when the loan exceeds 90 days delinquent or if, in the opinion of management, the possibility of collecting the loan becomes questionable. Mortgage loans are placed on nonaccrual generally when the loan exceeds 90 days delinquent; however, if the loan is below a 25% loan-to-value, management may at their option decide to accrue interest on the loan, since collection of the loan appears highly likely.
Interest income that would have been recognized for the year ended September 30, 2000, if nonaccrual loans had been current in accordance with their original terms, approximated $13,000. Interest income recognized on such loans for the year ended September 30, 2000, approximated $37,000. At September 30, 2000, the Banks had no loans that were deemed impaired in accordance with Statement of Financial Accounting Standards No. 114.
Federal regulations require savings associations to review their assets on a regular basis and to classify them as: special mention; substandard; doubtful and loss. Loans classified as special mention, are loans which currently do not expose the Banks to an unusual risk of loss but based on information available require the attention of management. This classification usually includes loans secured by unusual collateral, loans with documentary items that are being addressed by counsel, and relatively large loans where the borrower has had a history of delinquent payments and the collateral has a cashflow shortfall, however, the borrower has continued to service the debt.
Loans classified as substandard or doubtful generally represent balances where the borrower has made several late payments and is unable to bring the loan current. Substandard loans generally represent situations where the borrower is attempting to resolve the delinquency in the normal course of business (i.e., sale of the property or infusion of additional capital). Loans classified as doubtful represent situations where the borrower has been unsuccessful in attempts to resolve the delinquency in the normal course of business. Doubtful loans involve a greater degree of uncertainty regarding estimate of loss.
Loans classified as loss represent situations where the loan is severely delinquent. These loans typically involve extensive bankruptcy proceedings or other unusual circumstances where the debtor contests foreclosure.
Loans classified as special mention; substandard or doubtful do not necessarily require specific reserves. Individual loan balances may be classified in one or more categories based on management's analysis and estimate of the risk underlying each individual situation.
In accordance with the federal regulations, the Banks' management continually reviews the mix and delinquency status of its loan portfolio and classifies those loans, which it deems appropriate.
As of September 30, 2000, loan balances were classified by the Banks as follows:
Loss $ 29,602 Doubtful -0- Substandard 1,933,264 Special Mention 451,374
Allowance for Losses on Loans and Real Estate Owned
The allowances for loan and real estate owned losses represent amounts available to absorb inherent losses in the loan and real estate owned portfolios. Such allowances are based on management's continuing review of the portfolios, historical charge-offs, current economic conditions, and such other factors, which in management's judgment deserve recognition in estimating possible losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require additions to the allowances based on their judgment about the information available to them at the time of their examination. Provisions for losses are charged to earnings to bring the allowances to levels considered necessary by management. Losses are charged to the allowances when considered probable. As of September 30, 2000 allowances for losses on loans and real estate owned were $1,638,948 and $11,000, respectively. The Banks' management believes that the allowances are adequate to absorb known and inherent losses in the portfolios. No assurance can be given, however, that economic conditions which may adversely affect the Banks' markets or other circumstances will not result in additions to the allowance for loan and real estate owned losses.
The following table presents an allocation of the Banks' allowance for loan losses at the dates indicated and the percentage of loans in each category to total loans.
The following table is a summary of activity in the Banks' allowance for loan and real estate owned losses for the periods indicated.
Summary of Loan Loss Experience Years ended September 30, --------------------------------------- (Dollars in Thousands) 2000 1999 1998 1997 1996 ------- --------- ------ ------- ------ Balance of loan loss allowance at beginning of year $ 1,005 $ 947 $886 $887 $912 Allowance acquired in merger 562 - - - - Charge-offs Residential - - - - - Commercial real estate - - - - - Commercial - - - - - Consumer 118 53 47 84 55 -------- -------- ------ ------ ------ Total Charge-offs 118 53 47 84 55 -------- -------- ------ ------ ------ Recoveries Residential - - - - - Consumer 41 22 33 33 21 -------- -------- ------ ------ ------ Total Recoveries 41 22 33 33 21 -------- -------- ------ ------ ------ Net Charge-offs (Recoveries) 77 31 14 51 34 Provision for loan losses 160 89 75 50 9 -------- ------- ------ ------ ------ Balance of loan loss allowance at end of year $ 1,650 $1,005 $947 $886 $887 ======== ======= ====== ====== ====== Ratio of net charge-offs to average loans outstanding 0.02% 0.01% 0.01% 0.02% 0.02%
Investment Activities
Federal thrift institutions, such as the Banks, have authority to invest in various types of liquid assets, including United States Treasury obligations and securities of various federal agencies, certificates of deposit at insured banks, bankers' acceptances and federal funds. As a member of the FHLB System, the Banks must maintain minimum levels of liquid assets specified by the OTS, which vary from time to time. Subject to various regulatory restrictions, federal thrift institutions may also invest a portion of their assets in certain commercial paper, corporate debt securities and mutual funds whose assets conform to the investments that a federal thrift institution is authorized to make directly.
