<PAGE> 1
As filed with the Securities and Exchange Commission on June 27, 1996
Registration No. 333-2690
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
PEOPLES FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
OHIO 6035 34-1822228
- ------------------------------- ---------------------------- ----------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. employer
incorporation or organization) Classification Code Number) identification
number)
211 LINCOLN WAY EAST
MASSILLON, OHIO 44646
(216) 832-7441
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(Address, including Zip Code, and telephone
number, including area code, of
registrant's principal executive offices)
PAUL VON GUNTEN
PEOPLES FINANCIAL CORPORATION
211 LINCOLN WAY EAST
MASSILLON, OHIO 44646
(330) 832-7441
---------------------------------------------------------
(Name, address, including Zip Code, and telephone number,
including area code, of agent for service)
With copies to:
Cynthia A. Shafer
Vorys, Sater, Seymour and Pease
Atrium Two, 221 East Fourth Street
Cincinnati, Ohio 45202
(513) 723-4000
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 of the Securities
Act of 1933, check the following box: /X/
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<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of each class Proposed maximum Proposed maximum
of securities to be Amount to offering price aggregate Amount of
registered be registered per share offering price(1) registration fee
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<S> <C> <C> <C> <C>
Common shares,
without par value 1,719,250 shares $10.00 $17,192,500 $5,929
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<FN>
(1) Estimated solely for the purpose of calculating the registration fee.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
CROSS REFERENCE SHEET
Showing the location in the Prospectus of the Items of Form S-1
<TABLE>
<CAPTION>
Item and Caption Prospectus Heading
---------------- ------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus ............................... Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus ............................................. Cover Page, Back Cover Page
3. Summary Information, Risk Factors and Ratio of Earnings to
Fixed Charges .......................................... PROSPECTUS SUMMARY; RISK FACTORS
4. Use of Proceeds .......................................... USE OF PROCEEDS
5. Determination of Offering Price .......................... Cover Page; THE CONVERSION - Pricing and Number of
Common Shares to be Sold
6. Dilution ................................................. Not Applicable
7. Selling Security Holders ................................. Not Applicable
8. Plans of Distribution .................................... Cover Page; THE CONVERSION - General;
- Subscription Offering;
- Community Offering; and
- Plan of Distribution
9. Description of Securities to be Registered ............... DESCRIPTION OF AUTHORIZED SHARES
10. Interest of Named Experts and Counsel .................... Not Applicable
11. Information with Respect to the Registrant
(a) Description of Business ............................. PEOPLES FINANCIAL CORPORATION; PEOPLES FEDERAL
SAVINGS AND LOAN ASSOCIATION OF MASSILLON; THE
BUSINESS OF PEOPLES FEDERAL
(b) Description of Property ............................. THE BUSINESS OF PEOPLES FEDERAL - Properties
(c) Legal Proceedings ................................... THE BUSINESS OF PEOPLES FEDERAL - Legal Proceedings
(d) Market Price and Dividends .......................... Cover Page; MARKET FOR THE COMMON SHARES; DIVIDEND
POLICY
(e) Financial Statements ................................ Index to Financial Statements
(f) Selected Financial Data ............................. SELECTED FINANCIAL INFORMATION AND OTHER DATA
(g) Supplementary Financial Information ................. Not Applicable
(h) Management's Discussion and Analysis of Financial MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
Condition and Results of Operations ............... CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
(i) Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............... Not Applicable
(j) Directors and Executive Officers .................... MANAGEMENT OF PFC;
MANAGEMENT OF PEOPLES FEDERAL
(k) Executive Compensation .............................. MANAGEMENT OF PEOPLES FEDERAL - Compensation; Stock
Option Plan; Employee Stock Ownership Plan;
Recognition and Retention Plan; Retirement Benefit
Plans; and Employment Agreements
(l) Security Ownership of Certain Beneficial Owners and THE CONVERSION - Shares to be Purchased by
Management ........................................ Management Pursuant to Subscription Rights
(m) Certain Relationships and Related MANAGEMENT OF PEOPLES FEDERAL -
Transactions ....................................... Certain Transactions with Peoples Federal
12. Disclosure of Commission Position on Indemnification for
Securities Act Liability ............................... Not Applicable
</TABLE>
<PAGE> 4
PROSPECTUS PEOPLES FINANCIAL CORPORATION
(HOLDING COMPANY FOR PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON)
UP TO 1,495,000 COMMON SHARES
$10 PURCHASE PRICE PER SHARE
Peoples Financial Corporation, an Ohio corporation ("PFC"), is hereby
offering for sale up to 1,495,000 common shares, without par value (the "Common
Shares"), in connection with its acquisition of all of the capital stock to be
issued by Peoples Federal Savings and Loan Association of Massillon, a federal
savings and loan association ("Peoples Federal"), upon the conversion of Peoples
Federal from a mutual savings and loan association to a permanent capital stock
savings and loan association chartered under the laws of the United States (the
"Conversion"). The consummation of the Conversion and the sale of the Common
Shares are subject to the approval of Peoples Federal's Plan of Conversion (the
"Plan") and the adoption of the Federal Stock Charter of Peoples Federal at a
Special Meeting of the members of Peoples Federal to be held at ____ _.m.,
Eastern Time, on ____________, 1996, at the offices of Peoples Federal at 211
Lincoln Way East, Massillon, Ohio 44646 (the "Special Meeting").
THE COMMON SHARES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OFFICE OF THRIFT
SUPERVISION OF THE DEPARTMENT OF THE TREASURY (THE "OTS"), THE FEDERAL DEPOSIT
INSURANCE CORPORATION (THE "FDIC"), OR THE SECURITIES COMMISSION OF ANY STATE,
NOR HAS THE SEC, THE OTS, THE FDIC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
Based on an independent appraisal of the pro forma market value of
Peoples Federal, as converted, as of March 8, 1996, the aggregate purchase price
of the Common Shares offered in connection with the Conversion ranges from a
minimum of $11,050,000 to a maximum of $14,950,000 (the "Valuation Range"),
resulting in a range of 1,105,000 to 1,495,000 Common Shares at $10.00 per
share. The actual number of Common Shares sold in connection with the Conversion
will be determined in the sole discretion of PFC's Board of Directors and will
be based upon the final valuation of Peoples Federal, as converted. The final
valuation will be determined by the independent appraiser upon the completion of
this Offering. If the final valuation is within the Valuation Range, or does not
exceed the maximum of the Valuation Range by more than 15%, the number of Common
Shares to be issued in connection with the Conversion will not be less than
1,105,000, nor more than 1,719,250. If, due to changing market or regulatory
conditions, the final valuation is not between the minimum of the Valuation
Range and 15% above the maximum of the Valuation Range, subscribers will be
given a notice of such final valuation and the right to affirm, increase,
decrease or rescind their subscriptions. Any such subscriber who does not
affirmatively elect to continue his subscription or elects to rescind his
subscription before the date specified in the notice will have all of his funds
promptly refunded with interest. Any person who elects to decrease his
subscription will have the appropriate portion of his funds promptly refunded
with interest. See "THE CONVERSION - Pricing and Number of Common Shares to be
Sold." Any upward or downward adjustment in the number of Common Shares sold
will have a corresponding effect on the estimated net proceeds of the Conversion
and the pro forma capitalization and book value per share of PFC. See "USE OF
PROCEEDS," "CAPITALIZATION" and "PRO FORMA DATA."
THE COMMON SHARES BEING OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
FOR A DISCUSSION OF CERTAIN RISKS AND OTHER FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON SHARES, SEE "RISK FACTORS"
BEGINNING AT PAGE 2 OF THIS PROSPECTUS.
<TABLE>
<CAPTION>
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE CONVERSION CENTER AT (330) 832-7108.
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Estimated Underwriting
Subscription Commissions Estimated Net
Price And Other Expenses(1) Proceeds
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share Minimum $10.00 $0.49 $9.51
Per share Mid-Point $10.00 $0.45 $9.55
Per share Maximum $10.00 $0.39 $9.61
Per share Maximum, as adjusted (2) $10.00 $0.34 $9.66
Total Minimum $11,050,000 $543,000 $10,507,000
Total Mid-point $13,000,000 $580,000 $12,420,000
Total Maximum $14,950,000 $580,000 $14,370,000
Total Maximum, as adjusted (2) $17,192,500 $580,000 $16,612,500
====================================================================================================================================
<FN>
(1) Consists of estimated printing, postage, legal, accounting, filing fee,
appraisal and miscellaneous costs to Peoples Federal and PFC in
connection with the Conversion, including estimated fees, sales
commissions and reimbursable expenses to be paid to McDonald & Company
Securities, Inc. ("McDonald & Company"), and Trident Securities, Inc.
("Trident"), both of which have been engaged by Peoples Federal to
consult, advise and assist in the sale of the Common Shares on a best
efforts basis. Actual Conversion expenses may be more or less than
estimated amounts. See "THE CONVERSION - Plan of Distribution."
(2) Gives effect to the increase in the number of Common Shares sold in
connection with the Conversion of up to 15% above the maximum of the
Valuation Range. Such shares may be offered without the resolicitation of
persons who subscribe for Common Shares. See "THE CONVERSION - Pricing
and Number of Common Shares to be Sold."
The date of this Prospectus is ___________, 1996.
MCDONALD & COMPANY TRIDENT SECURITIES, INC.
SECURITIES, INC.
</TABLE>
<PAGE> 5
In accordance with the Plan, nontransferable subscription rights to
purchase Common Shares are offered hereby in a subscription offering to (a) each
account holder who, as of September 30, 1994 (the "Eligibility Record Date"),
had deposit accounts with deposit balances, in the aggregate, of $50 or more (a
"Qualifying Deposit") with Peoples Federal; (b) the Peoples Financial
Corporation Employee Stock Ownership Plan (the "ESOP"); (c) each account holder
who as of March 31, 1996 (the "Supplemental Eligibility Record Date"), had a
Qualifying Deposit at Peoples Federal; and (d) certain other depositors and
borrowers of Peoples Federal (the "Subscription Offering"). All subscription
rights to purchase Common Shares in the Subscription Offering are
nontransferable and will expire at _:__ _.m., Eastern Time, on
__________________ (the "Subscription Expiration Date"), unless extended.
PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE SUBJECT TO
FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER PENALTIES IMPOSED BY THE OTS. See
"THE CONVERSION - Subscription Offering."
To the extent that all of the Common Shares are not subscribed for in
the Subscription Offering, the remaining shares are hereby concurrently being
offered to the general public in a direct community offering in which preference
will be given to natural persons residing in Stark County, Ohio (the "Community
Offering"). See "THE CONVERSION - Community Offering." If the Community Offering
extends beyond ______________, 45 days after the Subscription Expiration Date,
persons who have subscribed for Common Shares in the Subscription Offering or in
the Community Offering will receive a notice that, until a date specified in the
notice, they have the right to affirm, increase, decrease or rescind their
subscriptions for Common Shares. Any person who does not affirmatively elect to
continue his subscription or elects to rescind his subscription during any such
extension will have all of his funds promptly refunded with interest. Any person
who elects to decrease his subscription will have the appropriate portion of his
funds promptly refunded with interest. See "THE CONVERSION - Subscription
Offering." The Community Offering may end at any time after orders for at least
1,719,250 Common Shares have been received, but in no event later than ________.
See "THE CONVERSION - Subscription Offering; Community Offering; and Plan of
Distribution."
Peoples Federal has engaged McDonald & Company and Trident to consult,
advise and assist in the sale of the Common Shares on a best efforts basis in
the Subscription Offering and the Community Offering (together, the "Offering").
See "THE CONVERSION - Plan of Distribution."
The Plan and federal regulations limit the number of Common Shares
which may be purchased by various categories of persons, including the
limitation that no person may purchase fewer than 25 shares, nor more than one
percent of the Common Shares sold in connection with the Conversion (17,192
Common Shares at the maximum of the Valuation Range, as adjusted). Such
limitation does not apply to the ESOP. In addition, no person together with such
person's Associates (hereinafter defined) and persons Acting in Concert
(hereinafter defined) with such person, may purchase more than two percent of
the Common Shares sold in connection with the Conversion (34,385 Common Shares
at the maximum of the Valuation Range, as adjusted). SUBJECT TO APPLICABLE OTS
REGULATIONS, THE LIMITATIONS SET FORTH IN THE PLAN MAY BE CHANGED AT ANY TIME IN
THE SOLE DISCRETION OF THE BOARD OF DIRECTORS OF PFC AND PEOPLES FEDERAL. See
"THE CONVERSION - Limitations on Purchases of Common Shares."
Common Shares may be subscribed for in the Subscription Offering or
ordered in the Community Offering only by returning the accompanying order form,
along with full payment of the subscription or order price per share for all
shares for which subscription is made or order is submitted, no later than _:__
_.m., Eastern Time, __________________. See "THE CONVERSION - Use of Order
Forms." Payment may be made in cash or by check or money order and will be held
in a segregated account at Peoples Federal, insured by the FDIC up to the
applicable limit and earning interest at Peoples Federal's passbook rate,
currently ____ annual percentage yield, from the date of receipt until the
completion of the Conversion. Payment may also be made by authorized withdrawal
from an existing Peoples Federal savings account, the amount in which will
continue to earn interest until completion of the Conversion at the rate
normally in effect from time to time for such account. Neither payments made in
cash or by check or money order, nor payments made by authorized withdrawal from
an account at Peoples Federal will be available during the Subscription Offering
and the Community Offering. See "THE CONVERSION - Payment for Common Shares."
Payment by wire will not be accepted. AN EXECUTED ORDER FORM, ONCE RECEIVED BY
PFC, MAY NOT BE MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF PFC UNLESS
THE COMMUNITY OFFERING IS NOT COMPLETED WITHIN 45 DAYS AFTER THE SUBSCRIPTION
EXPIRATION DATE.
There is presently no market for the Common Shares. The aggregate
offering price for the Common Shares is based upon an independent appraisal of
Peoples Federal performed by Keller & Company, Inc. ("Keller"). The appraisal is
not a recommendation as to the advisability of purchasing Common Shares. See
"THE CONVERSION - Pricing and Number of Common Shares to be Sold." No assurance
can be given that persons purchasing Common Shares will thereafter be able to
sell such shares at a price at or above the offering price.
See "RISK FACTORS - Limited Market for the Common Shares."
In connection with the completion of the Conversion, PFC will register
the Common Shares with the SEC under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Exchange Act requires that PFC file an Annual Report on
Form 10-KSB with the SEC containing audited consolidated financial statements
and other information concerning the consolidated financial condition and
operations of PFC and its subsidiaries. PFC will also be subject to the proxy
solicitation rules of the SEC, including the requirement that PFC provide its
shareholders with an annual report containing audited consolidated financial
statements and management's discussion and analysis of financial condition and
results of operations. OTS regulations require that the Common Shares remain
registered for at least three years after the completion of the Conversion. In
the unlikely event that PFC has fewer than 300 shareholders of record at the
expiration of such three-year period, PFC may deregister the Common Shares.
THE CONVERSION OF PEOPLES FEDERAL FROM A MUTUAL SAVINGS AND LOAN
ASSOCIATION TO A PERMANENT CAPITAL STOCK SAVINGS AND LOAN ASSOCIATION IS
CONTINGENT UPON (i) THE APPROVAL OF THE PLAN AND THE ADOPTION OF THE FEDERAL
STOCK CHARTER BY PEOPLES FEDERAL'S VOTING MEMBERS, (ii) THE SALE OF THE
REQUISITE NUMBER OF COMMON SHARES, AND (iii) THE SATISFACTION OR WAIVER OF
CERTAIN OTHER CONDITIONS. SEE "THE CONVERSION."
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<PAGE> 6
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON
MASSILLON, OHIO
[Map of the State of Ohio with an outline of each county, indicating the
location of Akron and Canton, and below the map of Ohio is an enlargement of
Stark County showing the location of Massillon within Stark County]
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<PAGE> 7
PROSPECTUS SUMMARY
The following information is not complete and is qualified in its
entirety by the detailed information and the financial statements and
accompanying notes appearing elsewhere in this Prospectus:
PEOPLES FINANCIAL CORPORATION
PFC was incorporated under Ohio law in November 1995 at the direction
of Peoples Federal for the purpose of purchasing all of the capital stock of
Peoples Federal to be issued in connection with the Conversion. PFC has not
conducted and will not conduct any business before the completion of the
Conversion other than business related to the Conversion. Upon the consummation
of the Conversion, PFC will be a unitary savings and loan holding company, the
principal assets of which initially will be the capital stock of Peoples
Federal, a loan to the ESOP and the investments made with 50% of the net
proceeds retained from the sale of PFC shares in connection with the Conversion.
See "USE OF PROCEEDS."
The main office of PFC is located at 211 Lincoln Way East, Massillon,
Ohio 44646, and its telephone number is (330) 832-7441.
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION
HISTORICAL PERSPECTIVE. Peoples Federal is a mutual savings and loan
association which has served the Massillon, Ohio, area since 1892. Organized in
1892 under Ohio law as Peoples Building and Loan Company, Peoples Federal
converted to a federally chartered savings and loan association in 1941, at
which time the name Peoples Federal Savings and Loan Association of Massillon
was adopted.
As a federal savings and loan association, Peoples Federal is subject
to supervision and regulation by the OTS and the FDIC and is a member of the
Federal Home Loan Bank (the "FHLB") of Cincinnati. The deposits of Peoples
Federal are insured up to applicable limits by the FDIC in the Savings
Association Insurance Fund (the "SAIF"). See "REGULATION." At March 31, 1996,
$32.2 million, or approximately 79.3% of Peoples Federal's loan portfolio,
consisted of loans secured by first mortgages on one- to four-family homes,
virtually all of which were located within Stark County, Ohio, and adjacent
counties. See "BUSINESS OF PEOPLES FEDERAL - Lending Activities -- One- to
Four-Family Real Estate Loans."
Peoples Federal's capital exceeds by a substantial margin all
regulatory requirements. At March 31, 1996, Peoples Federal's tangible and core
capital were $9.5 million, or 12.2% of assets, amounts which exceeded the
minimum tangible and core capital requirements by approximately $8.3 million and
$7.2 million, respectively. On a pro forma basis, assuming the sale of 1,300,000
shares (the mid-point of the Valuation Range) and the retention by PFC of 50% of
the net proceeds from such sale, Peoples Federal's tangible and core capital
ratios will both be 17.5%. See "REGULATORY CAPITAL COMPLIANCE," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
PEOPLES FEDERAL - Liquidity and Capital Resources," and "REGULATIONS - OTS
Regulations -- Regulatory Capital Requirements."
Peoples Federal conducts business from its main office and one
full-service branch office, both located in Massillon, Ohio, and a lending
office located in the Belden Village area of North Canton, Ohio. Peoples
Federal's primary market area consists of Stark County, Ohio, and adjacent
counties. The main office of Peoples Federal is located at 211 Lincoln Way East,
Massillon, Ohio 44646, and its telephone number is (330) 832-7441.
CURRENT STRATEGY. During the past two years, the earnings of Peoples
Federal have been below the average earnings of similar thrifts. The reason for
the low level of earnings centers primarily on the decline in the net interest
margin of Peoples Federal from 3.18% for the fiscal year ended September 30,
1993, to 2.70% for the six months ended March 31, 1996. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
PEOPLES FEDERAL." The net interest margin declined during such period because
competition for deposits forced Peoples Federal to offer accounts with interest
rates which were above market and because the interest received by Peoples
Federal on interest-earning assets decreased due to a shift in Peoples Federal's
available investable funds from higher yielding mortgage loans to lower yielding
mortgage-backed securities. See "RISK FACTORS - Low Return on Assets and Low
Return on Equity."
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<PAGE> 8
Such shift can be attributed generally to a change in the early 1990s
from Peoples Federal's historic emphasis on mortgage lending. With increased
competition for loans from a rapidly growing number of lenders offering a vast
array of different loan products, Peoples Federal found that its traditional
methods of attracting mortgage lending business were not producing the volume of
mortgage loans which Peoples Federal previously processed and closed. See "RISK
FACTORS -Low Return on Assets and Low Return on Equity." When the impact of the
decline in mortgage lending on the net interest margin became clear in late 1994
and 1995, Peoples Federal began a search for a lending officer to revitalize its
lending program. In January 1996, Peoples Federal hired William P. Hart, an
individual with over 24 years of experience in mortgage lending, as Vice
President of Lending. Before January 1996, Mr. Hart served as the Vice President
of Loan Originations for Citizens Savings Bank, Canton, Ohio, where he
supervised consumer and mortgage loan officers and processors, created and
implemented new mortgage loan programs, and managed the underwriting of all
mortgage, consumer and college loans.