The carrying values of the Banks' investment securities, including its liquid assets, as of the dates indicated are presented in the following table.
At September 30, ------------------------------------ 2000 1999 1998 --------- ----------- ------------ Interest-bearing deposits and (Dollars in thousands) certificates of deposit (1) $11,937 $ 834 $ 718 U.S. government and federal agency securities Held to maturity 500 - 4,000 Available for sale 8,474 7,139 11,287 Mortgage backed securities Held to Maturity 9,092 258 372 Available for sale 1,601 Stock in FHLB of Indianapolis 4,234 2,474 2,218 Other Held to maturity 684 610 696 Available for sale(2) 8,129 9,793 10,591 ---------- ---------- ---------- Total investments $44,651 $21,108 $29,882 ========== ========== ========== - ------------------------------------------------ (1) In interest-bearing accounts in FHLB of Indianapolis $8,773; In insured certificates of deposit $3,164 at September 30, 2000; In FHLB of Indianapolis at September 30, 1999; In insured certificates of deposit at September 30, 1998; (2) Van Kampen Prime Income Fund $2,407, Van Kampen Senior Income Trust $1,540, Nuveen Senior Income Fund $158, State and Municipal obligations $4,707 at September 30, 20000; Van Kampen Prime Income Fund $3,677, Van Kampen Senior Income Trust $1,617, State and Municipal obligations $4,500 at September 30, 1999; Van Kampen Prime Income Fund $3,784, Van Kampen Senior Income Trust $1,677, State and Municipal obligations $5,130 at September 30, 1998;
The following table sets forth information regarding the maturity distribution of investment securities at September 30, 2000, and the weighted average yield on those securities.
Sources of Funds
General
Deposits have traditionally been the primary source of funds of the Banks for use in lending and investment activities. In addition to deposits, the Banks derive funds from loan prepayments and income on earning assets. While income on earning assets is a relatively stable source of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, money market conditions, and levels of competition.
Deposits
Deposits are attracted principally from within the Banks' primary market areas through the offering of a variety of deposit instruments, including passbook and statement accounts and certificates of deposit ranging in terms from three months to five years. Deposit account terms vary, principally on the basis of the minimum balance required, the time periods the funds must remain on deposit and the interest rate. The Banks also offer individual retirement accounts ("IRA's").
The Banks' policies are designed primarily to attract deposits from local residents rather than to solicit deposits from areas outside their primary markets. The Banks do not accept deposits from brokers due to the volatility and rate sensitivity of such deposits. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Banks on a periodic basis. Determination of rates and terms are predicated upon funds acquisition and liquidity requirements, rates paid by competitors, growth goals and federal regulations.
A major determinant of the Banks' average cost of funds is the distribution of the Banks' accounts by interest rate paid. An important indicator of the Banks' stability of lendable funds is the distribution of the Banks' accounts by maturity.
For information on the amounts of certificate accounts at September 30, 2000, maturing during the next five years and thereafter see page eleven in Management's Discussion and Analysis of the Company's 2000 Annual Report to Stockholders.