Since January 1996, Mr. Hart, in conjunction with the Board of
Directors and management, has reorganized the Loan Department of Peoples Federal
in a manner by which contacts with the community, including realtors, have been
particularly emphasized. In addition, Peoples Federal recently applied to the
Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National
Mortgage Association ("FNMA") for approval as a seller of mortgage loans to
FHLMC and FNMA and introduced several new loan products, including a 95% LTV
loan, which requires a minimum down payment of 5% of the value of the real
estate and improvements; a "reduced rate" plan, which rewards borrowers for
making down payments of 30% or more by giving them reduced interest rates; and
an "equity advance" plan, which provides equity financing for borrowers who wish
to buy or build a new house with the equity from their existing house. Other new
loan programs are currently being planned and implemented. In addition, on June
3, 1996, Peoples Federal opened for business a new lending office in the Belden
Village area of North Canton.
Peoples Federal has taken the foregoing and other steps to revitalize
its lending program under the leadership of the Board of Directors, management
and Mr. Hart. With new loan programs planned and implemented, Peoples Federal
expects to invest the proceeds from the Conversion in loans and hopes to
increase the net interest margin as a result. There can be no assurance,
however, that the net interest margin will increase. See "RISK FACTORS - Low
Return on Assets and Low Return on Equity." As the only remaining savings
association in Stark County and as an institution with strong capital and asset
quality, Peoples Federal believes that the opportunity to become the locally
preferred community bank for the residents of Stark and surrounding counties is
significant.
THE CONVERSION
On October 16, 1995, the Board of Directors of Peoples Federal
unanimously approved the Plan of Conversion. The OTS approved the Plan, subject
to the approval of the Plan by Peoples Federal's voting members at a special
meeting to be held at ____ _.m., Eastern Time, on ____________, 1995, at the
offices of Peoples Federal at 211 Lincoln Way East, Massillon, Ohio 44646.
THE SUBSCRIPTION AND COMMUNITY OFFERINGS
The Plan provides for the formation of PFC for the purpose of acquiring
all of the capital stock to be issued by Peoples Federal in the Conversion.
Pursuant to the Plan, subscription rights to purchase Common Shares are hereby
offered at a price of $10 per share to (a) depositors of Peoples Federal with
Qualifying Deposits as of September 30, 1994 (the "Eligibility Record Date"),
(b) the ESOP, (c) depositors of Peoples Federal with Qualifying Deposits as of
March 31, 1996 (the "Supplemental Eligibility Record Date"), and (d) account
holders of Peoples Federal having savings deposits of record on ____ (the
"Voting Record Date") and borrowers of record on the Voting Record Date whose
loans were outstanding on April 25, 1996 (such deposits and borrowers as of
April 25, 1996, collectively, the "Voting Members"). See "THE CONVERSION -
Subscription Offering." Common Shares not subscribed for in the Subscription
Offering are hereby being concurrently offered to those members of the general
public receiving this Prospectus in the Community Offering in which preference
will be given to natural persons residing in Stark County, Ohio. See "THE
CONVERSION - Community Offering."
The Plan authorizes the Board of Directors of PFC and Peoples Federal
to establish limits on the number of Common Shares that may be purchased by
various categories of persons. The Plan also permits the Board of Directors of
PFC and Peoples Federal, subject to any required regulatory approval and the
requirements of applicable laws and regulations, to increase or decrease such
purchase limitations in their sole discretion. Pursuant to such authority, the
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<PAGE> 9
Boards of Directors have established the preliminary limitation that,
generally, a depositor of Peoples Federal with a Qualifying Deposit on the
Eligibility Record Date (an "Eligible Account Holder") or with a Qualifying
Deposit on the Supplemental Eligibility Record Date (a "Supplemental Eligible
Account Holder") may purchase in the Subscription Offering a number of Common
Shares equal to the greater of (i) 1% of the Common Shares sold in connection
with the Conversion (17,192 Common Shares at the maximum of the Valuation
Range, as adjusted) or (ii) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of Common Shares to be
sold in connection with the Conversion by a fraction, the numerator of which is
the amount of such Eligible Account Holder's or Supplemental Eligible Account
Holder's Qualifying Deposit and the denominator of which is the total amount of
Qualifying Deposits of all Eligible Account Holders or Supplemental Eligible
Account Holders, as the case may be. A Voting Member in the Subscription
Offering or any person in the Community Offering, in the latter case together
with any Associates (hereinafter defined) or persons Acting in Concert
(hereinafter defined), may purchase 1% of the Common Shares sold in connection
with the Conversion (17,192 Common Shares at the maximum of the Valuation
Range, as adjusted). Such limitation does not apply to the ESOP, which intends
to purchase 4% of the Common Shares sold in connection with the Conversion. The
ESOP may purchase Common Shares if shares remain available after satisfying the
subscriptions of Eligible Account Holders up to $14,950,000, the maximum of the
Valuation Range. If Common Shares in excess of the maximum of the Valuation
Range are sold, the ESOP will have the first right to purchase such excess
Common Shares. If the ESOP is unable to purchase all or part of the Common
Shares for which it subscribes, the ESOP may purchase Common Shares in the open
market or may purchase authorized but unissued Common Shares from PFC. If the
ESOP purchases authorized but unissued Common Shares from PFC, such purchases
could have a dilutive effect on the interest of PFC's shareholders. No person
together with his or her Associates and other persons Acting in Concert with
him or her may purchase more than 2% of the Common Shares sold in connection
with the Conversion. Subject to applicable regulations, the purchase limitation
may be increased or decreased after the commencement of the Offering in the
sole discretion of the Boards of Directors. See "THE CONVERSION Limitations on
Purchases of Common Shares" and "RESTRICTIONS ON ACQUISITION OF PFC AND PEOPLES
FEDERAL." The sale of Common Shares pursuant to subscriptions or offers
received in the Offering will be subject to the approval of the Plan by the
voting members of Peoples Federal at the Special Meeting, to the sale of the
requisite number of Common Shares and to certain other conditions. See "THE
CONVERSION - Subscription Offering; - Community Offering; and - Pricing and
Number of Common Shares to be Sold."
Peoples Federal has retained McDonald & Company and Trident to consult,
advise and assist in the sale of the Common Shares in the Subscription Offering
and in the Community Offering. McDonald & Company and Trident will be paid a
commission equal to 2% of the aggregate amount received by PFC in the
Subscription Offering, excluding any amounts paid for Common Shares by Peoples
Federal's directors, executive officers and employee benefit plans and any of
the associates of Peoples Federal's directors and executive officers. McDonald &
Company and Trident will also receive a commission equal to 2.5% of the
aggregate purchase price paid for Common Shares sold in the Community Offering.
No commission will be paid, however, on Common Shares sold in excess of the
mid-point of the final Valuation Range. Peoples Federal will reimburse McDonald
& Company and Trident for legal and out-of-pocket expenses up to $45,000. See
"THE CONVERSION - Plan of Distribution."
The Subscription Offering will terminate at _:__ _.m., Eastern Time, on
___________, 1996 (the "Subscription Expiration Date"). The Community Offering
may be terminated at any time after orders for at least 1,719,250 shares have
been received, but in no event later than __________, 1996, unless extended. If
the Community Offering extends beyond 45 days after the Subscription Expiration
Date, persons who have subscribed for Common Shares in the Subscription Offering
or in the Community Offering will receive a notice that, until a date specified
in the notice, they have the right to affirm, increase, decrease or rescind
their subscriptions or orders for Common Shares. Any person who does not
affirmatively elect to continue his subscription or order or elects to rescind
his subscription or order during such time will have all of his funds promptly
refunded with interest. Any person who elects to decrease his subscription or
order will have the appropriate portion of his funds promptly refunded with
interest. The sale of Common Shares pursuant to subscriptions or orders received
in the Subscription Offering and the Community Offering will be subject to the
approval of the Plan by the voting members of Peoples Federal at the Special
Meeting, to the determination by the Board of Directors of PFC of the total
number of Common Shares to be sold and to the satisfaction or waiver of certain
other conditions. See "THE CONVERSION - Subscription Offering; - Community
Offering; and - Pricing and Number of Common Shares to be Sold."
Assuming 1,300,000 Common Shares are sold in connection with the
Conversion, all directors and executive officers of PFC and Peoples Federal and
their Associates (hereinafter defined) intend to purchase an aggregate of 95,500
Common Shares in connection with the Conversion, which would constitute 7.35% of
the Common Shares sold. The aggregate number of Common Shares proposed to be
purchased by the directors, the executive officers and the ESOP is
-vi-
<PAGE> 10
147,500, which would constitute 11.35% of the Common Shares sold. See "THE
CONVERSION -- Shares to be purchased by Management Pursuant to Subscription
Rights."
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS
Federal regulations prohibit any person from transferring or entering
into any agreement or understanding before the completion of the Conversion to
transfer the ownership of the subscription rights issued in the Conversion or
the shares to be issued upon the exercise of such subscription rights. Persons
attempting to violate such provision may lose their rights to purchase Common
Shares in the Conversion and may be subject to penalties imposed by the OTS.
Each person exercising subscription rights will be required to certify that a
purchase of Common Shares is solely for the subscriber's own account and that
there is no agreement or understanding regarding the sale or transfer of such
Common Shares.
PRICING OF THE COMMON SHARES
Keller, an independent firm experienced in valuing thrift institutions,
has prepared a valuation of the estimated pro forma market value of Peoples
Federal, as converted. Keller's valuation of the estimated pro forma market
value of Peoples Federal, as converted, is $13,000,000 as of March 8, 1996 (the
"Pro Forma Value"). PFC will issue the Common Shares at a fixed price of $10 per
share and, by dividing the price per share into the Pro Forma Value, will
determine the number of shares to be issued. Applicable regulations require,
however, that Peoples Federal establish a range of 15% above and below the
Valuation Range to allow for fluctuations in the aggregate value of the Common
Shares due to changes in the market for thrift shares and other factors from the
time of the commencement of the Subscription Offering until the completion of
the offering of the Common Shares. Based on the Pro Forma Value of Peoples
Federal as of March 8, 1996, the Valuation Range is $11,050,000 to $14,950,000,
resulting in the offer of between 1,105,000 and 1,495,000 Common Shares at a
purchase price of $10 per share.
The actual number of Common Shares sold in connection with the
Conversion will be determined in the discretion of PFC's Board of Directors upon
the completion of the Subscription Offering and the Community Offering, if any,
and will be based upon the final valuation of Peoples Federal, as converted. The
final valuation will be determined by Keller at the time of the closing of this
Offering. If the final valuation is within the Valuation Range, or does not
exceed the maximum of the Valuation Range by more than 15%, the number of Common
Shares to be issued in connection with the Conversion will not be less than
1,105,000 or more than 1,719,250. If, due to changing market conditions, the
final valuation is not between the minimum of the Valuation Range and 15% above
the maximum of the Valuation Range, subscribers will be given the opportunity to
affirm, increase, decrease or rescind their subscriptions. See "THE CONVERSION
Pricing and Number of Common Shares to be Sold."
USE OF PROCEEDS
PFC will retain 50% of the net proceeds from the sale of the Common
Shares, or $6,210,000 at the mid-point of the Valuation Range, including the
value of a promissory note from the ESOP which PFC intends to accept in exchange
for the issuance of Common Shares to the ESOP. Such proceeds will be used to
fund the Peoples Financial Corporation Recognition and Retention Plan (the
"RRP") and will be invested in short-term and intermediate-term government
securities. The remainder of the net proceeds received from the sale of the
Common Shares, $6,210,000 at the mid-point of the Valuation Range, will be
invested by PFC in the capital stock to be issued by Peoples Federal to PFC as a
result of the Conversion. Such investment will increase the regulatory capital
of Peoples Federal and will permit Peoples Federal to expand its lending and
investment activities and to enhance customer services. Enhancements of customer
services may include automated teller machine and card services. Peoples Federal
has also expanded its hours of operation and established a loan origination
office in the fastest growing area of Stark County, Ohio. Peoples Federal
anticipates that such net proceeds initially will be invested in short-term
interest-bearing deposits. Eventually, however, Peoples Federal will attempt to
use such net proceeds to originate loans. Although PFC and Peoples Federal could
use the increase in capital to acquire other financial institutions or for PFC
to purchase its own outstanding shares, PFC and Peoples Federal have no current
intentions to do so. No assurance can be given that any dividends, special or
otherwise, will be paid. See "USE OF PROCEEDS."
OFFICER AND DIRECTOR BENEFITS
In connection with the Conversion, PFC will establish the ESOP. Common
Shares will be purchased by the ESOP in the Conversion with a loan from PFC. The
ESOP intends to repay the loan with discretionary contributions made by
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<PAGE> 11
Peoples Federal to the ESOP. As the loan is repaid, the Common Shares held by
the ESOP will be allocated to the accounts of employees of Peoples Federal and
PFC, including executive officers. See "MANAGEMENT OF PEOPLES FEDERAL - Employee
Stock Ownership Plan."
The Boards of Directors of PFC and Peoples Federal also intend to adopt
and present to the shareholders for approval at the first annual meeting of the
shareholders of PFC following the consummation of the Conversion the Peoples
Financial Corporation RRP and the Peoples Financial Corporation 1996 Stock
Option and Incentive Plan (the "Stock Option Plan"). If the RRP is approved at
such meeting, PFC will form a trust (the "RRP Trust") to which PFC will
contribute sufficient amounts for the purchase by the RRP Trust of an
unspecified number of PFC common shares equal to up to 4% of the number of
Common Shares sold in the Conversion. Such PFC common shares may be purchased
after shareholder approval of the RRP in the open market or from the authorized,
but unissued common shares of PFC, and will be awarded by a committee of the PFC
Board of Directors to the officers and directors of PFC and Peoples Federal for
services rendered to Peoples Federal. See "MANAGEMENT OF PEOPLES FEDERAL - Stock
Option Plan; and - Recognition and Retention Plan and Trust."
If the Stock Option Plan is approved at the first annual meeting of
shareholders following the Conversion, directors, officers and employees of PFC
and Peoples Federal will be granted options to purchase, in the aggregate, a
number of Common Shares equal to up to 10% of the Common Shares sold in the
Conversion. The exercise price for options granted will equal the PFC market
price on the date of grant. The grant of such options, in combination with
purchases of Common Shares by such officers and directors and certain
anti-takeover provisions in the Articles of Incorporation and Regulations of PFC
and the Amended Charter of Peoples Federal, may facilitate the perpetuation of
current management and discourage proxy contests and takeover attempts. See
"RESTRICTIONS ON ACQUISITIONS OF PEOPLES FEDERAL AND PFC AND RELATED
ANTI-TAKEOVER PROVISIONS."
Assuming the purchase by directors and executive officers of 7.35% of
the Common Shares sold in the Conversion, the purchase by the RRP of a number of
Common Shares equal to 4% of the Common Shares sold in the Conversion, the
exercise by directors and executive officers of all options authorized pursuant
to the Stock Option Plan and the control by directors and executive officers of
the 4% of the Common Shares purchased by the ESOP in the Conversion, directors
and executive officers could own or control up to 23.04% of the outstanding
common shares of PFC. See "RISK FACTORS-Controlling Influence of Management and
Anti-Takeover Provisions which May Discourage Sales of Common Shares for Premium
Prices."
MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The aggregate
offering price for the Common Shares is based upon an independent appraisal of
Peoples Federal. The appraisal is not a recommendation as to the advisability of
purchasing Common Shares. See "THE CONVERSION - Pricing and Number of Common
Shares to be Sold." No assurance can be given that persons purchasing Common
Shares will thereafter be able to sell such shares at a price at or above the
offering price.
PFC has received approval to have the Common Shares quoted on the
Nasdaq Small Cap under the symbol "PFFC" upon the closing of the Conversion,
subject to certain conditions which PFC and Peoples Federal believe will be
satisfied, although no assurance can be provided that the conditions will be
met. In connection with such approval, McDonald & Company has informed Peoples
Federal that McDonald & Company intends to make a market in the Common Shares.
No assurance can be given, however, that an active or liquid market for the
Common Shares will develop after the completion of the Conversion or, if such a
market does develop, that such market will continue. Investors should consider,
therefore, the potentially illiquid and long-term nature of an investment in the
Common Shares. See "RISK FACTORS - Market for the Common Shares."
DIVIDEND POLICY
The declaration and payment of dividends by PFC will be subject to the
discretion of the Board of Directors of PFC and will be based on the earnings
and financial condition of PFC and general economic conditions. Other than the
earnings on the investment of proceeds retained by PFC, the only source of
income of PFC will be dividends periodically declared and paid by the Board of
Directors of Peoples Federal on the common stock of Peoples Federal held by PFC.
The payment of dividends by Peoples Federal to PFC will be subject to various
regulatory restrictions. On a pro forma basis, as of March 31, 1996, assuming
(i) receipt by Peoples Federal of $6.2 million of net conversion proceeds, (ii)
the investment of such net proceeds in assets having a risk weighting of 20% and
(iii) the establishment of a Liquidation Account in the amount of $10.0 million
(the regulatory capital of Peoples Federal at March 31, 1996), Peoples Federal
would have $6.1 million available for the payment of dividends to PFC. In an
effort to manage the capital of PFC, the Board of Directors of PFC may determine
that the payment of a regular or a special cash dividend or both may be prudent.
No assurance can be
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<PAGE> 12
given, however, that any dividend will be declared, what the
amount will be or whether such dividends, if declared, will continue in the
future. See "DIVIDEND POLICY."
INVESTMENT RISKS
Special attention should be given to the matters discussed under "RISK
FACTORS."
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding Peoples
Federal at the dates and for the periods indicated. The financial information
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere herein. However, in the opinion of management
of Peoples Federal, all adjustments necessary for a fair presentation of such
financial data have been included. All such adjustments are of a normal
recurring nature. The consolidated financial information at March 31, 1996, and
for the six months ended March 31, 1996 and 1995, is derived from unaudited
financial information. The results of operations and other data for the six
months ended March 31, 1996, are not necessarily indicative of the results of
operations that may be expected for the entire year.
<TABLE>
<CAPTION>
At September 30,
SELECTED FINANCIAL CONDITION At March 31, -----------------------------------------------------------
AND OTHER DATA: 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total amount of:
Assets $78,078 $77,307 $75,327 $77,504 $75,893 $77,327
Cash and cash equivalents (1) 5,196 1,864 1,812 3,321 5,250 11,676
Investment securities available for sale 1,742 809 - - - -
Investment securities held to maturity 6,687 7,912 10,989 5,097 4,673 4,750
Mortgage-backed and related securities
available for sale 13,210 - - - - -
Mortgage-backed and related securities
held to maturity 10,083 26,008 22,870 26,762 20,254 7,915
Loans receivable - net 38,308 38,021 37,070 39,841 43,347 50,971
FHLB stock - at cost 722 685 653 620 593 508
Deposits 67,374 66,564 65,800 68,293 67,422 69,442
Retained earnings, substantially
restricted-net (2) 10,050 9,882 8,984 8,605 7,947 7,614
Number of offices, all full service 2 2 2 2 2 3
</TABLE>
<TABLE>
<CAPTION>
Six months ended
March 31, Year ended September 30,
--------------- ------------------------------------------
SUMMARY OF EARNINGS: 1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $2,747 $2,642 $5,359 $5,150 $5,925 $6,476 $6,909
Interest expense 1,721 1,484 3,142 3,120 3,540 4,253 4,940
------ ------ ------ ------ ------ ------ ------
Net interest income 1,026 1,158 2,217 2,030 2,385 2,223 1,969
Provision for loan losses 105 -- 12 5 21 67 120
------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses 921 1,158 2,205 2,025 2,364 2,156 1,849
Noninterest income 12 13 23 27 49 54 58
Noninterest expense 773 872 1,657 1,498 1,440 1,344 1,223
------ ------ ------ ------ ------ ------ ------
Income before income tax 160 299 571 554 973 866 684
Income tax expense (2) 48 92 177 175 315 298 202
------ ------ ------ ------ ------ ------ ------
Net income (2) $ 112 $ 207 $ 394 $ 379 $ 658 $ 568 $ 482
====== ====== ====== ====== ====== ====== ======
- -----------------------------
(Footnotes on next page)
</TABLE>
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<PAGE> 14
<TABLE>
<CAPTION>
At or for six months
ended
March 31, (3) At or for the year ended September 30,
----------------- --------------------------------------------------
SELECTED FINANCIAL RATIOS: 1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Return on assets (4) .28% .55% .52% .49% .85% .74% .64%
Return on equity (5) 2.24 4.46 4.14 4.28 7.97 7.30 6.63
Interest rate spread (6) 2.10 2.67 2.46 2.28 2.69 2.43 2.12
Net interest margin (7) 2.70 3.18 3.01 2.73 3.18 2.97 2.69
Noninterest expense to average assets (8) 1.98 2.33 2.18 1.95 1.87 1.75 1.61
Average equity to average assets 12.81 12.39 12.58 11.51 10.71 10.16 9.58
Equity to assets at period end 12.87 12.60 12.78 11.93 11.10 10.47 9.85
Nonperforming loans to total loans 1.68 .11 1.66 - .02 - .28
Nonperforming assets to total assets .87 .05 .84 - .01 .06 .28
Allowance for loan losses to total loans .48 .18 .20 .18 .17 .15 .04
Allowance for loan losses to
nonperforming loans 28.30 165.85 12.35 N/A 971.43 N/A 14.69
Net charge-offs to average loans - - - .01 .05 .04 .27
- ----------------------------
<FN>
(1) Includes cash and amounts due from depository institutions and
interest-bearing deposits in other financial institutions.
(2) Effective October 1, 1991, Peoples Federal retroactively adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). The effect of adopting SFAS No. 109 on income tax expense
in 1995, 1994,1993 and 1992 was not material.
(3) Six-month results have been annualized.
(4) Net income divided by average total assets.
(5) Net income divided by average total equity.
(6) Average yield on interest-earning assets less average cost of
interest-bearing liabilities.
(7) Net interest income as a percentage of average interest-earning assets.
(8) Noninterest expense divided by average total assets.
</TABLE>
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<PAGE> 15
REGULATORY CAPITAL COMPLIANCE
The following table sets forth the historical and pro forma regulatory
capital of Peoples Federal at March 31, 1996, based on the receipt of proceeds
for the number of Common Shares indicated, less estimated expenses of $543,000
at the minimum of the Valuation Range and $580,000 at the mid-point, maximum and
maximum, as adjusted, respectively, of the Valuation Range, assuming all of such
shares are sold in the Subscription Offering.
<TABLE>
<CAPTION>
Pro forma capital at March 31, 1996, assuming the sale of
------------------------------------------------------------------------------
1,105,000 1,300,000 1,495,000 1,719,250
Common Shares Common Shares Common Shares Common Shares
Historical at (offering price (offering price (offering price (offering price
March 31, of $10 per of $10 per of $10 per of $10 per
1996(1) share) share) share) share)
------------------ ----------------- ---------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under
generally
accepted accounting
principles, before
adjustments (2)(3) $10,050 12.94% $14,419 17.39% $15,220 18.15% $16,039 18.91% $16,980 19.76%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Current tangible
capital (2)(3):
Capital level $9,490 12.22 $13,859 16.72% $14,660 17.48% $15,479 18.25% $16,420 19.10%
Requirement 1,165 1.50 1,243 1.50 1,258 1.50 1,272 1.50 1,289 1.50
------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Excess $8,325 10.72% $12,616 15.22% $13,402 15.98% $14,207 16.75% $15,131 17.60%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
Current core
capital (2)(3):
Capital level $9,490 12.22% $13,859 16.72% $14,660 17.48% $15,479 18.25% $16,420 19.10%
Requirement 2,329 3.00 2,487 3.00 2,516 3.00 2,545 3.00 2,579 3.00
------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Excess $7,161 9.22% $11,372 13.72% $12,144 14.48% $12,934 15.25% $13,841 16.10%
====== ====== ======= ===== ======= ===== ======= ===== ======= =====
Current risk-based
capital (4):
Capital level $9,683 31.25% $14,052 43.87% $14,852 46.09% $15,671 48.34% $16,613 50.89%
Requirement 2,479 8.00 2,563 8.00 2,578 8.00 2,593 8.00 2,611 8.00
------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Excess $7,204 23.25% $11,489 35.87% $12,274 38.09% $13,078 40.34% $14,002 42.89%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
- -----------------------------------
<FN>
(1) See Note J of the Notes to Consolidated Financial Statements.
(2) Pro forma amounts assume Peoples Federal will receive 50% of the
conversion proceeds before reduction for the ESOP loan. Also reflects a
deduction from capital for unearned ESOP shares equal to 4% of the
shares offered and unearned RRP shares equal to 4% of the shares
offered.
(3) Historical tangible and core capital percentages are based on adjusted
total assets of $77.7 million. Pro forma tangible and core capital
percentages are based on adjusted total assets of $82.9 million, $83.9
million, $84.8 million, and $85.9 million, which assumes the receipt by
Peoples Federal of net proceeds from the sale of Common Shares of $5.3
million, $6.2 million, $7.2 million and $8.2 million, respectively. The
OTS has proposed a new regulation which would increase the core capital
requirement to between 4% and 5% of adjusted total assets, with the
specific requirement to be determined on a case-by-case basis. See
"REGULATION - OTS Regulations -Regulatory Capital Requirements."
(4) Historical risk-based capital percentages are based on risk-weighted
assets of $31.0 million. Pro forma risk-based capital percentages are
based on $32.0 million, $32.2 million, $32.4 million and $32.8 million,
and assumes the net proceeds will be invested in short-term
interest-bearing deposits having a risk weighting of 20%.
</TABLE>
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<PAGE> 16
RISK FACTORS
Investment in the Common Shares involves certain risks. Before
investing, prospective purchasers should consider carefully the following
matters:
LOW RETURN ON ASSETS AND LOW RETURN ON EQUITY
During the six months ended March 31, 1996, and the fiscal years ended
September 30, 1995 and 1994, the return on assets of Peoples Federal equaled
.28% (annualized), .52% and .49% respectively. During the same periods, the
return on equity of Peoples Federal equaled 2.24% (annualized), 4.14% and 4.28%,
respectively. The low returns on assets and equity may be attributed to a
variety of factors. During fiscal year 1994 and early fiscal year 1995, for
example, Peoples Federal did not originate sufficient loans to replace existing
loans that matured or were refinanced elsewhere. As a result, excess funds were
invested in lower yielding investments, including a high proportion of
mortgage-backed securities. In addition, as part of its management of interest
rate risk, Peoples Federal attempted to attract long-term certificates of
deposit by paying higher rates than its peers on such deposits. Peoples Federal
also increased its allowance for loan losses by $105,000 in December 1995 as a
result of an increase in nonperforming loans over the previous 15 months.
Although Peoples Federal no longer pays the highest rates in its market
on deposits and has hired a new Vice President of Lending in an attempt to
increase loan originations, there can be no assurance that the return on assets
or the return on equity of Peoples Federal or PFC will increase in the future.
Moreover, because the investment of the proceeds of the Conversion in loans will
not occur immediately upon receipt and because PFC's total shareholders' equity
will increase significantly, the return on equity may decrease substantially for
some time after the completion of the Conversion.
INTEREST RATE RISK
Peoples Federal's operating results are dependent to a significant
degree on its net interest income, which is the difference between interest
income from loans and investments and interest expense on deposits. Like most
thrift institutions, the interest income and interest expense of Peoples Federal
change as the interest rates on mortgages, securities and other assets and on
deposits and other liabilities change. Interest rates may change because of
general economic conditions, the policies of various regulatory authorities and
other factors beyond Peoples Federal's control. The interest rates on specific
assets and liabilities of Peoples Federal will change or "reprice" in accordance
with the contractual terms of the asset or liability instrument and in
accordance with customer reaction to general economic trends.
Peoples Federal, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. As part of its effort to
monitor and manage interest rate risk, Peoples Federal uses the "net portfolio
value" ("NPV") methodology recently adopted by the OTS as part of its capital
regulations. Although Peoples Federal is not currently subject to the NPV
regulation because such regulation does not apply to institutions with less than
$300 million in assets and risk-based capital in excess of 12%, the application
of the NPV methodology may illustrate Peoples Federal's interest rate risk.
Generally, NPV is the difference between incoming cash flows on
interest-earning and other assets and outgoing cash flows on interest-bearing
and other liabilities, discounted to their present value. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
which would result from a theoretical 200 basis point (1 basis point equals
.01%) change in market interest rates. Both a 200 basis point increase in market
interest rates and a 200 basis point decrease in market interest rates are
considered. If the NPV would decrease more than 2% of the present value of the
institution's assets with either an increase or a decrease in market rates, the
institution must, in determining its risk-based capital, deduct from its capital
50% of the amount of the decrease in excess of such 2%.
At March 31, 1996, 2% of the present value of Peoples Federal's assets
was approximately $1.6 million. Because the interest rate risk of a 200 basis
point increase in market interest rates (which was greater than the interest
rate risk of a 200 basis point decrease) was $2.0 million at March 31, 1996,
Peoples Federal would have been required to deduct approximately $192,000 (half
of the approximate $384,000 difference) from its capital in determining whether
Peoples Federal met its risk-based capital requirement. Regardless of such
reduction, Peoples Federal's risk-based capital at March 31, 1996, would still
have exceeded the regulatory requirement by $7.0 million.
-2-
<PAGE> 17
Peoples Federal's NPV is more sensitive to rising rates than declining
rates. Such difference in sensitivity occurs principally because, as rates rise,
borrowers do not prepay fixed-rate loans as quickly as they do when interest
rates are declining. The loan portfolio of Peoples Federal consists almost
entirely of fixed-rate loans. In addition, because Peoples Federal has not
originated loans in accordance with traditional secondary market guidelines, the
sale of its fixed-rate loans might be difficult.
As a result, in a rising interest rate environment, the amount of
interest Peoples Federal would receive on its loans would increase relatively
slowly as loans are slowly prepaid and new loans at higher rates are made.
Moreover, the interest Peoples Federal would pay on its deposits would increase
rapidly because Peoples Federal's deposits generally have shorter periods to
repricing.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Further, in the event of a change in
interest rates, expected rates of prepayment on loans and mortgage-backed
securities and early withdrawal levels from certificates of deposit would likely
deviate significantly from those assumed in making the risk calculations. For
further discussion of the NPV methodology, the risks to Peoples Federal and the
steps Peoples Federal is taking to reduce such risks, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
PEOPLES FEDERAL - Asset and Liability Management."
If interest rates continue to rise from the recent historically low
levels, Peoples Federal's net interest income will be negatively affected.
Moreover, rising interest rates may negatively affect Peoples Federal's earnings
due to diminished loan demand. A negative effect on interest income and earnings
will adversely affect the value of an investment in the Common Shares.
RISK OF INCREASING PROPORTION OF NONRESIDENTIAL REAL ESTATE LOANS
Over the last five years, an increasing proportion of Peoples Federal's
loan portfolio has been comprised of loans secured by nonresidential real
estate, including retail stores, office buildings, churches, a theater, a
manufacturing facility and a party center. At March 31, 1996, Peoples Federal
had a total of $3.9 million invested in nonresidential real estate loans, which
comprised 9.6% of Peoples Federal's total loans at such date. Of such amount,
$572,000 was delinquent and classified as substandard, as a result of which an
addition was made to Peoples Federal's allowance for loan losses in December
1995. See "THE BUSINESS OF PEOPLES FEDERAL - Lending Activities -- Delinquent
Loans, Non-performing Assets and Classified Assets."
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Peoples Federal has endeavored to reduce such
risk by evaluating the credit history and past performance of the borrower, the
location of the real estate, the quality of the management constructing and
operating the property, the debt service ratio, the quality and characteristics
of the income stream generated by the property and appraisals supporting the
property's valuation. Although management considers its allowance for loan
losses to be sufficient to cover anticipated losses on classified assets, the
amount of any actual loss could adversely affect Peoples Federal's net income
and regulatory capital.
LIMITED MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The aggregate
offering price for the Common Shares is based upon an independent appraisal of
Peoples Federal. The appraisal is not a recommendation as to the advisability of
purchasing Common Shares. See "THE CONVERSION - Pricing and Number of Common
Shares to be Sold." No assurance can be given that persons purchasing Common
Shares will thereafter be able to sell such shares at a price at or above the
offering price.
-3-
<PAGE> 18
PFC has received approval to have the Common Shares quoted on the
Nasdaq Small Cap under the symbol "PFFC" upon the closing of the Conversion,
subject to certain conditions which PFC and Peoples Federal believe will be
satisfied, although no assurance can be provided that the conditions will be
met. In connection with such approval, McDonald & Company has informed Peoples
Federal that McDonald & Company intends to make a market in the Common Shares.
No assurance can be given, however, that an active or liquid market for the
Common Shares will develop after the completion of the Conversion or, if such a
market does develop, that it will continue. Investors should consider,
therefore, the potentially illiquid and long-term nature of an investment in the
Common Shares.
POSSIBLE INADEQUACY OF THE ALLOWANCE FOR LOAN LOSSES
Peoples Federal maintains an allowance for loan losses based upon a
number of relevant factors, including, but not limited to, trends in the level
of non-performing assets and classified loans, current and anticipated economic
conditions in the lending area, past loss experience, possible losses arising
from specific problem assets and changes in the composition of the loan
portfolio. While the Board of Directors believes that it uses the best
information available to determine the amount of the allowance for loan losses,
unforeseen market conditions could result in material adjustments, and net
income could be significantly adversely affected, if circumstances differ
substantially from the assumptions used in making the determination of the
allowance for loan losses.
LEGISLATION AND REGULATION WHICH MAY ADVERSELY AFFECT PEOPLES FEDERAL'S EARNINGS
Peoples Federal is subject to extensive regulation by the OTS and the
FDIC and is periodically examined by such regulatory agencies to test compliance
with various regulatory requirements. As a savings and loan holding company, PFC
will also be subject to regulation and examination by the OTS. Such supervision
and regulation of Peoples Federal and PFC are intended primarily for the
protection of depositors and not for the maximization of shareholder value and
may affect the ability of PFC to engage in various business activities. The
assessments, filing fees and other costs associated with reports, examinations
and other regulatory matters are significant and may have an adverse effect on
PFC's net earnings. See "REGULATION."
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance each for members of the Bank Insurance Fund (the "BIF")
and 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 its
target level within a reasonable time and may decrease such rates if such target
level has been met. The reserves of the SAIF are below the level required by law
because a significant portion of the assessments paid into the SAIF are used to
pay the cost of prior thrift failures.
The BIF has, however, met its required reserve level. The assessments
paid by healthy savings associations exceeded those paid by healthy BIF members
by approximately $.19 per $100 in deposits for 1995, and no BIF assessments will
be required of healthy commercial banks in 1996 except a $2,000 minimum fee. The
disparity in the premiums paid between savings associations and commercial banks
could have a negative competitive impact on Peoples Federal and other savings
associations.
Congress is considering legislation to recapitalize the SAIF and
eliminate the significant premium disparity. Currently, the recapitalization
plan provides for a special assessment of approximately $.85 per $100 of SAIF
deposits held at some date in 1995, currently March 31, 1995, in order to
increase SAIF reserves to the level required by law. Certain associations
holding SAIF-insured deposits would pay a lower special assessment. In addition,
the cost of prior thrift failures would be shared by both the SAIF and the BIF,
which might increase BIF assessments by $.02 to $.025 per $100 in deposits. SAIF
assessments for healthy savings associations would initially be set at a
significantly lower level, but could never be reduced below the level set for
healthy BIF institutions.
Peoples Federal had $65.7 million in deposits at March 31, 1995. If a
special assessment of $.85 per $100 in deposits is imposed, Peoples Federal will
pay an additional assessment of approximately $559,000. Such assessment should
be tax-deductible, but will reduce earnings and capital for the quarter in which
it is recorded by approximately $.56 per $100 in deposits, or $369,000 based
upon $65.7 million in deposits.
The recapitalization plan also provides for the merger of the SAIF and
the BIF on January 1, 1998. The SAIF recapitalization legislation currently
eliminates the thrift charter or separate thrift regulation under federal law
prior to the merger of the deposit insurance funds. As a result, Peoples Federal
would be regulated as a bank under federal law and
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<PAGE> 19
would be subjected to the more restrictive activity limits imposed on national
banks. If required to convert to a bank charter, Peoples Federal would be
required to recapture as income, before taxes, over a six-year period the
approximately $500,000 of its bad debt reserve taken after 1987, for which
deferred taxes have been provided. In addition, Peoples Federal's proposed
holding company would become a bank holding company, which would become subject
to more restrictive activity limits and capital requirements similar to those
imposed on Peoples Federal. Congress is considering legislation requiring,
generally, that even if a savings association does not convert to a bank, bad
debt reserves taken after 1987 using the percentage of taxable income method
must be included in future taxable income of the association over a six-year
period, although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test.
No assurance can be given that the SAIF recapitalization plan or the
proposed tax legislation will be enacted into law or in what form either may be
enacted. Moreover, Peoples Federal can give no assurance that the disparity
between BIF and SAIF assessments will be eliminated. Finally, Peoples Federal
cannot predict the impact of conversion to, or regulation as, a bank until the
legislation requiring such change is enacted.
CONTROLLING INFLUENCE OF MANAGEMENT AND ANTI-TAKEOVER PROVISIONS WHICH MAY
DISCOURAGE SALES OF COMMON SHARES FOR PREMIUM PRICES
The Articles of Incorporation and Code of Regulations of PFC and the
Amended Charter of Peoples Federal contain certain provisions that could deter
or prohibit non-negotiated changes in the control of PFC and Peoples Federal.
Such provisions include a restriction on the acquisition of more than 10% of the
outstanding shares of PFC by any person during the five-year period following
the effective date of the Conversion, the ability to issue additional common
shares and a supermajority voting requirement for certain transactions. See
"DESCRIPTION OF AUTHORIZED SHARES" and "RESTRICTIONS ON ACQUISITION OF PEOPLES
FEDERAL AND PFC AND RELATED ANTI-TAKEOVER PROVISIONS."
The Articles of Incorporation of PFC provide that for five years after
the effective date of the Conversion, no person, except the ESOP, may acquire
the beneficial ownership of more than 10% of any class of outstanding equity
securities of PFC. If such a prohibited acquisition occurs, the securities owned
by such person in excess of the 10% limit may not be voted on any matter
submitted to the shareholders of PFC. Such provision may not be waived by
management. The ability of management or any other person to solicit revocable
proxies from shareholders and vote on behalf of such shareholders will not be
restricted by such 10% limit.
The Articles of Incorporation of PFC also provide that if the Board of
Directors recommends that shareholders approve certain matters, including
mergers, acquisitions of a majority of the shares of PFC or the transfer of
substantially all of the assets of PFC, the affirmative vote of the holders of
only a majority of the voting shares of PFC is required to approve such matter.
If, however, the Board of Directors recommends against the approval of any such
matter, the affirmative vote of the holders of at least 75% of the voting shares
of PFC is required to approve such matters. The existence of such 75% provision
in the Articles of Incorporation of PFC may make more difficult actions which
certain shareholders deem to be in their best interests.
Officers and directors of PFC are expected to purchase approximately
7.35% of the shares issued in connection with the Conversion at the mid-point of
the Valuation Range. In addition, the ESOP intends to purchase approximately 4%
of the shares issued in connection with the Conversion. The ESOP trustee must
vote shares allocated under the ESOP as directed by the participants to whom the
shares are allocated and vote unallocated shares in his sole discretion in the
best interest of the participants. The RRP may acquire Common Shares in the open
market or acquire authorized but unissued common shares from PFC following
approval of the RRP by the shareholders of PFC at the first annual meeting of
the shareholders in an amount equal to up to 4% of the Common Shares issued in
connection with the Conversion. The RRP trustees, who are expected to be two
directors of PFC, will vote shares awarded but not distributed under the RRP in
their discretion.
In view of the various provisions of the Articles of Incorporation and
the stock benefit plans of PFC and Peoples Federal, the aggregate ownership by
the ESOP, the RRP and the directors and officers of PFC and Peoples Federal may
have the effect of facilitating the perpetuation of current management and
discouraging proxy contests and takeover attempts. Thus, officers and directors,
who are anticipated to be allocated or awarded shares under such plans, will
have a significant influence over the vote on such a transaction and may be able
to defeat such a proposal. The Boards of Directors
-5-
<PAGE> 20
of PFC and Peoples Federal believe that such provisions will be in the best
interests of shareholders by encouraging prospective acquirers to negotiate a
proposed acquisition with the directors. Such provisions could, however,
adversely affect the market value of the Common Shares or deprive shareholders
of the opportunity to sell their shares for premium prices.
Federal and Ohio law also restrict the acquisition of control of PFC
and Peoples Federal. Any or all of these provisions may facilitate the
perpetuation of current management and discourage proxy contests or takeover
attempts not first negotiated with the Board of Directors. See "RESTRICTIONS ON
ACQUISITION OF PEOPLES FEDERAL AND PFC AND RELATED ANTI-TAKEOVER PROVISIONS."
Regulations of the OTS also restrict the ability of any person to
acquire the beneficial ownership of more than 10% of any class of voting equity
security of Peoples Federal or PFC without the prior written approval of or lack
of objection by the OTS. Such restrictions could restrict the use of revocable
proxies. See "RESTRICTIONS ON ACQUISITION OF PEOPLES FEDERAL AND PFC AND RELATED
ANTI-TAKEOVER PROVISIONS."