The following table lists maturities of certificates of deposits where the balance of the certificate exceeds $100,000 for the periods indicated. None of these certificates were brokered deposits. (dollars in thousands)
At September 30, ---------------- ---------------- 3 months or less $ 4,294 3-6 months 5,411 6-12 months 6,326 over 12 months 13,449 ---------------- Total $29,480 ================
Borrowings
As members of the FHLB System and the FHLB of Indianapolis, the Banks are eligible to arrange borrowings or advances for various purposes and on various terms. As of September 30, 2000, 1999 and 1998 the Banks had outstanding advances to the FHLB of Indianapolis of $47,182,393, $7,2000,000, and $5,000,000, respectively. Of the $7,200,000 outstanding at September 30, 1999, $5,000,000 was long-term debt. See page 24 of the Company's 2000 Annual Report to Stockholders for the maturity breakdown of these long-term instruments.
Reverse repurchase agreements, another source of borrowing for Peoples Federal, are retail obligations of Peoples Federal with a maturity of 90 days or less, and are generally secured with specific investment securities owned by Peoples Federal.
The following tables set forth certain information as to the Banks' short-term borrowings consisting of FHLB of Indianapolis advances and reverse repurchase agreements for the periods and at the dates indicated. Average balances and average interest rates are based on month-end balances.
Years Ended September 30 -------------------------- 2000 1999 1998 ------- -------- -------- (Dollars in thousands) Average balance of short-term borrowings $5,859 $3,533 $4,166 Highest month-end balance of total borrowings 7,568 4,417 5,088 Weighted average interest rate of total borrowing 5.28% 5.28% 5.21%
At September 30 ------------------------- 2000 1999 1998 -------- -------- ------- Reverse Repurchase agreements - 3,040 4,203 -------- -------- ------- Total short-term borrowings $ - $3,040 $4,203 ======== ======= =======
Weighted average interest rate 0.00% 6.33% 5.22%
Trust Department
In October 1984, the FHLB of Indianapolis granted full trust powers to Peoples Federal, one of the first savings institutions in Indiana to be granted such powers. As of September 30, 2000, Peoples Federal's trust department assets totaled approximately $57,858,000 including self-directed Individual Retirement Accounts ("IRA's"), and it was offering a variety of trust services including estate planning. As of that date, the trust department was administering approximately 650 trust accounts, including estates, guardianships, revocable and irrevocable trusts, testamentary trusts, and self-directed IRA accounts. The trust department also offers and administers self-directed IRA's and Simplified Employee Pension IRA's for small businesses. The trust department provides a needed service to the communities served by Peoples Federal, as well as generating fee income which is largely unaffected by interest rate fluctuations.
Non-Bank Subsidiary
Peoples Financial Services, Inc. ("PFSI") was organized in 1977 under the laws of the State of Indiana. It is wholly owned by Peoples Federal and conducts a general insurance business within the State of Indiana under the name of Peoples Insurance Agency. During fiscal years ended September 30, 2000 and 1999, PFSI recorded total income of $84,351 and $90,515, respectively, with net income for such periods amounting to $20,322 and $24,327, respectively.
Alpha Financial was organized under the laws of the state of Michigan in 1975 as a wholly owned subsidiary of First Savings. First Savings' investment in Alpha Financial was $100,000 at September 30, 2000. The assets of Alpha Financial consist of cash and stock in MIMLIC Life Insurance Company, which reinsures credit life insurance policies written on the lives of borrowers of various financial institutions.
Discount Brokerage Services
Since 1985, Peoples Federal has offered discount brokerage services to its customers. In 1996, this service was moved to the service corporation and was offered through U.S. Clearing Corp. Prior to 1996, another vendor was used. This service also reduces the expenses of securities transactions for the various trust accounts administered by the trust department and provides customers with a convenient and inexpensive means of conducting brokerage transactions.
Employees
As of September 30, 2000, the Banks employed 135 persons on a full-time basis and 16 persons on a part-time basis. The Banks' employees are not represented by any collective bargaining group, and management considers its relations with its employees to be excellent. The holding company has no employees.
REGULATION
General
The Company, as a savings and loan holding company, and the Banks, as federally chartered savings associations, are subject to extensive regulation by the OTS and the FDIC. The lending activities and other investments of the Banks must comply with various federal regulatory requirements, and the OTS periodically examines the Banks for compliance with various regulatory requirements and for safe and sound operations. The FDIC also has the authority to conduct examinations. The Banks must file reports with the OTS describing their activities and financial condition and are also subject to certain reserve requirements promulgated by the Board of Governors of the Federal Reserve System. This supervision and regulation is intended primarily for the protection of depositors and the deposit insurance funds and not for the protection of stockholders of the Company. Certain of these regulatory requirements are referred to below or appear elsewhere herein.