POSSIBLE ADVERSE EFFECTS IF PREFERRED SHARES ARE ISSUED
The PFC Articles of Incorporation authorize the issuance of one million
preferred shares. The Board of Directors is authorized to issue, without
shareholder approval, preferred shares and to fix the designations, preferences
or other special rights of such shares and the qualifications, limitations and
restrictions thereof. If preferred shares are issued, each holder of preferred
shares will be entitled to one vote for each preferred share held of record on
all matters submitted to a vote of shareholders. The issuance of preferred
shares and any conversion rights which may be specified by the Board of
Directors for the preferred shares could adversely affect the voting power of
holders of the common shares. In addition, if the purchase price of the
preferred shares is less than the book value of the common shares, the book
value of the common shares could be adversely affected. No preferred shares will
be issued in connection with the Conversion, and the Board of Directors has no
present intention to issue any of the preferred shares. See "DESCRIPTION OF
AUTHORIZED SHARES" and "RESTRICTIONS ON ACQUISITION OF PEOPLES FEDERAL AND PFC
AND RELATED ANTI-TAKEOVER PROVISIONS - Articles of Incorporation of PFC --
Ability of the Board of Directors to Issue Additional Shares."
RISK OF DELAYED OFFERING
PFC and Peoples Federal expect to complete the Conversion by ___, 1996.
It is possible, however, that adverse market, economic or other factors could
delay the completion of the Conversion. If the Community Offering is extended
beyond ________, 1996, each subscriber will be given a notice of such delay and
the right to affirm, increase, decrease or rescind his subscription. In such
event, any person who does not affirmatively elect to continue his subscription
or elects to rescind his subscription will have all of his funds promptly
refunded with interest. Any person who elects to decrease his subscription will
have the appropriate portion of his funds promptly refunded with interest. If
the Community Offering is extended, the cost of the Conversion could increase
and the valuation of Peoples Federal could change. Extensions of the Community
Offering will not extend past __________, 1998.
DILUTIVE EFFECT OF INCREASE IN VALUATION RANGE
The number of Common Shares to be sold in the Conversion may be as much
as 15% greater than the maximum of the Valuation Range due to changes in market
and financial conditions following the commencement of the Offering. An increase
in the number of Common Shares sold will decrease net earnings per share and
shareholders' equity per share on a pro forma basis. See "CAPITALIZATION" and
"PRO FORMA DATA."
DILUTIVE EFFECT OF PURCHASES BY THE ESOP AND THE RRP
If the ESOP is unable to purchase Common Shares in the Conversion due
to an oversubscription by eligible depositors as of the Eligibility Record Date,
the ESOP may purchase authorized but unissued shares from PFC or purchase in the
open market a number of shares equal to up to 4% of the Common Shares issued in
connection with the Conversion. If the ESOP shares are purchased from authorized
but unissued shares, shareholders would experience a dilution of their ownership
interests of up to 3.85%. In addition, the RRP may purchase authorized but
unissued shares from PFC or purchase in the open market a number of shares equal
to 4% of the Common Shares issued in connection with the
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<PAGE> 21
Conversion. The purchase of authorized but unissued shares by the RRP would have
a dilutive effect on the ownership interests of PFC's shareholders of up to
3.85%. See "CAPITALIZATION" and "PRO FORMA DATA."
PEOPLES FINANCIAL CORPORATION
PFC was incorporated under Ohio law in November 1995 at the direction
of Peoples Federal for the purpose of serving as a holding company for Peoples
Federal. PFC has not conducted and will not conduct any business other than
business related to the Conversion prior to the completion of the Conversion.
PFC has received approval of the OTS to acquire the capital stock to be issued
by Peoples Federal in the Conversion. Upon the consummation of the Conversion,
PFC will be a unitary savings and loan holding company, and its principal assets
initially will be the capital stock of Peoples Federal and the investments made
with the proceeds retained by PFC from the sale of Common Shares. See "USE OF
PROCEEDS." As a savings and loan holding company, PFC will be required to
register with, and will be subject to examination and supervision by, the OTS.
See "REGULATION - OTS Regulations -- Holding Company Regulation." The types of
business activities in which a unitary savings and loan holding company may
engage are virtually unrestricted. See, however, "RISK FACTORS - Legislation and
Regulation Which May Adversely Affect Peoples Federal's Earnings."
The main office of PFC is located at 211 Lincoln Way East, Massillon,
Ohio, 44646, and its telephone number is (330) 832-7441.
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON
Peoples Federal is a mutual savings and loan association which has
served the Massillon, Ohio, area since 1892. Organized under Ohio law as Peoples
Building and Loan Company, Peoples Federal converted to a federally chartered
savings and loan association in 1941, at which time the name Peoples Federal
Savings and Loan Association of Massillon was adopted. As a savings association
chartered under the laws of the United States, Peoples Federal is subject to
supervision and regulation by the OTS and the FDIC and is a member of the FHLB
of Cincinnati. The deposits of Peoples Federal are insured up to applicable
limits by the FDIC in the SAIF. See "REGULATION."
Peoples Federal is principally engaged in the business of making
permanent first mortgage loans secured by oneto four-family residential real
estate located within Stark County, Ohio, and adjacent counties and investing in
U.S. government agency obligations, interest-bearing deposits in other financial
institutions, mortgage-backed and related securities, automobile pass-through
certificates and municipal securities. Peoples Federal also makes construction
loans and loans secured by multifamily real estate (over four units) and
nonresidential real estate. The origination of consumer loans constitutes a
small part of the lending activity of Peoples Federal. Loan funds are obtained
primarily from savings deposits and loan repayments. See "THE BUSINESS OF
PEOPLES FEDERAL - Lending Activities; and - Investment Activities."
Interest on loans, mortgage-backed and related securities and
investments is Peoples Federal's primary source of income. The principal expense
of Peoples Federal is interest paid on deposit accounts. Operating results are
dependent to a significant degree on the net interest income of Peoples Federal,
which is the difference between interest earned on loans, mortgage-backed and
related securities and other investments and interest paid on deposits. Like
most thrift institutions, Peoples Federal's interest income and interest expense
are significantly affected by general economic conditions and by the policies of
various regulatory authorities. See "RISK FACTORS" and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Peoples Federal conducts business from its main office and a
full-service branch office, both located in Massillon, Ohio. Peoples Federal's
primary market area consists of Stark County, Ohio, and adjacent counties. The
main office of Peoples Federal is located at 211 Lincoln Way East, Massillon,
Ohio 44646, and its telephone number is (330) 832-7441. See "THE BUSINESS OF
PEOPLES FEDERAL."
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<PAGE> 22
USE OF PROCEEDS
The following table presents the estimated gross and net proceeds from
the sale of the Common Shares in connection with the Conversion based on the
Valuation Range:
<TABLE>
<CAPTION>
Minimum Mid-point Maximum Maximum
<S> <C> <C> <C> <C>
Gross proceeds $11,050,000 $13,000,000 $14,950,000 $17,192,500
Less estimated expenses 543,000 580,000 580,000 580,000
----------- ----------- ----------- -----------
Total net proceeds $10,507,000 $12,420,000 $14,370,000 $16,612,500
=========== =========== =========== ===========
</TABLE>
The net proceeds from the sale of the Common Shares may be outside the Valuation
Range, depending upon financial and market and regulatory conditions at the time
of the completion of the offering. See "THE CONVERSION - Pricing and Number of
Common Shares to be Sold." The expenses are estimated assuming that (a) all of
the indicated number of Common Shares are sold in the Subscription Offering; (b)
the directors, officers and their associates purchase 91,600, 95,500, 99,400 and
103,880 shares at the minimum, mid-point, maximum and maximum, as adjusted, of
the Valuation Range; and (c) the ESOP purchases 4% of the Common Shares sold.
Actual expenses may be more or less than estimated. See "THE CONVERSION - Plan
of Distribution."
PFC will retain 50% of the net proceeds from the sale of the Common
Shares, or $6,210,000 at the mid-point of the Valuation Range, including the
value of a promissory note from the ESOP, which PFC intends to accept in
exchange for the issuance of Common Shares to the ESOP. Such proceeds will be
used to fund the RRP and will be invested in short-term and intermediate-term
government securities. The remainder of the net proceeds received from the sale
of the Common Shares, $6,210,000 at the mid-point of the Valuation Range, will
be invested by PFC in the capital stock to be issued by Peoples Federal to PFC
as a result of the Conversion. Such investment will increase the regulatory
capital of Peoples Federal and will permit Peoples Federal to expand its lending
and investment activities and to enhance customer services. Enhanced customer
services may include automated teller machine and card services. Peoples Federal
has also expanded its hours of operation and established a loan origination
office in the fastest growing area of Stark County.
Peoples Federal anticipates that such net proceeds initially will be
invested in short-term interest-bearing deposits in other financial
institutions. Eventually, however, Peoples Federal will attempt to use the net
proceeds to originate loans, with a particular emphasis on increasing the
percentage of adjustable-rate mortgage loans in its portfolio. Such use will be
consistent with Peoples Federal's effort to improve its interest rate risk
position as well as increase its income. See "BUSINESS OF PEOPLES FEDERAL -
General."
Although PFC and Peoples Federal could use the increase in capital to
acquire other financial institutions or for PFC to repurchase its own
outstanding shares, PFC and Peoples Federal have no current plans or agreements,
written or oral, and are not negotiating, to acquire any other institution and
have no current plans for PFC to repurchase any of its shares.
MARKET FOR COMMON SHARES
There is presently no market for the Common Shares. The aggregate
offering price for the Common Shares is based upon an independent appraisal of
Peoples Federal. The appraisal is not a recommendation as to the advisability of
purchasing Common Shares. See "THE CONVERSION - Pricing and Number of Common
Shares to be Sold." No assurance can be given that persons purchasing Common
Shares will thereafter be able to sell such shares at a price at or above the
offering price.
PFC has received approval to have the Common Shares quoted on the
Nasdaq Small Cap under the symbol "PFFC" upon the closing of the Conversion,
subject to certain conditions which PFC and Peoples Federal believe will be
satisfied, although no assurance can be provided that the conditions will be
met. In connection with such approval, McDonald & Company has informed Peoples
Federal that McDonald & Company intends to make a market in the Common Shares.
No assurance can be given, however, that an active or liquid market for the
Common Shares will develop after the completion of the Conversion or, if such a
market does develop, that such market will continue. Investors should consider,
therefore,
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<PAGE> 23
the potentially illiquid and long-term nature of an investment in the Common
Shares. See "RISK FACTORS - Market for the Common Shares."
DIVIDEND POLICY
The declaration and payment of dividends by PFC will be subject to the
discretion of the Board of Directors of PFC and will be based on the earnings
and financial condition of PFC and general economic conditions. In an effort to
manage the capital of PFC, the Board of Directors may determine that the payment
of a regular or special cash dividend or both may be prudent. No assurance can
be given that any dividend will be declared or that any dividend, if declared,
will continue in the future.
Other than earnings on the investment of the proceeds retained by PFC,
the only source of income of PFC will be dividends periodically declared and
paid by the Board of Directors of Peoples Federal on the common stock of Peoples
Federal held by PFC. The declaration and payment of dividends by Peoples Federal
to PFC will be subject to the discretion of the Board of Directors of Peoples
Federal, to the earnings and financial condition of Peoples Federal, to general
economic conditions and to federal restrictions on the payment of dividends by
thrift institutions. Under regulations of the OTS applicable to converted
associations, Peoples Federal will not be permitted to pay a cash dividend on
its capital stock after the Conversion if its regulatory capital would, as a
result of the payment of such dividend, be reduced below the amount required for
the Liquidation Account or the applicable regulatory capital requirement
prescribed by the OTS. See "THE CONVERSION - Principal Effects of the Conversion
- -- Liquidation Account" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL - Liquidity and Capital
Resources." Peoples Federal may not pay a dividend unless such dividend also
complies with a regulation of the OTS limiting capital distributions by savings
associations. Capital distributions, for purposes of such regulation, include,
without limitation, payments of cash dividends, repurchases and certain other
acquisitions by an association of its shares and payments to stockholders of
another association in an acquisition of such other association.
The capital distribution regulation adopts a 3-tier classification of
associations based upon their capital immediately before and, on a pro forma
basis, after giving effect to the capital distribution. A tier 1 association is
an association which has capital immediately before and after giving effect to a
proposed capital distribution that is equal to or greater than the amount of its
fully phased-in capital requirement. A tier 2 association is an association
which has capital immediately before and after giving effect to a capital
distribution which is equal to or in excess of its minimum capital requirement,
but is less than the amount of its fully phased-in capital requirement. A tier 3
association is an association which fails to meet its minimum capital
requirement immediately before or after giving effect to a capital distribution.
A tier 1 association may make capital distributions equal to up to the
higher of (1) 100% of its net earnings to date during the calendar year in which
the distribution is made, plus the amount that would reduce by one-half its
"surplus capital ratio" at the beginning of the calendar year or (2) 75% of its
net income over the most recent four-quarter period. The "surplus capital ratio"
is the percentage by which an association's capital-to-assets ratio exceeds the
association's ratio of fully phased-in capital requirement to assets. A tier 2
association may make capital distributions up to 75% of its net earnings over
the most recent four-quarter period, if the association meets the current
risk-based capital standard. A tier 3 association may make capital distributions
only with the prior written approval of the District Director of the OTS or in
accordance with an approved capital plan.
If an association meeting the tier 1 criteria has been notified by the
OTS that the association requires more than normal supervision, such association
will be treated as a tier 2 or tier 3 association, unless the OTS determines
that such treatment is not necessary to ensure the association's safe and sound
operation. Moreover, the OTS may prohibit any capital distribution otherwise
permitted by the regulation if the OTS determines that such distribution would
constitute an unsafe or unsound practice. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL -
Liquidity and Capital Resources."
At March 31, 1996, Peoples Federal met the fully phased-in capital
requirement. Other than the earnings on the investment of proceeds retained by
PFC, the only source of income of PFC will be dividends periodically declared
and paid by the Board of Directors of Peoples Federal on the common stock of
Peoples Federal held by PFC. The payment of dividends by Peoples Federal will be
subject to various regulatory restrictions. On a pro forma basis, as of March
31, 1996, assuming (i) receipt by Peoples Federal of $6.2 million of net
conversion proceeds, (ii) the investment of such net proceeds in assets having a
risk weighting of 20% and (iii) the establishment of a Liquidation Account in
the amount of $10.0 million (the regulatory capital of Peoples Federal at March
31, 1996), Peoples Federal would have $6.1 million available for the payment of
dividends to PFC. See "REGULATORY CAPITAL COMPLIANCE."
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<PAGE> 24
CAPITALIZATION
Set forth below is the capitalization of Peoples Federal as of March
31, 1996, and the consolidated pro forma capitalization of PFC, as adjusted to
give effect to the sale of Common Shares based on the Valuation Range and
estimated expenses. A change in the number of Common Shares sold in the
Conversion would materially affect such pro forma capitalization. See "USE OF
PROCEEDS" and "THE CONVERSION - Pricing and Number of Common Shares to be Sold."
<TABLE>
<CAPTION>
Pro forma capitalization of PFC at March 31, 1996,
assuming the sale of:
-------------------------------------------------------------------
1,105,000 1,300,000 1,495,000 1,719,250
Peoples Federal's Common Common Common Common
historical Shares Shares Shares Shares
capitalization (offering (offering (offering (offering
at price of price of price of price of
March 31, 1996 $10 per share) $10 per share) $10 per share) $10 per share)
-------------- -------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1) $67,374 $67,374 $67,374 $67,374 $67,374
======= ======= ======= ======= =======
Borrowings - - - - -
Preferred shares, no par
value: authorized -
1,000,000 shares; assumed - - - - -
outstanding - none
Common Shares, no par value:
authorized - 6,000,000
shares; assumed outstanding - - - - -
- as shown (2)
Additional paid-in capital - 10,507 12,420 14,370 16,613
Unrealized gain on securities 560 560 560 560 560
Less Common Shares acquired by
the ESOP (3) - (442) (520) (598) (688)
Less Common Shares acquired by
the RRP (4) - (442) (520) (598) (688)
Retained earnings (5) $ 9,490 $ 9,490 $ 9,490 $ 9,490 $ 9,490
-------- -------- -------- -------- --------
Total capital and retained earnings $10,050 $19,673 $21,430 $23,224 $25,287
======= ======= ======= ======= =======
- ----------------------------------
<FN>
(1) Withdrawals from deposit accounts for the purchase of Common Shares
have not been reflected in these adjustments. Any deposit withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) The number of Common Shares to be issued will be determined on the
basis of the final valuation of Peoples Federal. See "THE CONVERSION -
Pricing and Number of Common Shares to be Sold." Common Shares assumed
to be outstanding does not reflect the issuance of any Common Shares
reserved for issuance under the Stock Option Plan. See "MANAGEMENT OF
PEOPLES FEDERAL - Stock Option Plan."
(3) Assumes that 4% of the Common Shares sold in connection with the
Conversion will be acquired by the ESOP trust, a separate entity, and
that the funds used to acquire such shares will be borrowed by the ESOP
trust from PFC, with repayment thereof secured solely by the Common
Shares purchased by the ESOP trust. Peoples Federal has agreed,
however, to use its best efforts to fund the ESOP based on future
earnings, which best efforts funding will reduce the total capital and
retained earnings, as reflected in the table. See "MANAGEMENT OF
PEOPLES FEDERAL -Employee Stock Ownership Plan."
(4) Assumes the establishment of the RRP and its acquisition of Common
Shares equal to 4% of the shares sold in the Conversion. The pro forma
table assumes the Common Shares for the RRP will be purchased in the
open market at a price of $10 per share. The Board of Directors may
elect, however, to issue the RRP shares from authorized but unissued
shares. In the event the RRP shares are obtained from authorized but
unissued shares or in the event the RRP is not ratified by the
shareholders of PFC, pro forma shareholders' equity would increase by
$442,000, $520,000, $598,000 and $688,000 at the minimum, mid-point,
maximum and 15% above the maximum of the Valuation Range, respectively.
The issuance of shares to the RRP would have the effect of diluting the
percentage interest of existing shareholders by 3.85%.
(5) Retained earnings are substantially restricted. See "THE CONVERSION -
Principal Effects of the Conversion -Liquidation Account" for
information concerning the Liquidation Account to be established in
connection with the Conversion and "TAXATION - Federal Taxation" for
information concerning restricted retained earnings for federal tax
purposes.
</TABLE>
-10-
<PAGE> 25
PRO FORMA DATA
Set forth below are the pro forma consolidated net earnings of PFC for
the year ended September 30, 1995, and the six months ended March 31, 1996, and
the pro forma shareholders' equity of PFC at such dates, along with the related
pro forma per share amounts, giving effect to the sale of the Common Shares in
connection with the Conversion. The computations are based on the assumed
issuance of 1,105,000 Common Shares (minimum point of the Valuation Range),
1,300,000 Common Shares (mid-point of the Valuation Range), 1,495,000 Common
Shares (maximum point of the Valuation Range) and 1,719,250 Common Shares (15%
above the maximum point of the Valuation Range). See "THE CONVERSION - Pricing
and Number of Common Shares to be Sold." The pro forma data is based on the
following assumptions: (i) the sale of the Common Shares occurred at the
beginning of the periods and yielded the net proceeds indicated; (ii) such net
proceeds were invested by PFC and Peoples Federal at the beginning of the
specified periods at 4.55%; (iii) no withdrawals from existing deposit accounts
were made to purchase the Common Shares; (iv) PFC will accept a promissory note
from the ESOP in exchange for the issuance of Common Shares; and (v) the cash
proceeds retained by PFC will be used to fund the RRP and, pending such
investment, be invested in short-term and intermediate-term government
securities. The assumed return is based upon the market rate for FHLB 90-day
deposits because management intends to invest the initial cash proceeds in
short-term interest-bearing deposits with the FHLB. In calculating pro forma net
earnings, a statutory federal income tax rate of 34% has been assumed for the
period, resulting in an after tax yield of 3.0%. In the opinion of management,
the assumed after-tax yield does not differ materially from the estimated
after-tax yield which will be obtained on the initial investment of the cash
proceeds in short-term, interest-bearing deposits and is viewed as being more
relevant in the current low interest rate environment than the use of an
arithmetic average of the fiscal year 1995 weighted average yield on
interest-earning assets and weighted average rates paid on deposits during such
period. Management also believes that utilization of savings withdrawals to fund
stock purchases would not have a material impact on the pro forma data
presented.
NO ASSURANCE CAN BE PROVIDED THAT THE YIELDS OR RESULTS SET FORTH IN
THE PRO FORMA DATA WILL BE ACHIEVED ON INVESTMENT OF THE CONVERSION PROCEEDS.