Recent Legislation
Financial Services Modernization Legislation. The Gramm-Leach-Bliley Act (the "Financial Services Modernization Act") became effective March 11, 2000. The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a "Financial Holding Company." "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
The Financial Services Modernization Act provides that no company may acquire control of an insured savings association, unless that company engages, and continues to engage, only in the financial activities permissible for a Financial Holding Company, unless grandfathered as a unitary savings and loan holding company. The Financial Institution Modernization Act grandfathers any company that was a unitary savings and loan holding company on May 4, 1999 (or becomes a unitary savings and loan holding company pursuant to an application pending on that date). Such a company may continue to operate under laws prior to the Financial Services Modernization Act as long as the company continues to meet the two tests: it can control only one savings institution, excluding supervisory acquisitions, and each such institution must meet the QTL test. It further requires that a grandfathered unitary savings and loan holding company must continue to control at least one savings association, or a successor institution, that is controlled on May 4, 1999.
The Financial Services Modernization Act also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the Bank Holding Company Act of 1956 ("BHCA") or permitted by regulation.
The Company and the Banks do not believe that the Financial Services Modernization Act will have a material adverse effect on the operations of the Company and the Banks in the near-term. However, to the extent that the act permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis and which unitary savings and loan holding companies already possess. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources that the Company and the Bank. In addition, because the Company may only be acquired by other unitary savings and loan holding companies or Financial Holding Companies, the legislation may have an anti-takeover effect by limiting the number of potential acquirers or by increasing the costs of an acquisition transaction by a bank holding company that has not made the election to be a Financial Holding Company under the new legislation.
Regulation of the Company
General. The Company is a savings and loan holding company as defined by the HOLA. As such, the Company is registered with the OTS and is subject to OTS regulation, examination, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Banks are subject to certain restrictions in their dealings with the Company and affiliates thereof. The Company also is required to file certain reports with, and otherwise comply with, the rules and regulations of the SEC under the federal securities laws.
Activities Restrictions. There are generally no restrictions on the activities of a savings and loan holding company. The broad latitude to engage in activities under current law can be restricted if the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings institution, the OTS may impose such restrictions as deemed necessary to address such risk including limiting: (i) payment of dividends by the savings institution; (ii) transactions between the savings institution and its affiliates; and (iii) any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings institution subsidiary of such a holding company fails to meet the QTL test, then such unitary holding company shall also become subject to the activities restrictions applicable to multiple holding companies and, unless the savings institution requalifies as a QTL within one year thereafter, register as, and become subject to, the restrictions applicable to a bank holding company. See "Regulation of the Bank--Qualified Thrift Lender."
Restrictions on Acquisitions. Savings and loan holding companies are prohibited from acquiring, without prior approval of the OTS, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Under certain circumstances, a registered savings and loan holding company is permitted to acquire, with the approval of the OTS, up to 15% of the voting shares of an undercapitalized savings institution pursuant to a "qualified stock issuance" without that savings institution being deemed controlled by the holding company. In order for the shares acquired to constitute a "qualified stock issuance," the shares must consist of previously unissued stock or treasury shares, the shares must be acquired for cash, the saving and loan holding company's other subsidiaries must have tangible capital of at least 6-1/2% of total assets, there must not be more than one common director or officer between the savings and loan holding company and the issuing savings institution, and transactions between the savings institution and the savings and loan holding company and any of its affiliates must conform to Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval of the OTS, no director or officer of a savings and loan holding company or person owning by proxy or otherwise more than 25% of such company's stock, may also acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company.
Regulation of the Banks
Federal Home Loan Bank System. The Banks are members of the FHLB System, which consists of 12 district Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central credit facility primarily for member institutions. As members of the FHLB of Indianapolis, the Banks are required to acquire and hold shares of capital stock in the FHLB of Indianapolis in an amount at least equal to 1% of the aggregate unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 1/20 of its advances (i.e., borrowings) from the FHLB of Indianapolis, whichever is greater. The Banks were in compliance with this requirement with an investment in FHLB of Indianapolis stock at September 30, 2000, of $4,234,400.
The FHLB of Indianapolis serves as a reserve or central bank for its member institutions within its assigned district. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members secured by certain prescribed collateral in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB of Indianapolis. Long-term advances may only be made for the purpose of providing funds for residential housing finance. Members must meet standards of community investment or service established by the FHLB of Indianapolis in order to maintain continued access to long-term advances. As of September 30, 2000, the Banks had advances totaling $47,182,393 outstanding. See "Business of the Company--Deposit Activity and Other Sources of Funds" and "--Borrowings."
Liquidity Requirements. Under OTS regulations, a savings association is required to maintain an average daily balance of liquid assets (including cash, certain time deposits and savings accounts, bankers' acceptances, certain government obligations, and certain other investments) in each calendar quarter of not less than 4% of either (1) its liquidity base (consisting of certain net withdrawable accounts plus short-term borrowings) as of the end of the preceding calendar quarter, or (2) the average daily balance of its liquidity base during the preceding quarter. The OTS may change this liquidity requirement from time to time to any amount from 4.0% to 10.0%, depending upon certain factors, including economic conditions and savings flows of all savings associations. The Banks maintains liquid assets in compliance with these regulations. Monetary penalties may be imposed upon an institution for violations of liquidity requirements.
Qualified Thrift Lender Test. Savings institutions must meet a qualified thrift lender ("QTL") test, which test may be met either by maintaining a specified level of assets in qualified thrift investments as specified in HOLA or by meeting the definition of a "domestic building and loan association" in section 7701 of the Internal Revenue Code of 1986, as amended (the "Code"). If the Banks maintain an appropriate level of certain specified investments (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise qualifies as a QTL or a domestic building and loan association, it will continue to enjoy full borrowing privileges from the FHLB. The required percentage of investments under HOLA is 65% of assets while the Code requires investments of 60% of assets. An association must be in compliance with the QTL test or definition of domestic building and loan association on a monthly basis in nine out of every 12 months. Associations that fail to meet the QTL test will generally be prohibited from engaging in any activity not permitted for both a national bank and a savings association. As of September 30, 2000, the Banks were in compliance with their QTL requirements and met the definition of a domestic building and loan association.
Regulatory Capital Requirements. Under OTS capital regulations, savings institutions must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core" capital equal to 3% of adjusted total assets and "total" capital (a combination of core and "supplementary" capital) equal to 8% of risk-weighted assets. In addition, OTS regulations which impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS examination rating system).
The OTS has adopted an amendment to its risk-based capital requirements that requires savings institutions with more than a "normal" level of interest rate risk to maintain additional total capital (the OTS is delaying implementation of this requirement). A savings institution's interest rate risk will be measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. Net portfolio value is defined, generally, as the present value of expected cash inflows from existing assets and off-balance sheet contracts less the present value of expected cash outflows from existing liabilities. A savings institution will be considered to have a "normal" level of interest rate risk exposure if the decline in its net portfolio value after an immediate 200 basis point increase or decrease in market interest rates (whichever results in the greater decline) is less than 2% of the current estimated economic value of its assets. A savings institution with a greater than normal interest rate risk will be required to deduct from total capital, for purposes of calculating its risk-based capital requirement, an amount (the "interest rate risk component") equal to one-half the difference between the institution's measured interest rate risk and the normal level of interest rate risk, multiplied by the economic value of its total assets.
The OTS will calculate the sensitivity of a savings institution's net portfolio value based on data submitted by the institution in a schedule to its quarterly Thrift Financial Report and using the interest rate risk measurement model adopted by the OTS. The amount of the interest rate risk component, if any, to be deducted from a savings institution's total capital will be based on the institution's Thrift Financial Report filed two quarters earlier. In general, savings institutions with less than $300 million in assets and a risk-based capital ratio above 12% are exempt from this interest rate risk component unless the OTS terminates such exemption. Although the Bank qualifies for the exemption, management believes that based on current financial data, the Bank would not be deemed to have more than a normal level of interest rate risk.