MOREOVER, THE PRO FORMA NET EARNINGS AMOUNTS DERIVED FROM THE ASSUMPTIONS SET
FORTH HEREIN SHOULD NOT BE CONSIDERED INDICATIVE OF THE ACTUAL RESULTS OF
OPERATIONS OF PFC THAT WOULD HAVE BEEN ATTAINED FOR ANY PERIOD IF THE CONVERSION
HAD BEEN ACTUALLY CONSUMMATED AT THE BEGINNING OF SUCH PERIOD. FURTHER, THE
RATIO OF SHARE OFFERING PRICE TO THE PRO FORMA BOOK VALUE IS NOT REPRESENTATIVE
OF ANY POTENTIAL PRICE APPRECIATION ON THE COMMON SHARES. NO EFFECT HAS BEEN
GIVEN IN THE PRO FORMA SHAREHOLDERS' EQUITY FOR ANY ASSUMED EARNINGS ON THE NET
PROCEEDS OF THE CONVERSION.
-11-
<PAGE> 26
<TABLE>
<CAPTION>
At or for the year ended September 30, 1995
-----------------------------------------------------------------------------------
1,105,000 1,300,000 1,495,000 1,719,250
Common Shares Common Shares Common Shares Common Shares
(offering price of (offering price of (offering price of (offering price of
$10 per share) $10 per share) $10 per share) $10 per share)(1)
------------------ ------------------ ------------------ --------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $11,050 $13,000 $14,950 $17,193
Less offering expenses and commissions (543) (580) (580) (580)
-------- ------- ------- -------
Estimated conversion proceeds 10,507 12,420 14,370 16,613
Less common shares acquired by ESOP (442) (520) (598) (688)
Less common shares acquired by RRP (442) (520) (598) (688)
-------- -------- ------- -------
Net cash proceeds $ 9,623 $ 11,380 $13,174 $15,237
======== ======== ======= =======
Consolidated net income:
Historical net income $ 394 $ 394 $ 394 $ 394
Pro forma income on net proceeds (2) 289 341 395 457
Pro forma ESOP adjustment (3) (42) (49) (56) (64)
Pro forma RRP adjustment (4) (58) (68) (79) (91)
--------- ---------- ------------ -----------
Pro forma net income $ 583 $ 618 $ 654 $ 696
========= ========== ========== =========
Per share net income: (5)
Historical net income (6) $ .36 $ .31 $ .26 $ .23
Pro forma income on net proceeds (2) .26 .26 .27 .27
Pro forma ESOP adjustment (3) (.04) (.04) (.04) (.04)
Pro forma RRP adjustment (4) (.05) (.05) (.05) (.05)
----------- ----------- ------------ -----------
Pro forma net income per share $ .53 $ .48 $ .44 $ .41
=========== =========== =========== ===========
Offering price to pro forma net income
per share annualized ("P/E Ratio") 18.87 x 20.83 x 22.73 x 24.39 x
========== ========== ========== =========
Shareholders' equity: (7)
Historical $ 9,882 $ 9,882 $ 9,882 $ 9,882
Estimated conversion proceeds 10,507 12,420 14,370 16,613
Less Common Shares acquired by:
ESOP (3) (442) (520) (598) (688)
RRP (4) (442) (520) (598) (688)
---------- ---------- ---------- ----------
Pro forma shareholders' equity $19,505 $21,262 $23,056 $25,119
======= ======= ======= =======
Shareholders' equity per share:
Historical (6) $ 8.94 $ 7.60 $ 6.61 $ 5.75
Estimated conversion proceeds 9.51 9.56 9.61 9.66
Less Common Shares acquired by:
ESOP (8) (.40) (.40) (.40) (.40)
RRP (4) (.40) (.40) (.40) (.40)
------------ ----------- ----------- -----------
Pro forma shareholders' equity per $ 17.65 $ 16.36 $ 15.42 $ 14.61
========= ======== ======== ========
share
Offering price as a percentage of pro
forma shareholders' equity per share 56.66% 61.12% 64.85% 68.45%
========== ========= ========= =========
<FN>
- -------------------------------------
(1) Reflects an increase in the number of shares which could occur due to an
increase in the Valuation Range of up to 15% to reflect changes in market
and financial conditions following the commencement of the Subscription and
Community Offerings.
(2) Pro forma net income is calculated using pro forma income earned on net
cash proceeds, as discussed above.
(3) It is assumed that 4% of the Common Shares sold in connection with the
Conversion will be acquired by the ESOP trust from PFC, with repayment
thereof secured solely by the Common Shares purchased by the ESOP trust.
Peoples Federal intends to make contributions to the ESOP in amounts equal
to the principal and interest requirement of the debt. Peoples Federal's
payment of the ESOP debt is based upon equal installments of principal over
a seven-year period, plus interest. Interest income earned by PFC on the
ESOP debt offsets the interest paid by Peoples Federal on the ESOP loan.
Accordingly, only the principal payments on the ESOP debt are recorded as
an expense (tax-effected) to PFC on a consolidated basis. The amount
borrowed is reflected as a reduction of shareholders' equity. No
reinvestment is assumed on proceeds contributed to fund the ESOP. The ESOP
expense has been computed in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-6 ("SOP 93-6"),
which requires recognition of expense based upon shares committed to be
released as security for the loan. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Impact of New
Accounting Standards." The valuation of shares committed to be released is
based upon the average market value of the shares during the year, which
for purposes of this calculation was assumed to be equal to the $10 per
share offering price. See "MANAGEMENT OF PEOPLES FEDERAL -- Employee Stock
Ownership Plan."
</TABLE>
(Footnotes continued on next page)
-12-
<PAGE> 27
(4) Assumes the establishment of the RRP and its acquisition of Common Shares
equal to 4% of the shares sold in the Conversion. The pro forma table
assumes the Common Shares for the RRP will be purchased in the open market
at a price of $10 per share. The effect reported on pro forma consolidated
net income includes the expense related to the vested RRP shares as well as
the reduction in income due to a decline in cash proceeds available for
investment. The Board of Directors may elect, however, to issue to the RRP
authorized but unissued shares. In the event RRP shares are obtained from
authorized but unissued shares, pro forma net income per share would
decrease $.02 at each level of the Estimated Valuation Range. See
"MANAGEMENT OF PEOPLES FEDERAL - Recognition and Retention Plan and Trust."
The issuance of shares to the RRP would have the effect of diluting the
percentage interest of existing shareholders by 3.85%. In the event the RRP
is not approved by the shareholders of PFC, pro forma net income per share
would increase $.05 at each level of the Estimated Valuation Range. In the
event RRP shares are obtained from authorized but unissued shares or in the
event the RRP is not ratified by shareholders, pro forma book value per
share would increase by $.40 per share at each level of Estimated Valuation
Range. No effect has been given to the shares reserved for issuance under
the Stock Option Plan.
(5) Per share amounts are based upon the weighted average number of shares
outstanding of 1,105,000, 1,300,000, 1,495,000 and 1,719,500 at the
minimum, mid-point, maximum and 15% above the maximum of the Valuation
Range, respectively.
(6) Historical per share amounts have been computed as if the Common Shares
expected to be issued in the Conversion had been outstanding during the
period or on the dates shown, but without any adjustments of historical net
income or historical retained earnings to reflect the investment of the
estimated net proceeds of the sale of shares in the Conversion or the
additional ESOP or RRP expense. At September 30, 1995, per share amounts
are based upon shares outstanding of 1,105,000, 1,300,000, 1,495,000 and
1,719,500 at the minimum, mid-point, maximum and 15% above the maximum of
the Valuation Range, respectively.
(7) The effect of the Liquidation Account is not included in these
computations. For additional information concerning the Liquidation
Account, see "THE CONVERSION -- Principal Effects of the Conversion --
Liquidation Account." The amounts shown do not reflect the federal income
tax consequences of the potential restoration of the bad debt reserves to
income for tax purposes, which would be required in the event of
liquidation. See "TAXATION -- Federal Taxation."
(8) Not intended to represent or suggest possible future appreciation or
depreciation of Common Shares.
-13-
<PAGE> 28
<TABLE>
<CAPTION>
At or for the six months ended March 31, 1996
--------------------------------------------------------------------------------------
1,105,000 1,300,000 1,495,000 1,719,250
Common Shares Common Shares Common Shares Common Shares
(offering price of (offering price of (offering price of (offering price of
$10 per share) $10 per share) $10 per share) $10 per share)(1)
--------------------- --------------------- ------------------ --------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 11,050 $ 13,000 $ 14,950 $ 17,193
Less offering expenses and commissions (543) (580) (580) (580)
-------- -------- -------- --------
Estimated conversion proceeds 10,507 12,420 14,370 16,613
Less common shares acquired by ESOP (442) (520) (598) (688)
Less common shares acquired by RRP (442) (520) (598) (688)
-------- -------- -------- --------
Net cash proceeds $ 9,623 $ 11,380 $ 13,174 $ 15,237
======== ======== ======== ========
Consolidated net income:
Historical net income $ 112 $ 112 $ 112 $ 112
Pro forma income on net proceeds (2) 144 170 197 228
Pro forma ESOP adjustment (3) (21) (25) (28) (32)
Pro forma RRP adjustment (4) (29) (34) (40) (46)
-------- -------- -------- --------
Pro forma net income $ 206 $ 223 $ 241 $ 262
======== ======== ======== ========
Per share net income: (5)
Historical net income (6) $ .11 $ .09 $ .08 $ .07
Pro forma income on net proceeds (2) .13 .13 .13 .13
Pro forma ESOP adjustment (3) (.02) (.02) (.02) (.02)
Pro forma RRP adjustment (4) (.03) (.03) (.03) (.03)
-------- -------- -------- --------
Pro forma net income per share $ .19 $ .17 $ .16 $ .15
======== ======== ======== ========
Offering price to pro forma net income
per share annualized ("P/E Ratio") 26.32 x 29.41 x 31.25 x 33.33 x
======== ======== ======== ========
Shareholders' equity: (7)
Historical $ 10,050 $ 10,050 $ 10,050 $ 10,050
Estimated conversion proceeds 10,507 12,420 14,370 16,613
Less Common Shares acquired by:
ESOP (3) (442) (520) (598) (688)
RRP (4) (442) (520) (598) (688)
-------- -------- -------- --------
Pro forma shareholders' equity $19,673 $ 21,430 $ 23,224 $ 25,287
======== ======== ======== ========
Shareholders' equity per share:
Historical (6) $ 9.09 $ 7.73 $ 6.72 $ 5.85
Estimated conversion proceeds 9.51 9.55 9.61 9.66
Less Common Shares acquired by
ESOP (8) (.40) (.40) (.40) (.40)
RRP (4) (.40) (.40) (.40) (.40)
-------- -------- -------- --------
Pro forma shareholders' equity per share $ 17.80 $ 16.48 $ 15.53 $ 14.71
======== ======== ======== ========
Offering price as a percentage of pro
forma shareholders' equity per share 56.18% 60.68% 64.39% 67.98%
======== ======== ======== ========
- -------------------------------------
<FN>
(1) Reflects an increase in the number of shares which could occur due to
an increase in the Valuation Range of up to 15% to reflect changes in
market and financial conditions following the commencement of the
Subscription and Community Offerings.
(2) Pro forma net income has been calculated using pro forma income earned
on net cash proceeds.
(3) It is assumed that 4% of the Common Shares sold in connection with the
Conversion will be acquired by the ESOP trust from PFC, with repayment
thereof secured solely by the Common Shares purchased by the ESOP
trust. Peoples Federal intends to make contributions to the ESOP in
amounts equal to the principal and interest requirement of the debt.
Peoples Federal's payment of the ESOP debt is based upon equal
installments of principal over a seven-year period, plus interest.
Interest income earned by PFC on the ESOP debt offsets the interest
paid by Peoples Federal on the ESOP loan. Accordingly, only the
principal payments on the ESOP debt are recorded as an expense
(tax-effected) to PFC on a consolidated basis. The amount borrowed is
reflected as a liability and a reduction of shareholders' equity. No
reinvestment is assumed on proceeds contributed to fund the ESOP. The
ESOP expense has been computed in accordance with the American
Institute of Certified Public Accountants' SOP 93-6, which requires
recognition of expense based upon shares committed to be released as
security for the loan. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL Impact
of New Accounting Standards." The valuation of shares committed to be
released is based upon the average market value of the shares during
the year, which for purposes of this calculation was assumed to be
equal to the $10 per share offering price. See "MANAGEMENT OF PEOPLES
FEDERAL -- Employee Stock Ownership Plan."
(4) Assumes the establishment of the RRP and its acquisition of Common
Shares equal to 4% of the shares sold in the Conversion. The pro forma
table assumes the Common Shares for the RRP will be purchased in the
open market at a price of $10 per share. The effect reported on pro
forma consolidated net income includes the expense related to the
vested RRP shares as well as the reduction in income due to a decline
in cash proceeds available for investment. The Board of Directors may
elect, however, to issue to the RRP authorized but unissued shares. In
the event RRP shares are obtained from authorized but unissued shares,
pro forma net income per share would not decrease at each level of the
Estimated Valuation Range. See "MANAGEMENT OF PEOPLES FEDERAL -
Recognition and Retention Plan and Trust." The issuance of shares to
the RRP would have the effect of diluting the percentage interest of
existing shareholders by 3.85%. In the event the RRP is not approved by
the shareholders of PFC, pro forma net income per share would increase
$.02 at each level of the Estimated Valuation Range. In the event RRP
shares are obtained from authorized but unissued shares or in the event
the RRP is not ratified by shareholders, pro forma book value per share
would increase by $.40 per share at each level of Estimated Valuation
Range. No effect has been given to the shares reserved for issuance
under the Stock Option Plan.
</TABLE>
(Footnotes continued on next page)
-14-
<PAGE> 29
(5) Per share amounts are based upon shares outstanding of 1,105,000,
1,300,000, 1,495,000 and 1,719,500 at the minimum, mid-point, maximum
and 15% above the maximum of the Valuation Range, respectively.
(6) Historical per share amounts have been computed as if the Common Shares
expected to be issued in the Conversion had been outstanding during the
period or on the dates shown, but without any adjustments of historical
net income or historical retained earnings to reflect the investment of
the estimated net proceeds of the sale of shares in the Conversion or
the additional ESOP or RRP expense. At March 31, 1996, per share
amounts are based upon shares outstanding of 1,105,000, 1,300,000,
1,495,000 and 1,719,500 at the minimum, mid-point, maximum and 15%
above the maximum of the Valuation Range, respectively.
(7) The effect of the Liquidation Account is not included in these
computations. For additional information concerning the Liquidation
Account, see "THE CONVERSION -- Principal Effects of the Conversion --
Liquidation Account." The amounts shown do not reflect the federal
income tax consequences of the potential restoration of the bad debt
reserves to income for tax purposes, which would be required in the
event of liquidation. See "TAXATION -- Federal Taxation."
(8) Not intended to represent or suggest possible future appreciation or
depreciation of Common Shares.
-15-
<PAGE> 30
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
The following Summary Consolidated Statements of Income set forth
information concerning Peoples Federal for the periods indicated:
<TABLE>
<CAPTION>
Six months ended
March 31, Year ended September 30,
-------------------- -------------------------------------
1996 1995 1995 1994 1993
------- ------- ------ ------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest on loans $1,568 $1,553 $3,103 $3,283 $3,827
Interest on mortgage-backed and related
securities 807 696 1,466 1,246 1,569
Interest on investments and deposits 372 393 790 621 529
------- ------- ------ ------- ------
2,747 2,642 5,359 5,150 5,925
Interest expense:
Interest on deposits 1,721 1,484 3,142 3,120 3,540
------- ------- ------ ------- ------
Net interest income 1,026 1,158 2,217 2,030 2,385
Provision for loan losses 105 - 12 5 21
------- ------- ------ ------- ------
Net interest income after provision for
loan losses 921 1,158 2,205 2,025 2,364
Noninterest income 12 13 23 27 49
Noninterest expense 773 872 1,657 1,498 1,440
------- ------- ------ ------- ------
Income before income tax 160 299 571 554 973
Income tax expense 48 92 177 175 315
------- ------- ------ ------- ------
Net income $ 112 $ 207 $ 394 $ 379 $ 658
======= ======= ====== ======= ======
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PEOPLES FEDERAL
Peoples Federal is primarily engaged in the business of attracting
savings deposits from the general public and investing such funds in permanent
mortgage loans secured by one- to four-family residential real estate located
primarily within Stark County, Ohio, and adjacent counties and in U.S.
Government obligations, interest-bearing deposits in other financial
institutions, mortgage-backed and related securities, automobile pass-through
certificates and other investments permitted by applicable law. Peoples Federal
also originates loans for the construction of one- to four-family residential
real estate, loans secured by multifamily real estate (over four units) and
nonresidential real estate and consumer loans.
ANALYSIS OF FINANCIAL CONDITION
GENERAL. Peoples Federal's assets totaled $77.3 million at September
30, 1995, an increase of $2.0 million, or 2.6%, from $75.3 million at September
30, 1994. The principal changes in the composition of assets during the year
ended September 30, 1995, consisted of increases in loans receivable and
mortgage-backed and related securities, offset by decreases in investment
securities held to maturity and in deposits in the FHLB.
Assets totaled $78.1 million at March 31, 1996, an increase of
$800,000, or 1.0%, from $77.3 million at September 30, 1995. Loan growth, funded
primarily by principal repayments of mortgage-backed and investment securities,
accounted for such increase in assets.
CASH AND CASH EQUIVALENTS, INVESTMENT SECURITIES AND MORTGAGE-BACKED
SECURITIES. Cash and cash equivalents, investment securities, mortgage-backed
and related securities and FHLB stock increased to $37.3 million at September
30,
-16-
<PAGE> 31
1995, from $36.3 million at September 30, 1994. At March 31, 1996, such
equivalents, securities and stock equalled $37.6 million, a $300,000 increase
from September 30, 1995.
The reason for the increase in cash and cash equivalents, investment
securities and mortgage-backed and related securities since September 30, 1995,
is related to the decline in mortgage lending during the early 1990's. See
"BUSINESS OF PEOPLES FEDERAL - General." Mortgage-backed and related securities
include FHLMC, Government National Mortgage Association ("GNMA") and FNMA
mortgaged-backed securities and collateralized mortgage obligations ("CMOs"), as
well as some privately issued mortgage-backed securities. Investment securities
are composed of municipal securities, corporate debt securities secured by
automobile loans, United States government agency securities and FHLMC common
stock.
At September 30, 1995, all of Peoples Federal's mortgage-backed and
related securities were classified as held to maturity. During the three months
ended December 31, 1995, however, management reclassified certain
mortgage-backed and related securities with total market values at March 31,
1996, of $13.2 million from held to maturity to available for sale. In addition,
during the same three-month period, management reclassified Peoples Federal's
corporate debt securities from held to maturity to available for sale.
Investment securities held to maturity decreased by $1.2 million during the six
months ended March 31, 1996, in part due to the reclassification of Peoples
Federal's corporate debt securities as available for sale, while principal
repayments equalled $117,000. The market value of investment securities
classified as available for sale increased by a net amount of $933,000 due to an
increase in the value of FHLMC stock of $221,000, offset by a decrease in the
value of auto loan pass-through certificates of $33,000.
At March 31, 1996, $15.5 million of Peoples Federal's $23.3 million in
mortgage-backed and related securities were variable-rate securities, adjusting
at least annually. Peoples Federal has not sold investment or mortgage-backed
and related securities since October 1, 1992. Management does not presently
expect to sell any material amount of such securities in any future period.
LOANS RECEIVABLE. Net loans receivable equalled $38.0 million at
September 30, 1995, an increase from $37.1 million at September 30, 1994. While
the total amount of loans secured by one- to four-family first mortgages
decreased from $32.6 million at September 30, 1994, to $31.9 million at
September 30, 1995, the amount of all other real estate loans increased. The
modest increase in net loans for the year ended September 30, 1995, was achieved
by offering competitive, long-term fixed rates of interest. Peoples Federal's
consumer loan portfolio increased to $418,000 at September 30, 1995, from
$229,000 at September 30, 1994. Most of this increase in consumer loans since
September 30, 1994, resulted from the offering of more competitive rates on
consumer loans.
Net loans receivable increased to $38.3 million at March 31, 1996, an
increase of $300,000 from the $38.0 million in loans receivable at September 30,
1995.
As of September 30, 1995, Peoples Federal had no loans which would be
defined as impaired under SFAS No. 114 of the Financial Accounting Standards
Board ("FASB"). See "Impact of New Accounting Standards." Peoples Federal
considers its investment in one- to four-family loans, multi-family residential
loans and consumer installment loans to be homogeneous and, therefore, excluded
from separate identification for evaluation of impairment.
In April 1996, Peoples Federal placed three nonperforming and
nonaccruing loans, with total remaining unpaid balances of $572,000, in
foreclosure. With first mortgages securing the loans, Peoples Federal is in the
first secured creditor position with regard to all of the properties. The
properties are expected to be sold at a sheriff's sale during 1996 or 1997.
Management believes Peoples Federal has a sufficient amount in its allowance for
loan losses to cover any loss ultimately incurred on these loans.