In addition to generally applicable capital standards for savings institutions, the Director of the OTS is authorized to establish the minimum level of capital for a savings institution at such amount or at such ratio of capital-to-assets as the Director determines to be necessary or appropriate for such institution in light of the particular circumstances of the institution. The Director of the OTS may treat the failure of any savings institution to maintain capital at or above such level as an unsafe or unsound practice and may issue a directive requiring any savings institution which fails to maintain capital at or above the minimum level required by the Director to submit and adhere to a plan for increasing capital. Such a directive may be enforced in the same manner as an order issued by the OTS.
At September 30, 2000, the Banks exceeded all regulatory minimum capital requirements as indicated in Note 14, page 27 of the Company's Annual Report to Stockholders.
Insurance of Deposit Accounts. The Banks' deposit accounts are insured by the SAIF to the maximum amount permitted by law. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. Under this system as of September 30, 2000, SAIF members paid within a range of 0 cents to 23 cents per $100 of domestic deposits, depending upon the institution's risk classification. This risk classification is based on an institution's capital group and supervisory subgroup assignment. Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"), the Bank pays, in addition to its normal deposit insurance premium as a member of the SAIF an amount equal to approximately 6.4 basis points toward the retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980s to assist in the recovery of the savings and loan industry. Members of the Bank Insurance Fund ("BIF"), by contrast, pay, in addition to their normal deposit insurance premium, approximately 1.3 basis points. Under the Act, the FDIC also is not permitted to establish SAIF assessment rates that are lower than comparable BIF assessment rates. Effective January 1, 2000, the rate paid to retire the Fico Bonds will be equal for members of the BIF and the SAIF. The Act also provided for the merging of the BIF and the SAIF by January 1, 1999, provided there were no financial institutions still chartered as savings associations at that time. Although legislation to eliminate the savings association charter had been proposed at January 1, 1999, financial institutions such as the Banks were still chartered as savings associations.
Federal Reserve System. Pursuant to regulations of the Federal Reserve Board, a savings institution must maintain average daily reserves equal to 3% on the first $54.0 million of transaction accounts, plus 10% on the remainder. This percentage is subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non-interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution's interest-earning assets. As of September 30, 2000, the Banks met their reserve requirements.
Dividend and Other Capital Distribution Limitations. The OTS imposes various restrictions or requirements on the ability of savings institutions to make capital distributions, including cash dividends. A savings institution that is a subsidiary of a savings and loan holding company, such as the Bank, must file an application or a notice with the OTS at least 30 days before making a capital distribution. Savings institutions are not required to file an application for permission to make a capital distribution and need only file a notice if the following conditions are met: (1) they are eligible for expedited treatment under OTS regulations, (2) they would remain adequately capitalized after the distribution, (3) the annual amount of capital distribution does not exceed net income for that year to date added to retained net income for the two preceding years, and (4) the capital distribution would not violate any agreements between the OTS and the savings institution or any OTS regulations. Any other situation would require an application to the OTS.
In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that the distribution would constitute an unsafe or unsound practice. A federal savings institution is prohibited from making a capital distribution if, after making the distribution, the savings institution would be unable to meet any one of its minimum regulatory capital requirements. Savings institutions cannot distribute regulatory capital that is needed for its liquidation account.
Affiliate Restrictions. Transactions between a savings association and its "affiliates" are subject to quantitative and qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings association include, among other entities, the savings association's holding company and companies that are under common control with the savings association.
In general, Sections 23A and 23B and OTS regulations issued in connection therewith limit the extent to which a savings association or its subsidiaries may engage in certain "covered transactions" with affiliates to an amount equal to 10% of the association's capital and surplus, in the case of covered transactions with any one affiliate, and to an amount equal to 20% of such capital and surplus, in the case of covered transactions with all affiliates. In addition, a savings association and its subsidiaries may engage in covered transactions and certain other transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the savings association or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A "covered transaction" is defined to include a loan or extension of credit to an affiliate; a purchase of investment securities issued by an affiliate; a purchase of assets from an affiliate, with certain exceptions; the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; or the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate.