DEPOSITS. Total deposits increased $800,000, or 1.2%, from $65.8
million at September 30, 1994, to $66.6 million at September 30, 1995. Increases
in deposits were attributable to the offer by Peoples Federal of more
competitive rates on longer-term deposits. Certificates of deposit increased by
$2.3 million during the year ended September 30, 1995. Substantially all of the
time deposits held by Peoples Federal mature in five years or less, with a large
portion being held in 24-month certificates.
-17-
<PAGE> 32
Deposits increased to $67.4 million at March 31, 1996, an $800,000, or
1.2%, increase from the $66.6 million in deposits at September 30, 1995.
Management has offered interest on deposits at rates designed to maintain
deposits and the cost of funds near current levels.
Negotiable order of withdrawal ("NOW") accounts, which pay lower
interest rates than passbook savings accounts and certificates of deposit,
increased to 1.6% of total deposits at September 30, 1995, from 1.3% of total
deposits at September 30, 1994. Money market deposit accounts decreased to 5.6%
at September 30, 1995, from 6.7% of total deposits at September 30, 1994, due to
a lowering of rates paid on such accounts.
NOW accounts and passbook savings accounts increased to 2.3% and 19.2%
of total deposits, respectively, at March 31, 1996, from 1.6% and 18.7% of total
deposits, respectively, at September 30, 1995. Money market accounts decreased
from 5.6% to 5.3% of total deposits from September 30, 1995, to March 31, 1996.
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. The operating results of Peoples Federal are affected by
general economic conditions, the monetary and fiscal policies of U.S. government
agencies and the regulatory policies of agencies which regulate financial
institutions. The net income of Peoples Federal is primarily dependent upon its
net interest income, which is the difference between interest earned on loans
and other interest-earning assets and interest expense incurred on customers'
deposits. Net income is also affected by provisions for loan losses,
non-interest income, non-interest expense and federal income taxes. Peoples
Federal's lending activities are influenced by the demand for real estate loans
and other types of loans, interest rates of local competitors, and general
economic conditions. Throughout the years ended September 30, 1995, 1994 and
1993, Peoples Federal had funds available for its lending activities and has
never borrowed funds. The cost of funds is influenced by interest rates on
competing investments and general market rates of interest.
For the year ended September 30, 1995, the net income of Peoples
Federal equalled $394,000, a $15,000 increase over the $379,000 net income for
the year ended September 30, 1994. For the year ended September 30, 1993, the
net income of Peoples Federal equalled $658,000. The $279,000 decrease in net
income between September 30, 1993 and 1994, was attributable primarily to a
decrease in net interest income.
For the six months ended March 31, 1996, the net income of Peoples
Federal equalled $112,000, a $95,000 decrease from the $207,000 net income for
the six months ended March 31, 1995. The primary reasons for the 45.9% decrease
in net income for the comparative six-month periods included a $132,000, or
11.4%, decrease in net interest income, offset by a $99,000, or 11.4%, decrease
in noninterest expense, and the $105,000 provision for loan losses during the
six months ended March 31, 1996. See "Provision for Loan Losses." Peoples
Federal made no provision for loan losses during the six months ended March 31,
1995.
NET INTEREST INCOME
FISCAL YEAR ENDED SEPTEMBER 30, 1995, COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1994. Net interest income is the largest component of Peoples
Federal's net income and is affected by local interest rates and the amount and
types of interest-earning assets and deposits of Peoples Federal. The net
interest income of Peoples Federal increased from $2.0 million for the year
ended September 30, 1994, to $2.2 million for the year ended September 30, 1995.
Interest earned on loans decreased from $3.3 million for the year ended
September 30, 1994, to $3.1 million for the year ended September 30, 1995.
Although loan balances increased in the last four months of the year ended
September 30, 1995, the average outstanding balance decreased from $37.3 million
for fiscal year 1994 to $37.0 million for the year ended September 30, 1995. Due
to the origination of new loans at lower rates, the average interest yield on
such loans decreased from 8.80% at September 30, 1994, to 8.39% at September 30,
1995.
Interest earned on mortgage-backed and related securities increased
from $1.2 million for the year ended September 30, 1994, to $1.5 million for the
year ended September 30, 1995. The average outstanding balance of
mortgage-backed and related securities decreased by $35,000, but the average
interest yield increased by .94% from 5.25% for the year ended September 30,
1994, to 6.19% for the year ended September 30, 1995, as rates on
adjustable-rate mortgage-backed and related securities adjusted upward.
-18-
<PAGE> 33
Interest earned on deposits in the FHLB increased from $92,000 for the
year ended September 30, 1994, to $118,000 for the year ended September 30,
1995. As maturing FHLB deposits were used to fund decreases in customer deposits
and to purchase investment securities, the average outstanding balance of
deposits in the FHLB decreased by $673,000 for fiscal year 1995 compared to
fiscal year 1994. The average interest yield increased from 3.47% to 5.92% as
Peoples Federal purchased FHLB certificates of deposit with higher interest
rates in late fiscal year 1994 and early fiscal year 1995. Interest earned on
investment securities increased from $529,000 for the year ended September 30,
1994, to $672,000 for the year ended September 30, 1995. The average outstanding
balance of investment securities increased by $339,000 for the year ended
September 30, 1995, and the average interest yield increased from 4.93% to
6.08%.
Interest paid on deposits increased from $3.12 million for the year
ended September 30, 1994, to $3.14 million for the year ended September 30,
1995. The average outstanding balance of deposits decreased from $67.3 million
during the year ended September 30, 1994, to $65.4 million during the year ended
September 30, 1995, but the average interest rate paid increased from 4.64% in
fiscal year 1994 to 4.81% in fiscal year 1995, as Peoples Federal attempted to
maintain funds for loans and investments while controlling its interest cost.
FISCAL YEAR ENDED SEPTEMBER 30, 1994, COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1993. The net interest income of Peoples Federal decreased from
$2.4 million for the year ended September 30, 1993, to $2.0 million for the year
ended September 30, 1994. Interest earned on loans decreased from $3.8 million
for the year ended September 30, 1993, to $3.3 million for the year ended
September 30, 1994. The average outstanding balance of loans decreased from
$39.1 million during the year ended September 30, 1993, to $37.3 million during
the year ended September 30, 1994, due to prepayments and refinancing of higher
rate loans, and the average interest yield for the period decreased from 9.78%
to 8.80% as interest rates decreased locally.
Interest earned on mortgage-backed and related securities decreased
from $1.6 million for the year ended September 30, 1993, to $1.2 million for the
year ended September 30, 1994. The average outstanding balance decreased from
$24.7 million during the year ended September 30, 1993, to $23.7 million during
the year ended September 30, 1994, and the average interest yield decreased from
6.36% to 5.25% as Peoples Federal used principal repayments to fund decreases in
customer deposits and to purchase investment securities.
Interest earned on deposits in the FHLB decreased from $165,000 for the
year ended September 30, 1993, to $92,000 for the year ended September 30, 1994.
The average outstanding balance decreased by $3.0 million, while the average
interest yield increased from 2.92% for the year ended September 30, 1993, to
3.47% for the year ended September 30, 1994. Interest earned on investment
securities increased from $364,000 for the year ended September 30, 1993, to
$529,000 for the year ended September 30, 1994. The average outstanding balance
on such securities increased by $5.2 million from the year ended September 30,
1993, to the year ended September 30, 1994, as the funds from matured
interest-bearing deposits and loan principal repayments were used to purchase
investment securities. The average interest yield on such balance decreased from
6.59% to 4.93%.
Interest paid on deposits decreased from $3.5 million for the year
ended September 30, 1993, to $3.1 million for the year ended September 30, 1994.
The average outstanding balance of deposits decreased from $68.0 million in
fiscal year 1993 to $67.3 million in fiscal year 1994, and the average interest
rate paid decreased from 5.21% to 4.64% as Peoples Federal attempted to control
its interest cost.
SIX MONTHS ENDED MARCH 31, 1996, COMPARED TO SIX MONTHS ENDED MARCH 31,
1995. The net interest income of Peoples Federal decreased from $1.2 million for
the six months ended March 31, 1995, to $921,000 for the six months ended March
31, 1996. Interest on loans was $1.6 million for the six months ended March 31,
1995, and March 31, 1996. The average outstanding balance of loans receivable
increased from $36.7 million for the six months ended March 31, 1995, to $38.0
million for the six months ended March 31, 1996. The interest yields on such
balances equalled 8.46% and 8.24% for the six months ended March 31, 1995 and
1996, respectively.
Interest earned on mortgage-backed and related securities increased
from $696,000 for the six months ended March 31, 1995, to $807,000 for the six
months ended March 31, 1996. Additional mortgage-backed and related securities
were purchased, resulting in an increased average outstanding balance of $24.4
million for the six months ended March 31, 1996, compared to $22.0 million for
the six months ended March 31, 1995. The interest yield increased from 6.33% to
6.62% due to the resetting of interest rates on adjustable-rate securities,
partially offset by generally lower rates on new mortgage-backed and related
securities purchased.
-19-
<PAGE> 34
Interest earned on interest-bearing deposits in the FHLB increased from
$61,000 for the six months ended March 31, 1995, to $102,000 for the six months
ended March 31, 1996. The average outstanding balance increased by $2.0 million,
while the interest yield decreased from 5.78% to 4.89%.
Interest earned on investment securities decreased from $332,000 for
the six months ended March 31, 1995, to $270,000 for the six months ended March
31, 1996. The average outstanding balance of investment securities decreased by
$2.8 million for the six months ended March 31, 1996, as average outstanding
balances of interest-earning deposits in the FHLB, mortgage-backed and related
securities and loans receivable increased. The average interest yield on
investment securities increased from 5.52% for the six-month period in fiscal
year 1995 to 5.83% for the six-month period in fiscal year 1996.
Interest paid on deposits increased from $1.5 million for the six
months ended March 31, 1995, to $1.7 million for the six months ended March 31,
1996. Interest rates paid were generally increased to generate funds to
originate loans and maintain investments. As a result, the average outstanding
balance increased from $64.8 million to $67.0 million, and the average interest
rate paid increased from 4.58% to 5.14%.
PROVISION FOR LOAN LOSSES. Peoples Federal maintains an allowance for
loan losses in an amount which, in management's judgment, is adequate to absorb
reasonably foreseeable losses inherent in the loan portfolio. While management
utilizes its best judgment and information available in maintaining the
allowance, the ultimate adequacy of the allowance is dependent upon a variety of
factors, including the performance of Peoples Federal's loan portfolio, the
economy, changes in real estate values and interest rates and the view of
regulatory agencies toward loan classifications. The provision for loan losses
is determined by management as the amount to be added to the allowance for loan
losses after net charge-offs have been deducted to increase the allowance to a
level which is considered adequate to absorb losses inherent in the loan
portfolio in accordance with generally accepted accounting principles ("GAAP").
The amount of the provision is based on management's regular review of the loan
portfolio and consideration of such factors as historical loss experience,
general prevailing economic conditions, changes in the size and composition of
the loan portfolio, and specific borrower considerations, including the ability
to repay the loan and the estimated value of the underlying collateral.
Peoples Federal experienced no charge-offs during the year ended
September 30, 1995, or during the six-month periods ended March 31, 1995 and
1996. Charge-offs of $5,000 and $21,000 were recorded in the years ended
September 30, 1994 and 1993, respectively. This relatively low charge-off
history of Peoples Federal is the result of a variety of factors, including the
composition of Peoples Federal's loan portfolio and underwriting guidelines. At
September 30, 1995, for example, loans secured by real estate made up 98.9% of
Peoples Federal's loan portfolio, and loans secured by first mortgages on one-
to four-family residential real estate, including construction loans,
constituted 87.8% of total loans.
Notwithstanding the historical charge-off history, however, management
believes that the continuation of periodic increases in the allowance for loan
losses is prudent as total loans, including particularly multifamily,
nonresidential real estate and consumer loans increase. Consistent with such
belief, provisions of $12,000, $5,000 and $21,000 were charged against income
during the years ended September 30, 1995, 1994 and 1993, respectively, and a
provision of $105,000 was recorded for the six months ended March 31, 1996.
Peoples Federal increased the allowance during the quarter ended December 31,
1995, as a result of the increase in nonperforming loans over the previous 15
months. Nonperforming nonresidential real estate loans increased by $572,000,
and nonperforming residential real estate loans increased by $109,000 during
such fifteen-month period. One nonperforming residential real estate loan in the
amount of $62,000 was repaid in full in May 1996. The ratio of nonperforming
loans to total loans was 1.73%, 1.62% and .02% at March 31, 1996, and September
30, 1995 and 1993, respectively. Peoples Federal had no nonperforming loans at
September 30, 1994. See "THE BUSINESS OF PEOPLES FEDERAL - Lending Activities -
Allowance for Loan Losses."
At March 31, 1996, and September 30, 1995, 1994 and 1993, Peoples
Federal had no real estate owned.
NONINTEREST INCOME. Noninterest income consists of mortgage and home
equity loan late charges and service fees. Noninterest income totaled $23,000
and $27,000 in the years ended September 30, 1995 and 1994, respectively. A
decrease in service charges and other fees of $14,000 from the year ended
September 30, 1993, to the year ended September 30, 1994, was a result of the
elimination of service charges on inactive and low balance savings accounts for
competitive reasons.
-20-
<PAGE> 35
Noninterest income totaled $12,000 and $13,000 for the six months ended
March 31, 1996 and 1995, respectively. Such income consisted primarily of
mortgage and home equity late charges and service fees.
NONINTEREST EXPENSE. Noninterest expense increased $159,000, or 10.6%,
between the year ended September 30, 1994, and the year ended September 30,
1995. Salaries and employee benefits decreased during such period by $4,000.
Normal merit increases, a provision for an officer retirement payment and
increased salaries resulting from extended office hours were offset by a
decrease in total compensation due to the elimination of the retired officer's
salary, a reduction in employee health care costs and a decrease in retirement
plan costs resulting from a 1994 excess provision. Data processing expense
increased $31,000 during the year ended September 30, 1995, in large part due to
cancellation charges from Peoples Federal's prior service bureau. An advertising
firm was engaged to promote Peoples Federal, which resulted in an increase of
$29,000 during such period for the first usage of outdoor, radio and television
advertising and printing brochures.
Noninterest expense increased $58,000, or 4.0%, during the year ended
September 30, 1994, compared to the year ended September 30, 1993. Salaries and
employee benefits increased by $133,000. Retirement plan costs increased by
$15,000 due to a change in the formula used to compute the contributions of
Peoples Federal to the plan. In addition, a provision for retirement plan costs
of $15,000 was charged to expense in the year ended September 30, 1994, and
reversed the following year when the contribution was finally determined. The
remainder of the increase in salaries and employee benefits was due to the
provision for an officer retirement payment, normal merit increases, the hiring
of a new employee and the cost of benefits for the new employee. Management
expects that future increases will result primarily from annual merit increases
and the addition of employees as deemed necessary. Salaries and employee
benefits are expected to total $764,000 for the year ended September 30, 1996,
representing a 10.9% increase from fiscal year 1995.
Noninterest expense decreased by $99,000 for the six months ended March
31, 1996, compared to the same period in 1995. Loan costs deferred on new loans
originated during the six months ended March 31, 1996, were $43,000. No loan
costs were deferred on new loans during the six months ended March 31, 1995.
Other principal decreases in noninterest expense were $12,000 in advertising,
$9,000 in data processing and $4,000 in salaries and employee benefits. Outdoor
and certain media advertising costs incurred during the six months ended March
31, 1995, were not repeated in 1996, and data processing costs were higher in
1995 due to the contract cancellation fees. Salaries and employee benefits
decreased due to provision for an officer retirement payment recorded in the six
months ended March 31, 1995, offset by the cost of new employees and normal
merit increases incurred in the six months ended March 31, 1996. The principal
increase in noninterest expense was $16,000 in occupancy and equipment expense
due to additional building maintenance.
INCOME TAX EXPENSE. Effective October 1, 1991, Peoples Federal
retroactively adopted SFAS No. 109 "Accounting for Income Taxes," which had no
material effect on income for prior years. Annual income tax expense changed
primarily in relation to net income before income taxes.
Income tax expense was $177,000 for the year ended September 30, 1995,
$175,000 for the year ended September 30, 1994, and $315,000 for the year ended
September 30, 1993, which, stated as a percentage of income before federal taxes
on income, was 31.0%, 31.6% and 32.4%, respectively.
SATELLITE OFFICES. Peoples Federal has leased facilities for a lending
office near the center of Peoples Federal's market area. The lease will be
classified as an operating lease and is for a period of three years beginning
April 1996, with an option to renew the lease for an additional three-year
period. The annual rental cost will be $12,000. The office opened for business
on June 3, 1996.
YIELDS EARNED AND RATES PAID
The spread between the average interest rate on interest-earning assets
and the average interest rate on interest-bearing liabilities increased to 2.46%
for the year ended September 30, 1995, from 2.28% for the year ended September
30, 1994. The spread decreased from 2.69% for the year ended September 30, 1993.
The yield on interest-earning assets increased to 7.27% for the year ended
September 30, 1995, from 6.92% for the year ended September 30, 1994. Increased
interest rates on mortgage-backed and related securities and FHLB securities and
dividends on FHLB stock partly offset by a decreasing average interest rate on
loans contributed to the increase in the yield on interest-earning assets for
the year ended September 30, 1995. The cost of funds to Peoples Federal
increased to 4.81% for the year ended September 30, 1995, from 4.64% for the
year ended September 30, 1994, due to the increased rates of interest on
certificates of deposit.
-21-
<PAGE> 36
Reduced interest rates on mortgage-backed securities and investment
securities contributed to the decrease in the yield on interest-earning assets
for the year ended September 30, 1994. The full effect on interest earned on
loans from refinancing higher rate loans during the year ended September 30,
1993, was first realized in the year ended September 30, 1994. The cost of funds
to Peoples Federal decreased to 4.64% for the year ended September 30, 1994,
from 5.21% for the year ended September 30, 1993. Interest rates decreased on
virtually all types of customer deposits for the year ended September 30, 1994.
The spread between the average interest rate on interest-earning assets
and the average interest rate on interest-bearing liabilities was 2.10% for the
six months ended March 31, 1996, and 2.67% for the six months ended March 31,
1995. Increased average interest rates on mortgage-backed and investment
securities were offset by decreased average interest rates on loans and
interest-bearing assets in the FHLB for the six months ended March 31, 1996,
compared to the six months ended March 31, 1995, so that the average interest
rate earned decreased from 7.25% to 7.24%. Average interest rates paid on
deposits increased from 4.58% to 5.14% for the same periods, due to the
increased rates on certificates of deposit.
-22-
<PAGE> 37
The following table presents certain information relating to Peoples
Federal's average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of customer deposits for the
periods indicated. Such yields and costs are derived by dividing annual income
or expense by the average monthly balance of interest-earning assets or customer
deposits, respectively, for the years presented. Average balances are derived
from daily balances, which include nonaccruing loans in the loan portfolio, net
of the allowance for loan losses.
<TABLE>
<CAPTION>
Six months ended March 31, Year ended September 30,
--------------------------------------------------------------- -----------------------------
1996 1995 1995
------------------------------ ------------------------------ ------------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
--------- ------- ------ --------- ------- ------ --------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 4,155 $ 102 4.89% $ 2,112 $ 61 5.78% $ 1,989 $ 118 5.92%
Investment securities 9,266 270 5.83 12,037 332 5.52 11,060 672 6.08
Mortgage-backed and related 24,366 807 6.62 22,015 696 6.33 23,680 1,466 6.19
securities
Loans receivable (2) 38,074 1,568 8.24 36,711 1,553 8.46 37,007 3,103 8.39
-------- ------- -------- ------- -------- -------
Total interest-earning assets 75,861 2,747 7.24 72,875 2,642 7.25 73,736 5,359 7.27
Non-interest-earning assets:
Cash and amounts due from
depository institutions 232 269 257
Premises and equipment, net 1,520 1,495 1,493
Other nonearning assets 457 303 357
-------- -------- --------
Total assets $78,070 $ 74,942 $ 75,843
======== ======== ========
Interest-bearing liabilities:
NOW accounts $ 1,371 $ 9 1.31% $ 893 $ 7 1.58 $ 985 $ 15 1.53%
Money market accounts 3,609 47 2.60 4,301 57 2.66 4,076 109 2.67
Passbook savings accounts 12,633 157 2.50 13,020 163 2.51 12,877 323 2.51
Certificates of deposit 49,365 1,508 6.11 46,623 1,257 5.39 47,445 2,695 5.68
-------- ------- -------- ------- -------- -------
Total deposits 66,978 1,721 5.14 64,837 1,484 4.58 65,383 3,142 4.81
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 66,978 1,721 5.14 64,837 1,484 4.58 65,383 3,142 4.81
------- ------- -------
Non-interest-bearing liabilities 1,091 821 917
-------- -------- --------
Total liabilities 68,069 65,658 66,300
Unrealized gains on securities 573 187 337
Retained earnings 9,428 9,097 9,206
-------- -------- --------
Total liabilities and retained
earnings $78,070 $ 74,942 $ 75,843
======== ======== ========
Net interest income; interest rate
spread $ 1,026 2.10% $ 1,158 2.67% $ 2,217 2.46%
======= ===== ======= ===== ======= =====
Net interest margin (net interest
income as a percent of average 2.70% 3.18% 3.01%
interest-earning assets)
Average interest-earning assets to
interest-bearing liabilities 113.26% 112.40% 112.78%
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------------------------------------
1994 1993
------------------------------ -----------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
--------- ------- ------ --------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 2,662 $ 92 3.47% $ 5,652 $ 165 2.92%
Investment securities 10,721 529 4.93 5,513 364 6.59
Mortgage-backed and related 23,715 1,246 5.25 24,682 1,569 6.36
securities
Loans receivable (2) 37,293 3,283 8.80 39,114 3,827 9.78
--------- ------- --------- -------
Total interest-earning assets 74,391 5,150 6.92 74,961 5,925 7.90
Non-interest-earning assets:
Cash and amounts due from
depository institutions 274 280
Premises and equipment, net 1,528 1,522
Other nonearning assets 528 279
--------- ---------
Total assets $ 76,721 $ 77,042
--------- ---------
Interest-bearing liabilities:
NOW accounts $ 820 $ 13 1.59% $ 672 $ 14 2.08%
Money market accounts 4,559 123 2.71 4,648 139 2.98
Passbook savings accounts 14,120 364 2.58 13,931 411 2.95
Certificates of deposit 47,754 2,620 5.49 48,706 2,976 6.11
--------- ------- --------- -------
Total deposits 67,253 3,120 4.64 67,957 3,540 5.21
------- -------
Total interest-bearing
liabilities 67,253 3,120 4.64 67,957 3,540 5.21
------- --------- -------
Non-interest-bearing liabilities 641 831
--------- ---------
Total liabilities 67,894 68,788
Unrealized gains on securities - -
Retained earnings 8,827 8,254
--------- ---------
Total liabilities and retained
earnings $76,721 $77,042
--------- ---------
Net interest income; interest rate
spread $2,030 2.28% $2,385 2.69%
-------- ----- -------- ------
Net interest margin (net interest
income as a percent of average 2.73% 3.18%
interest-earning assets)
Average interest-earning assets to
interest-bearing liabilities 110.61% 110.31%
- ------------------------------------
<FN>
(1) Annualized
(2) Calculated net of deferred loan fees, loan discounts, loans in process
and allowance for loan losses.
</TABLE>
-23-
<PAGE> 38
The following table sets forth, for the periods indicated, the weighted
average yields earned on Peoples Federal's interest-earning assets, the weighted
average interest rates paid on interest-bearing liabilities, the interest rate
spread and the net interest margin on interest-earning assets. Such yields and
costs are derived by dividing income or expense by the average balances of
assets or liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
Six months
ended
March 31, Year ended September 30,
--------- ------------------------------------------
1996 1995 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average yield on loan portfolio 8.24% 8.39% 8.80% 9.78%
Weighted average yield on mortgage-backed and
related securities 6.62 6.19 5.25 6.36
Weighted average yield on investment securities 5.83 6.08 4.93 6.59
Weighted average yield on interest-bearing
deposits 4.89 5.92 3.47 2.92
Weighted average yield on all interest-earning
assets 7.24 7.27 6.92 7.90
Weighted average interest rate paid on all
interest-bearing liabilities (1) 5.14 4.81 4.64 5.21
---- ---- ---- ----
Interest rate spread (spread between weighted
average interest rate on all interest-bearing
assets and all interest-bearing liabilities) 2.10% 2.46% 2.28% 2.69%
==== ==== ==== ====
Net interest margin (net interest income as a
percentage of average interest-earning assets) 2.70% 3.01% 2.73% 3.18%
- ----------------------------
<FN>
(1) All of Peoples Federal's interest-bearing liabilities are in the form
of deposits.
</TABLE>
The following table sets forth, at the dates indicated, the weighted
average yields earned on Peoples Federal's interest-earning assets, the weighted
average interest yield paid on interest-bearing liabilities and the interest
rate spread.
<TABLE>
<CAPTION>
At
March 31, At September 30,
--------- ------------------------------------------
1996 1995 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average yield on loan portfolio 8.71% 8.58% 8.63% 8.88%
Weighted average yield on mortgage-backed and
related securities 6.55 6.42 5.32 5.81
Weighted average yield on investment securities 5.80 5.97 5.49 5.90
Weighted average yield on interest-bearing
deposits 4.84 4.99 4.03 2.64
Weighted average yield on all interest-earning
assets 7.44 7.43 6.99 7.30
Weighted average interest rate paid on all
interest-bearing liabilities (1) 5.13 5.32 4.49 4.89
---- ---- ---- ----
Interest rate spread (spread between weighted
average interest rate on all interest-bearing
assets and all interest-bearing liabilities) 2.31% 2.11% 2.50% 2.41%
==== ==== ==== ====
- ------------------------------------
<FN>
(1) All of Peoples Federal's interest-bearing liabilities are in the form
of deposits.
</TABLE>
-24-
<PAGE> 39
The table below describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected Peoples Federal's interest income and expense during
the years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume) and (iii) total
changes in rate and volume. The combined effects of changes in both volume and
rate, which cannot be separately identified, have been allocated proportionately
to the change due to volume and the change due to rate:
<TABLE>
<CAPTION>
Six months ended
March 31, Year ended September 30,
-------------------------- --------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
-------------------------- ------------------------- ---------------------------
Increase Increase Increase
(decrease) (decrease) (decrease)
due to due to due to
------------- ---------------- ----------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $ 50 $ (9) $ 41 $ (39) $ 65 $ 26 $ (104) $ 31 $ (73)
Investment securities (81) 19 (62) 20 123 143 256 (91) 165
Mortgage-backed and related
securities 78 33 111 (2) 222 220 (51) (272) (323)
Loans receivable 56 (41) 15 (24) (156) (180) (161) (383) (544)
---- ------- ----- ----- ----- ----- ------ ------- -----
Total interest income 103 2 105 (45) 254 209 (60) (715) (775)
---- ------- ----- ----- ----- ----- ------ ------- -----
Interest expense attributable to:
NOW accounts 3 (1) 2 3 (1) 2 2 (3) (1)
Money market accounts (9) (1) (10) (13) (1) (14) (3) (13) (16)
Passbook savings accounts (5) (1) (6) (31) (10) (41) 4 (51) (47)
Certificates of deposit 84 167 251 (18) 93 75 (52) (304) (356)
---- ------- ----- ----- ----- ----- ------ ------- -----
Total interest expense 73 164 237 (59) 81 22 (49) (371) (420)
---- ------- ----- ----- ----- ----- ------ ------- -----
Increase (decrease) in net
interest income $ 30 $ (162) $(132) $ 14 $ 173 $ 187 $ (11) $ (344) $(355)
==== ======= ===== ===== ===== ===== ====== ======= =====
</TABLE>
ASSET AND LIABILITY MANAGEMENT
Peoples Federal, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. As part of its effort to
monitor and manage interest rate risk, Peoples Federal uses the NPV methodology
recently adopted by the OTS as part of its capital regulations. Although Peoples
Federal is not currently subject to the NPV regulation because such regulation
does not apply to institutions with less than $300 million in assets and
risk-based capital in excess of 12%, the application of the NPV methodology may
illustrate Peoples Federal's interest rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and outgoing
cash flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
which would result from a theoretical 200 basis point (1 basis point equals
.01%) change in market interest rates. Both a 200 basis point increase in market
interest rates and a 200 basis point decrease in market interest rates are
considered. If the NPV would decrease more than 2% of the present value of the
institution's assets with either an increase or a decrease in market rates, the
institution must deduct 50% of the amount of the decrease in excess of such 2%
in the calculation of the institution's risk-based capital. See "Liquidity and
Capital Resources."
At March 31, 1996, 2% of the present value of Peoples Federal's assets
was approximately $1.6 million. Because the interest rate risk of a 200 basis
point increase in market interest rates (which was greater than the interest
rate risk of a 200 basis point decrease) was $2.0 million at March 31, 1996,
Peoples Federal would have been required to deduct approximately $192,000 (50%
of the approximate $384,000 difference) from its capital in determining whether
Peoples Federal met its risk-based capital requirement. Regardless of such
reduction, however, Peoples Federal's risk-based capital at March 31, 1996,
would still have exceeded the regulatory requirement by $7.0 million.
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<PAGE> 40
Presented below, as of March 31, 1996, is an analysis of Peoples
Federal's interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts of 100 basis points in market interest rates. The
table also contains the policy limits set by the Board of Directors of Peoples
Federal as the maximum change in NPV that the Board of Directors deems advisable
in the event of various changes in interest rates. Such limits have been
established with consideration of the dollar impact of various rate changes and
Peoples Federal's strong capital position.
As illustrated in the table, Peoples Federal's NPV is more sensitive to
rising rates than declining rates. Such difference in sensitivity occurs
principally because, as rates rise, borrowers do not prepay fixed-rate loans as
quickly as they do when interest rates are declining. The loan portfolio of
Peoples Federal consists almost entirely of fixed-rate loans. In addition,
because Peoples Federal has not originated loans in accordance with traditional
secondary market guidelines, the sale of fixed-rate loans may be difficult. As a
result, in a rising interest rate environment, the amount of interest Peoples
Federal would receive on its loans would increase relatively slowly as loans are
slowly prepaid and new loans at higher rates are made. Moreover, the interest
Peoples Federal would pay on its deposits would increase rapidly because Peoples
Federal's deposits generally have shorter periods to repricing. Assumptions used
in calculating the amounts in this table are OTS assumptions.
<TABLE>
<CAPTION>
March 31, 1996
---------------------------
Change in Interest Rate Board Limit $ Change % Change
(Basis Points) % Change in NPV in NPV
----------------------- ----------- ---------------------------
<S> <C> <C> <C>
+300 (70)% $(3,269) (28)%
+200 (45) (1,984) (17)
+100 (25) (841) (7)
- - - -
-100 (25) 465 4
-200 (45) 601 5
-300 (70) 800 7
</TABLE>
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Further, in the event of a change in
interest rates, expected rates of prepayment on loans and mortgage-backed
securities and early withdrawal levels from certificates of deposit would likely
deviate significantly from those assumed in making the risk calculations.
If interest rates continue to rise from the recent historically low
levels, Peoples Federal's net interest income will be negatively affected.
Moreover, rising interest rates may negatively affect Peoples Federal's earnings
due to diminished loan demand.
As part of management's overall strategy to manage interest rate risk,
Peoples Federal commenced the origination of adjustable-rate mortgage loans in
June 1995. In addition, at March 31, 1996, $15.5 million of Peoples Federal's
mortgage-backed and related securities were backed by mortgages with adjustable
rates. Management has also increased consumer lending and expects such lending
to become a larger part of overall lending activities. Consumer loans typically
have a significantly shorter weighted average maturity and offer less exposure
to interest rate risk. In the event interest rates decline, however, the
origination of adjustable-rate loans could be expected to decline as consumers
demand more fixed-rate loans. On the deposit side, management has attempted to
reduce the impact of interest rate changes by emphasizing low interest rate
deposit products and by maintaining competitive pricing on longer term
certificates of deposit.
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<PAGE> 41
LIQUIDITY AND CAPITAL RESOURCES
Peoples Federal's liquidity, primarily represented by cash equivalents,
is a result of its operating, investing and financing activities. These
activities are summarized below for the periods presented.
<TABLE>
<CAPTION>
Six months ended
March 31, Year Ended September 30,
---------------- -------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income $ 112 $ 207 $ 394 $ 379 $ 658
Adjustments to reconcile net income to net cash
from operating activities (248) (38) 137 136 119
------- ------- ------- ------- -------
Net cash provided by operating activities (136) 169 531 515 777
Net cash provided by (used in) investing activities 2,656 886 (1,243) 469 (3,577)
Net cash provided by (used in) financing activities 812 (317) 764 (2,493) 871
------- ------- ------- ------- -------
Net change in cash and cash equivalents 3,332 738 52 (1,509) (1,929)
Cash and cash equivalents at beginning of period 1,864 1,812 1,812 3,321 5,250
------- ------- ------- ------- -------
Cash and cash equivalents at end of period $ 5,196 $ 2,550 $ 1,864 $ 1,812 $ 3,321
======= ======= ======= ======= =======
</TABLE>
Peoples Federal's principal sources of funds are deposits, loan and
mortgage-backed securities repayments, maturities of securities and other funds
provided by operations. Peoples Federal also has the ability to borrow from the
FHLB of Cincinnati. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan and mortgage-backed
security prepayments are more influenced by interest rates, general economic
conditions and competition. Peoples Federal maintains investments in liquid
assets based upon management's assessment of (i) the need for funds, (ii)
expected deposit flows, (iii) the yields available on short-term liquid assets
and (iv) the objectives of the asset/liability management program.
OTS regulations presently require Peoples Federal to maintain an
average daily balance of investments in United States Treasury, federal agency
obligations and other investments having maturities of five years or less in an
amount equal to 5% of the sum of Peoples Federal's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. The
liquidity requirement, which may be changed from time to time by the OTS to
reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which Peoples Federal may rely if necessary to fund
deposit withdrawals or other short-term funding needs. At March 31, 1996,
Peoples Federal's regulatory liquidity ratio was 20.4%. At such date, Peoples
Federal had commitments to originate loans totaling $7.2 million and no
commitments to purchase or sell loans. Peoples Federal considers its liquidity
and capital reserves sufficient to meet its outstanding short- and long-term
needs. See Note K of the Notes to Consolidated Financial Statements.
Peoples Federal is required by applicable law and regulation to meet
certain minimum capital standards. Such capital standards include a tangible
capital requirement, a core capital requirement or leverage ratio and a
risk-based capital requirement. See "REGULATION - OTS Regulations -- Regulatory
Capital Requirements." Peoples Federal exceeded all of its capital requirements
at March 31, 1996, September 30, 1995, and at September 30, 1994.
The tangible capital requirement requires savings associations to
maintain "tangible capital" of not less than 1.5% of the association's adjusted
total assets. Tangible capital is defined in OTS regulations as core capital
minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of the association's total
assets. The OTS has proposed to increase such requirement to 4% to 5%, except
for those associations with the highest examination rating and acceptable levels
of risk. See "REGULATION - OTS Regulations--Regulatory Capital Requirements."
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<PAGE> 42
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Peoples Federal includes a general loan loss allowance of
$193,000 at March 31, 1996.
The following table summarizes Peoples Federal's regulatory capital
requirements and actual capital (see Note J of the Notes to Consolidated
Financial Statements for a reconciliation of capital under generally accepted
accounting principles and regulatory capital amounts) at March 31, 1996.
<TABLE>
<CAPTION>
Excess of Actual
Capital Over Current
Actual capital Current Requirement Requirement
------------------ ------------------- ------------------ Applicable
Amount Percent Amount Percent Amount Percent Asset Total
------ ------- ------ ------- ------ ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible Capital $9,490 12.22% $1,165 1.50% $8,325 10.72 $77,646
Core Capital 9,490 12.22 2,329 3.00 7,161 9.22 77,646
Risk-based Capital 9,683 31.25 2,479 8.00 7,204 23.25 30,982
</TABLE>
For information concerning regulatory capital on a pro forma basis
after the Conversion, see "REGULATORY CAPITAL COMPLIANCE."
At March 31, 1996, Peoples Federal had no material commitments for
capital expenditures.
PROPOSED ONE-TIME SAIF ASSESSMENT
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance each for members of the BIF and 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 its target level within a reasonable
time and may decrease such rates if such target level has been met. The reserves
of the SAIF are below the level required by law because a significant portion of
the assessments paid into the SAIF are used to pay the cost of prior thrift
failures.
The BIF has, however, met its required reserve level. The assessments
paid by healthy savings associations exceeded those paid by healthy BIF members
by approximately $.19 per $100 in deposits for 1995, and no BIF assessments will
be required of healthy commercial banks in 1996 except a $2,000 minimum fee. The
disparity in the premiums paid between savings associations and commercial banks
could have a negative competitive impact on Peoples Federal and other savings
associations.
Congress is considering legislation to recapitalize the SAIF and
eliminate the significant premium disparity. Currently, the recapitalization
plan provides for a special assessment of approximately $.85 per $100 of SAIF
deposits held at some date in 1995, currently March 31, 1995, in order to
increase SAIF reserves to the level required by law. Certain associations
holding SAIF-insured deposits would pay a lower special assessment. In addition,
the cost of prior thrift failures would be shared by both the SAIF and the BIF,
which might increase BIF assessments by $.02 to $.025 per $100 in deposits. SAIF
assessments for healthy savings associations would initially be set at a
significantly lower level but could never be reduced below the level set for
healthy BIF institutions.
Peoples Federal had $65.7 million in deposits at March 31, 1995. If a
special assessment of $.85 per $100 in deposits is imposed, Peoples Federal will
pay an additional assessment of approximately $559,000. Such assessment should
be tax-deductible, but it will reduce earnings and capital for the quarter in
which it is recorded by approximately $.56 per $100 in deposits, or $369,000
based upon $65.7 million in deposits.
The recapitalization plan also provides for the merger of the SAIF and
the BIF on January 1, 1998. The SAIF recapitalization legislation currently
eliminates the thrift charter or separate thrift regulation under federal law
prior to the merger of the deposit insurance funds. As a result, Peoples Federal
would be regulated as a bank under federal law and would be subject to the more
restrictive activity limits imposed on national banks. If required to convert to
a bank charter, Peoples Federal would be required to recapture as income, before
taxes, over a six-year period the approximately $500,000 of its bad debt reserve
taken after 1987. In addition, Peoples Federal's proposed holding company would
become a bank
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<PAGE> 43
holding company, which would become subject to more restrictive activity limits
and capital requirements similar to those imposed on Peoples Federal. Congress
is considering legislation requiring, generally, that even if a savings
association does not convert to a bank, bad debt reserves taken after 1987 using
the percentage of taxable income method must be included in future taxable
income of the association over a six-year period, although a two-year delay may
be permitted for institutions meeting a residential mortgage loan origination
test.
No assurance can be given that the SAIF recapitalization plan or the
proposed tax legislation will be enacted into law or in what form they may be
enacted. Moreover, Peoples Federal can give no assurance that the disparity
between BIF and SAIF assessments will be eliminated. Finally, Peoples Federal
cannot predict the impact of conversion to, or regulation as, a bank until the
legislation requiring such change is enacted.
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1993, the FASB issued SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities," which revised the accounting
treatment, classification and carrying value of investment securities. This new
accounting standard results in adjusting certain investment securities to market
value. Under SFAS No. 115, investment securities are classified for balance
sheet purposes based on whether such securities are either held in trading
accounts, available for sale or strictly to be held to maturity. Under the new
standard, trading account securities are marked to market and the corresponding
unrealized gains and losses are reflected in income. Investment securities
"available for sale" are adjusted to market value with the corresponding
unrealized gain or loss shown as an adjustment to shareholders' equity net of
deferred income taxes. Investment securities earmarked to be held to maturity
are carried at amortized cost. Peoples Federal adopted SFAS No. 115 for the
fiscal year beginning July 1, 1994. The effect of adoption was to initially
increase retained earnings by approximately $382,000 on October 1, 1994,
representing the unrealized market value appreciation of the Bank's securities
net of applicable deferred federal income taxes. As of September 30, 1995, the
amount of unrealized gains on securities designated as available for sale had
increased to approximately $504,000, which is reflected in Peoples Federal's
equity accounts.
In November 1995, the FASB issued a "Special Report" on implementation
of SFAS No. 115 (the "Special Report"). The Special Report allowed an entity to
reclassify securities, including held-to-maturity debt securities, without
calling into question the intent of the entity to hold debt securities to
maturity in the future. Any transfers from the held-to-maturity category to an
available-for-sale classification would result in unrealized gains or losses
being recognized as a separate component of equity, net of related tax effects.
Pursuant to the provisions of the Special Report, management transferred
approximately $14.8 million of securities to an available-for-sale
classification.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which further clarifies the accounting treatment,
classification and valuation of impaired loans. SFAS No. 114, as amended by SFAS
No. 118 in December 1994 as to certain income recognition and financial
statement disclosure provisions, will result in applying discounted cash flow
analysis and other valuation techniques to impaired or other nonperforming loans
as those terms are defined in the Statement. Based upon the composition of
Peoples Federal's loan portfolio, SFAS No. 114 did not have a material effect on
Peoples Federal's financial position at the implementation date of October 1,
1995.