In addition, under the OTS regulations, a savings association may not make a loan or extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies; a savings association may not purchase or invest in securities of an affiliate other than shares of a subsidiary; a savings association and its subsidiaries may not purchase a low-quality asset from an affiliate; and covered transactions and certain other transactions between a savings association or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices. With certain exceptions, each loan or extension of credit by a savings association to an affiliate must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings association subsidiaries of savings associations from treatment as affiliates, except to the extent that the OTS or the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") decides to treat such subsidiaries as affiliates. The regulation also requires savings associations to make and retain records that reflect affiliate transactions in reasonable detail, and provides that certain classes of savings associations may be required to give the OTS prior notice of affiliate transactions.
Prompt Corrective Action. The prompt corrective action regulation of the OTS requires certain mandatory actions and authorizes certain other discretionary actions to be taken by the OTS against a savings bank that falls within certain undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Under the regulation, the risk-based capital, leverage capital, and tangible capital ratios are used to determine an institution's capital classification. At September 30, 2000, the Banks met the capital requirements of "well capitalized" institutions under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured depository institution from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, the institution would be within any of the three undercapitalized categories. In addition, adequately capitalized institutions may accept Brokered Deposits only with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll-over Brokered Deposits.
If the OTS determines that an institution is in an unsafe or unsound condition, or if the institution is deemed to be engaging in an unsafe and unsound practice, the OTS may, if the institution is well capitalized, reclassify it as adequately capitalized; if the institution is adequately capitalized but not well capitalized, require it to comply with restrictions applicable to undercapitalized institutions; and, if the institution is undercapitalized, require it to comply with certain restrictions applicable to significantly undercapitalized institutions.
Community Reinvestment Act and Fair Lending Developments. The Banks are subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low- and moderate-income neighborhoods. A savings association may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws. The federal banking agencies may take compliance with such laws and CRA obligations into account when regulating and supervising other activities.
A savings association's compliance with its CRA obligations is based on a performance-based evaluation system that bases CRA ratings on an institution's lending service and investment performance. When a holding company applies for approval to acquire another financial institution or financial institution holding company, the OTS will review the assessment of each subsidiary savings association of the applicant; and such records may be the basis for denying the application. As of the latest CRA Examinations, the Banks each received a rating of "satisfactory" in complying with its CRA obligations.
Item 2.
Item 2. Properties
Peoples Federal owns eight full-service banking offices located in Avilla, Auburn, Columbia City, Garrett, Kendallville, LaGrange and Waterloo, Indiana.
The following table provides certain information with respect to Peoples Federal's full-service offices at September 30, 2000.
Full Service Date Net Book Offices Opened Value (1) - -------------------------------- ------------ ----------- Main Office, Auburn 1973 $ 149 Avilla 1980 107 Garrett 1972 97 Columbia City-Downtown 1971 128 Columbia City-North 1998 524 Kendallville 1941 430 LaGrange 1972 154 Waterloo 2000 1,028
(1) Of real estate at September 30, 2000.
The total net book value of Peoples Federal's premises and equipment at September 30, 2000, was $3.2 million.
First Savings Bank owns six full-service banking offices located in Three Rivers, Union, and Schoolcraft, Michigan and Howe and Middlebury, Indiana.
The following table provides certain information with respect to First Saving's full service offices at September 30, 2000.
Full Service Date Net Book Offices Opened Value (1) - -------------------------------- ------------ ----------- Main Office, Three Rivers 1981 $1,261 Schoolcraft 1971 93 Union 1988 269 Three Rivers, branch 1988 128 Howe 1998 399
(1) Of real estate at September 30, 2000.
The total net book value of First Savings' premises and equipment at September 30, 2000 was $2.9 million.
Item 3.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company, the Banks or any subsidiary is a party or to which any of their property is subject.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Reference is made to page 2 of the Company's Annual Report to Stockholders, for the year ended September 30, 2000 for the information required by this Item, which is hereby incorporated by reference.
Item 6.
Item 6. Selected Financial Data
Reference is made to page 9 of the Company's Annual Report to Stockholders for the year ended September 30, 2000, for the information required by this Item, which is hereby incorporated by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - --------------
Reference is made to pages 10 to 116 of the Company's Annual Report to Stockholders for the year ended September 30, 2000, for the information required by this Item, which is hereby incorporated by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to pages 11 and 12 of the Company's Annual Report to Stockholders for the year ended September 30, 2000, for the information required by this item, which is hereby incorporated by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
Reference is made to pages 17 to 32 of the Company's Annual Report to Stockholders for the year ended September 30, 2000 for the information required by this Item, which is hereby incorporated by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosures - ---------------------
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the section captioned "The Peoples Bancorp Annual Meeting-Election of Directors" in the Company's Proxy Statement dated December 12, 2000 for the information required by this Item, which is hereby incorporated by reference.
Item 11.
Item 11. Executive Compensation
Reference is made to the section captioned "The Peoples Bancorp Annual Meeting-Executive Officer Compensation" in the Company's Proxy Statement dated December 12, 2000 for the information required by this Item, which is hereby incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the section captioned "The Peoples Bancorp Annual Meeting-Securities Ownership of Certain Beneficial Owners in the Company's Proxy Statement dated December 12, 2000 for the information required by this Item which is hereby incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Reference is made to the section captioned "The Peoples Bancorp Annual Meeting-Transactions with Certain Related Persons" in the Company's Proxy Statement dated December 12, 2000 for the information required by this Item, which is hereby incorporated by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) The following consolidated financial statements of Peoples Bancorp and Its Wholly-owned Subsidiaries, included in the Annual Report to Stockholders of the registrant for the year ended September 30, 2000 are filed as part of this report:
1. Financial Statements
o REPORT OF OLIVE LLP, INDEPENDENT AUDITORS PAGE 7. o CONSOLIDATED BALANCE SHEET - AS OF SEPTEMBER 30, 2000, AND 1999 PAGE 17. o CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998 PAGE 18. o CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998 PAGE 19. o CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998 PAGE 20. .o NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PAGES 21-32.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements and notes.
3. Exhibits
Exhibit No. Description of Exhibit - ----------- -----------------------
3.1 Articles of Incorporation of Peoples Bancorp (1)
3.2 Bylaws of Peoples Bancorp (1)
10.4 Amended and Restated Stock Option and Stock Grant Plan (2)
10.5 Employee Stock Ownership Plan (1)
10.5(a) First Amendment to Employee Stock Ownership Plan (3)
10.5(b) Second Amendment to Employee Stock Ownership Plan (3)
10.5(c) Third Amendment to Employee Stock Ownership Plan (3)
10.6 Expense and Tax Sharing Agreement between Peoples Bancorp, Peoples Federal Savings Bank of DeKalb County and Peoples Financial Services, Inc., dated May 28, 1992 (3)
10.7 New option plan
13 Annual Report to Stockholders
22 Subsidiaries of the Registrant
23 Consent of Auditors - --------------------------------- (1) Incorporated by reference to Exhibit bearing the same number in the Company's Registration Statement of Form S-4 (33-37343) filed with the Securities and Exchange Commission on October 17, 1990.
(2) Incorporated by reference to Exhibit bearing the same number in the Company's Annual Report on form 10-K for the year ended September 30, 1991.
(3) Incorporated by reference to Exhibit bearing the same number in the Company's Annual Report on form 10-K for the year ended September 30, 1992.
(b) There were no reports on Form 8-K filed for the period June 1, 2000 through September 30, 2000.
The Securities and Exchange Commission maintains a Web sit that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission including the Company. That address is http://www.sec.gov.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PEOPLES BANCORP
December 22, 2000 Roger J. Wertenberger Chairman of the Board, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
December 22, 2000 Roger J. Wertenberger, Chairman of the Board, and Director
December 22, 2000 Maurice F. Winkler III, President, Chief Executive Officer and Director
December 22, 2000 Deborah K. Stanger Vice President-Chief Financial Officer
December 22, 2000 Robert D. Ball, Director
December 22, 2000 Bruce S. Holwerda, Director
December 22, 2000 John C. Harvey, Director
December 22, 2000 Douglas D. Marsh, Director
December 22, 2000 Lawrence R. Bowmar, Director
December 22, 2000 John C. Thrapp, Director
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation - -------------------------------- ---------------------- Peoples Federal Savings Bank of DeKalb County United States of America
and its subsidiary
Peoples Financial Services Inc. Indiana
First Savings Bank Federal Savings Bank United States of America
And its subsidiary
Alpha Financial Michigan