In November 1993, the American Institute of Certified Public
Accountants issued SOP 93-6, "Employers' Accounting for Employee Stock Ownership
Plans." SOP 93-6 addresses the accounting for shares of stock issued to
employees by an employee stock ownership plan ("Employee Plan"). SOP 93-6
requires that the employer record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from the Employee
Plan to employees. SOP 93-6 is effective for fiscal years beginning after
December 31, 1993, and relates to shares purchased by an Employee Plan after
December 31, 1992. Assuming the Common Shares appreciate in value over time, the
adoption of SOP 93-6 will likely increase compensation expense relative to the
ESOP, as compared with prior guidance which required the recognition of
compensation expense based on the cost of shares acquired by the ESOP. However,
the amount of the increase has not been determined as the expense will be based
on the fair value of the shares committed to be released to employees, which is
not yet determinable.
In December 1994, the Accounting Standards Division of the AICPA
approved SOP 94-6, "Disclosure of Certain Significant Risks and Uncertainties."
SOP 94-6 requires disclosures in the financial statements beyond those now being
required or generally made in the financial statements about the risk and
uncertainties existing as of the date of those financial statements in the
following areas: nature of operation, use of estimates in the preparation of
financial statements,
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<PAGE> 44
certain significant estimates, and current vulnerability due to certain
concentrations. The standard is effective for financial statements issued for
fiscal years ending after December 15, 1995.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used and for long-lived assets and certain identifiable intangibles
to be disposed of. The standard requires an impairment loss to be recognized
when the carrying amount of the asset exceeds the fair value of the asset. The
fair value of an asset is the amount at which the asset could be bought or sold
in a current transaction between willing parties, that is, other than in a
forced liquidation sale. An entity that recognizes an impairment loss shall
disclose additional information in the financial statements related to the
impaired asset. All long-lived assets and certain identifiable intangibles to be
disposed of and for which management has committed to a plan to dispose of the
assets, whether by sale or abandonment, shall be reported at the lower of the
carrying amount or fair value less cost to sell. Subsequent revisions in
estimates of fair value less cost to sell shall be reported as adjustments to
the carrying amount of assets to be disposed of, provided that the carrying
amount of the asset does not exceed the carrying amount of the asset before an
adjustment was made to reflect the decision to dispose of the asset. The
statement requires additional disclosure in the footnotes regarding assets to be
disposed of. SFAS No. 121 is effective for fiscal years beginning after December
15, 1995. Peoples Federal does not anticipate that SFAS No. 121 will have a
material effect on Peoples Federal's financial condition or results of
operations.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights and Excess Servicing Receivables and for Securitization of
Mortgage Loans." SFAS No. 122, which is effective for years beginning after
December 15, 1995, will require Peoples Federal, to the extent it services
mortgage loans for others in return for servicing fees, to recognize these
servicing rights as assets, regardless of how such assets were acquired.
Additionally, Peoples Federal would be required to assess the fair value of
these assets at each reporting date to determine any potential impairment.
Management of Peoples Federal does not expect the adoption of SFAS No. 122 to
have a material effect on financial condition or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. This Statement encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net income and, if presented, earnings per share, as if SFAS No. 123
had been adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. As Peoples Federal
is currently a mutual savings and loan association, management of Peoples
Federal cannot complete an analysis of the potential effects of SFAS No. 123 on
its financial condition or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes included herein have
been prepared in accordance with GAAP. GAAP requires Peoples Federal to measure
financial position and operating results in terms of historical dollars, and
changes in the relative value of money due to inflation or recession are
generally not considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies.
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<PAGE> 45
RECENT DEVELOPMENTS
The following tables set forth certain selected financial data for
Peoples Federal as of June 30, 1996, March 31, 1996, and September 30, 1995, and
for the three and nine months ended June 30, 1996 and 1995. In the opinion of
the management of Peoples Federal, all adjustments necessary for a fair
presentation have been included. All such adjustments
-31-
<PAGE> 46
are of a normal recurring nature. The results of operations and other data for
the three and nine months ended, June 30, 1996, are not necessarily indicative
of the results of operations that may be expected for the entire year.
<TABLE>
<CAPTION>
At At At
June 30, March 31, September 30,
SELECTED FINANCIAL CONDITION DATA: 1996 1996 1995
-------- ------ -----
(In thousands)
<S> <C> <C> <C>
Total amount of:
Assets $78,252 $78,078 $77,307
Cash and cash equivalents(1) 6,041 5,196 1,864
Investment securities available for sale 1,545 1,742 809
Investment securities held to maturity 3,687 6,687 7,912
Mortgage-backed and related securities
available for sale 13,402 13,210 --
Mortgage-backed and related securities held
to maturity 9,531 10,083 26,008
Loans receivable, net 41,090 38,308 38,021
FHLB stock - at cost 722 722 685
Deposits 67,543 67,374 66,564
Retained earnings, substantially restricted 10,080 10,050 9,882
</TABLE>
- -----------------------------
(1) Includes cash and amounts due from depository institutions and
interest-bearing deposits.
<TABLE>
<CAPTION>
Three months Nine months
ended June 30, ended June 30,
------------------- -------------------
SUMMARY OF EARNINGS: 1996 1995 1996 1995
------ ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest and dividend income $1,397 $1,386 $4,144 $4,028
Interest expense 834 813 2,555 2,297
------ ------ ------ ------
Net interest income 563 573 1,589 1,731
Provision for loan losses -- 3 105 3
------ ------ ------ ------
Net interest income after provision for loan
losses 563 570 1,484 1,728
Noninterest income 7 5 19 18
Noninterest expense 433 411 1,206 1,283
------ ------ ------ ------
Income before income tax 137 164 297 463
Income tax expense 43 52 91 144
------ ------ ------ ------
Net income $ 94 $ 112 $ 206 $ 319
====== ====== ====== ======
</TABLE>
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<PAGE> 47
<TABLE>
<CAPTION>
At or for the three At or for the nine
months ended June 30, months ended June 30,
--------------------- ---------------------
SELECTED FINANCIAL RATIOS OTHER DATA: 1996 1995 1996 1995
------ ------ ------ -----
<S> <C> <C> <C> <C>
Return on assets (1)(2) .48% .59% .35% .56%
Return on equity (1)(3) 3.73 4.60 2.74 4.51
Interest rate spread(1)(4) 2.44 2.51 2.21 2.62
Net interest margin (1)(5) 2.98 3.09 2.80 3.15
Noninterest expense to average assets(1)(6)
2.22 2.15 2.06 2.27
Average equity to average assets 12.92 12.76 12.85 12.51
Equity to assets at period end 12.88 12.71 12.88 12.71
Nonperforming loans to total loans(7) .05 -- .05 --
Nonperforming assets to total assets(7) .77 -- .77 --
Allowance for loan losses to total loans .41 .18 .41 .18
Allowance for loan losses to
nonperforming loans(7) 32.38 -- 32.38 --
Net charge-offs to average loans -- -- -- --
Number of offices (8) 3 2 2 2
</TABLE>
- -----------------------------
(1) Annualized.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) Average yield on interest-earning assets less average cost of
interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Noninterest expense divided by average total assets.
(7) Peoples Federal had no nonperforming assets at June 30, 1995.
(8) In addition to its two existing full-service offices, Peoples Federal
opened a lending office in June 1996.
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<PAGE> 48
<TABLE>
<CAPTION>
At June 30, 1996 At March 31, 1996
---------------- -----------------
REGULATORY CAPITAL COMPLIANCE: Amount Percent of assets Amount Percent of assets
------ ----------------- ------ -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Capital under generally accepted
accounting principles before adjustments $10,080 12.88% $10,050 12.94%
======= ===== ======= =====
Current tangible capital:(1)(3)
Capital level $ 9,584 12.25% $ 9,490 12.22%
Requirement 1,174 1.50 1,165 1.50
------- ----- ------- -----
Excess $ 8,410 10.75% $ 8,325 10.72%
======= ===== ======= =====
Current core capital:(1)(3)
Capital level $ 9,584 12.25% $ 9,490 12.22%
Requirement 2,348 3.00 2,329 3.00
------- ----- ------- -----
Excess $ 7,236 9.25% $ 7,161 9.22%
======= ===== ======= =====
Current risk-based capital:(2)(3)
Capital $ 9,777 31.54% $ 9,683 31.25%
Requirement 2,480 8.00 2,479 8.00
------- ----- ------- -----
Excess $ 7,297 23.54% $ 7,204 23.25%
======= ===== ======= =====
</TABLE>
- ------------------------------
(1) Tangible and core capital percentages are based on adjusted total
assets of $78.3 and $77.7 million at June 30, 1996, and March 31, 1996,
respectively.
(2) Risk-based capital percentages are based on risk-weighted assets of
$31.0 million at June 30, 1996, and March 31, 1996.
(3) Capital levels are net of unrealized gains on securities designated as
available for sale.
MANAGEMENT'S DISCUSSION OF RECENT RESULTS
FINANCIAL CONDITION. Total assets were $78.3 million at June 30, 1996,
and $78.1 million at March 31, 1996. During the three-month period ended June
30, 1996, Peoples Federal experienced loan growth, which was funded primarily by
principal repayments of investment and mortgage-backed securities.
Net loans receivable increased by $2.8 million during the three months
ended June 30, 1996. During the quarter ended June 30, 1996, Peoples Federal
pursued both mortgage and home equity loans. Mortgage loans originated during
the period totalled $8.5 million, with a net increase in loans receivable for
the three-month period of $6.3 million. Home equity loans increased $388,000.
Mortgage-backed and related securities decreased by $360,000 during the
three-month period ended June 30, 1996. Investment in mortgage-backed and
related securities during the period was $974,000. Principal repayments during
the period were $1.3 million. Market values of mortgage-backed and related
securities classified as available for sale decreased $43,000. Investment
securities decreased by $3.2 million during the quarter ended June 30, 1996.
Such decrease was due to a decrease in certificates of deposit in the FHLB in a
net amount of $3.0 million, principal payments on investment securities
available for sale in the amount of $144,000 and a decrease of $53,000 in the
market value of investment securities available for sale.
In April 1996, Peoples Federal placed three nonperforming and
nonaccruing loans, with total remaining unpaid balances of $572,000, in
foreclosure. With first mortgages securing the loans, Peoples Federal is in the
first secured creditor position with regard to all of the properties. The
properties are expected to be sold at a sheriff's sale during calendar year 1996
or 1997. Management believes Peoples Federal has a sufficient amount in its
allowance for loan losses to cover any loss ultimately incurred on these loans.
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<PAGE> 49
Cash and cash equivalents increased by $845,000 for the three-month
period ended June 30, 1996. The increased funds were placed in interest-earning
deposits at the FHLB. Loan commitments, including undisbursed loans in process,
as of June 30, 1996, were $9.0 million. Management plans to maintain the
necessary amount of cash in short-term investments while loan commitments are at
the current level.
Deposits increased by $169,000 during the three-month period ended June
30, 1996. Management has offered interest on deposits at rates designed to
maintain deposits at current levels while reducing the cost of funds.
Retained earnings totalled $10.1 million as of June 30, 1996, and as of
March 31, 1996. Retained earnings increased by net income for the three months
ended June 30, 1996, of $94,000, offset by a reduction in net unrealized gains
on securities available for sale of $64,000.
NET INCOME. Net income for the three months ended June 30, 1996, was
$94,000, compared to $112,000 for the same period in 1995. The primary reasons
for the decrease in net income were a decrease in net interest income of $10,000
and an increase in noninterest expense of $22,000, offset by a decrease in
income tax expense.
Net income for the nine months ended June 30, 1996, was $206,000,
compared to $319,000 for the nine months ended June 30, 1995. The primary
reasons for the decrease in net income were a decrease in net interest income
of $142,000 and an increase in the provision for loan losses of $102,000,
partially offset by a decrease in noninterest expense of $77,000 and a decrease
in income tax expense of $53,000.
Total interest income increased by $11,000 and $116,000 for the
three months and nine months ended June 30, 1996, respectively, compared to the
three months and nine months ended June 30, 1995. For the three-month periods,
average net loans were $3.1 million higher in 1996 than in 1995, while the
average interest rate was .46% lower, resulting in an increase in income from
loans of $20,000. For the nine-month periods, average net loans were $1.9
million higher in 1996 than in 1995, while the average interest rate was .31%
lower, resulting in an increase in income from loans of $36,000. For the three
months ended June 30, 1996, average balances of mortgage-backed and related
securities, investment securities and interest-earning deposits in the FHLB
were $1.8 million lower, and the average interest rate was .21% higher,
resulting in a decrease in income from investments of $9,000. For the nine
months ended June 30, 1996, average balances of mortgage-backed and related
securities, investment securities and interest-bearing deposits in the FHLB
were $479,000 higher, and the average interest rate was .21% higher, resulting
in an increase in income from investments of $80,000.
Average total deposits were $1.6 million higher during the three months
ended June 30, 1996, than during the three months ended June 30, 1995, and the
average yield on deposits was .01% higher, resulting in an increase in interest
expense of $21,000. Average total deposits were $1.9 million higher during the
nine months ended June 30, 1996, than during the nine months ended June 30,
1995, and the average yield on deposits was .37% higher, resulting in an
increase in interest expense of $258,000.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is based on
estimates and is adjusted when necessary as management reviews Peoples Federal's
loan portfolio. No provision was recorded during the three months ended June 30,
1996, and $105,000 was recorded during the nine months ended June 30, 1996,
compared to $3,000 during the three months and nine months ended June 30,
1995.
NONINTEREST EXPENSE. Noninterest expense increased by $22,000 for the
three months ended June 30, 1996, compared to the same quarter in 1995 and
decreased by $77,000 for the nine months ended June 30, 1996, compared to the
nine months ended June 30, 1995. The principal increases in noninterest expense
for the three-month period were an increase in salaries and employee benefits
of $29,000 due to the hiring of additional employees and normal salary
increases, an increase in directors' fees of $10,000 from the holding of
special meetings and an increase in occupancy and equipment of $5,000 due
primarily to depreciation expense on asset additions. Principal decreases in
noninterest expense for the three-month period were decreases in advertising
and data processing costs of $19,000 and $6,000 respectively. During the three
months ended June 30, 1995, data processing costs were higher than during the
three months ended June 30, 1996, due to contract termination fees charged by
Peoples Federal's former service bureau. In addition, during the three months
ended June 30, 1995, advertising costs were higher due to an expanded
advertising program. For the nine-month period ended June 30, 1996, increased
loan originations resulted in deferred loan costs of $68,000, compared to
$4,000 in the nine-month period ended June 30, 1995. Also during the nine-month
period ended June 30, 1996, advertising costs and data processing costs
decreased $31,000 and $15,000, respectively, salaries and benefits increased
$24,000 and occupancy expense increased $21,000 compared to the same period in
1995, for the same reasons changes in such expenses occurred between the
comparable three month periods.
INCOME TAX EXPENSE. Income tax expense is based on income before income
tax for all periods presented. The effective tax rate did not change
significantly from period to period.
SATELLITE OFFICE. Peoples Federal has leased facilities for a lending
office near the center of Peoples Federal's market area. The lease is classified
as an operating lease and is for a period of three years beginning April 1,
1996, with an option for Peoples Federal to renew the lease for an additional
three-year period. An annual rental cost of $12,000 was first incurred in April
1996. The office opened for business in early June 1996.
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<PAGE> 50
THE BUSINESS OF PEOPLES FEDERAL
GENERAL
Peoples Federal is principally engaged in the business of making
permanent first and second mortgage loans secured by one- to four-family
residential real estate located in Peoples Federal's primary lending area and
investing in U.S. Government and agency obligations, interest-bearing deposits
in other financial institutions, mortgage-backed securities, municipal
securities and automobile loan pass-through certificates. Peoples Federal also
originates loans for the construction of residential real estate and loans
secured by multifamily real estate (over four units) and nonresidential real
estate. The origination of consumer loans, including unsecured loans and loans
secured by deposits, constitutes a small portion of Peoples Federal's lending
activities. Loan funds are obtained primarily from deposits, which are insured
up to applicable limits by the FDIC, and loan and mortgage-backed and related
securities repayments.
During the past two years, the earnings of Peoples Federal have been
below the average earnings of similar thrifts. The reason for the low level of
earnings centers primarily on the decline in the net interest margin of Peoples
Federal from 3.18% for the fiscal year ended September 30, 1993, to 2.70% for
the six months ended March 31, 1996. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL." The net
interest margin declined during such period because competition for deposits
forced Peoples Federal to offer accounts with interest rates which were above
market and because the interest received by Peoples Federal on interest-earning
assets decreased due to a shift in Peoples Federal's available investable funds
from higher yielding mortgage loans to lower yielding mortgage-backed
securities. See "RISK FACTORS - Low Return on Assets and Low Return on Equity."
Such shift can be attributed generally to a change in the early 1990s
from Peoples Federal's historic emphasis on mortgage lending. With increased
competition for loans from a rapidly growing number of lenders and with a vast
array of different loan products, Peoples Federal found that its traditional
methods of attracting mortgage lending business were not producing the volume of
mortgage loans which Peoples Federal previously processed and closed. When the
impact of the decline in mortgage lending on the net interest margin became
clear in late 1994 and 1995, Peoples Federal began a search for a lending
officer to revitalize its lending program. In January 1996, Peoples Federal
hired William P. Hart, an individual with over 24 years of experience in
mortgage lending, as Vice President of Lending. Before January 1996, Mr. Hart
served as the Vice President of Loan Originations for Citizens Savings Bank,
Canton, Ohio, where he supervised consumer and mortgage loan officers and
processors, created and implemented new mortgage loan programs, and managed the
underwriting of all mortgage, consumer and college loans.
Since January 1996, Mr. Hart, in conjunction with the Board of
Directors and management, has reorganized the Loan Department of Peoples Federal
in a manner by which contacts with the community, including contractors and
realtors, have been particularly emphasized. In addition, Peoples Federal
recently applied to FHLMC and FNMA for approval as a seller of mortgage loans to
FNMA and FHLMC and introduced several new loan products, including a 95% LTV
loan, which requires a minimum down payment of 5% of the value of the real
estate and improvements; a "reduced rate" plan, which rewards borrowers for
making down payments of 30% or more by giving them reduced interest rates; and
an "equity advance" plan, which provides equity financing for borrowers who wish
to buy or build a new house with the equity from their existing house. Other new
loan programs are currently being planned and implemented. In addition, on June
3, 1996, Peoples Federal opened for business a new lending office in the Belden
Village area of North Canton, Ohio.
Peoples Federal has taken the foregoing and other steps to revitalize
its lending program under the leadership of the Board of Directors, management
and Mr. Hart. With new loan programs planned and implemented, Peoples Federal
intends to invest the proceeds from the Conversion in loans and hopes to
increase the net interest margin as a result. There can be no assurance,
however, that the net interest margin will increase. See "RISK FACTORS - Low
Return on Assets and Low Return on Equity." As the only remaining savings
association in Stark County and as an institution with strong capital and asset
quality, Peoples Federal believes that the opportunity to become the locally
preferred community bank for the residents of Stark and surrounding counties is
significant.
MARKET AREA
Peoples Federal conducts business from its main office and a
full-service branch office, both located in Massillon, Ohio. In addition, on
June 3, 1996, Peoples Federal opened for business a new lending office in the
Belden Village area of
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<PAGE> 51
North Canton. Massillon is located eight miles west of Canton, 32 miles south of
Akron and 50 miles south of Cleveland. Peoples Federal's primary market area
consists of Stark County, Ohio, and adjacent counties.
Peoples Federal's primary market area has an industrial economy, with
its largest employers including Republic Engineered Steels, Inc., U.S. Chemical
and Plastics, Inc., Central States Can Co. and Weight Watchers Food Co.
Unemployment in Stark County in October 1995 was 4.3%, compared to 4.2% for the
State of Ohio. The population of Massillon and Stark County, Ohio, increased
2.3% between 1990 and 1995, compared to 2.8% for the State of Ohio. Per capita
and median household income in both Massillon and Stark County are slightly
below those of the State of Ohio.
LENDING ACTIVITIES
GENERAL. Peoples Federal's primary lending activity is the origination
of conventional mortgage loans secured by one- to four-family homes located in
Peoples Federal's primary lending area and home equity loans secured by first or
second mortgages. Loans for the construction of one- to four-family homes and
mortgage loans on multifamily properties containing five units or more and
nonresidential properties are also offered by Peoples Federal. Peoples Federal
does not originate loans insured by the Federal Housing Administration or loans
guaranteed by the Veterans Administration. In addition to mortgage lending,
Peoples Federal makes unsecured loans and consumer loans secured by deposits.
Peoples Federal does not originate its loans in accordance with traditional
secondary market guidelines and has not sold any loans.
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information with respect to the composition of Peoples Federal's loan portfolio
at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
At March 31, --------------------------------------------------------------
1996 1995 1994 1993
------------------ ----------------- ----------------------------------------
Percent Percent Percent Percent
of total of total of total of total
Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans:
One- to four-family (first
mortgage) $32,156 79.26% $31,923 81.66% $32,582 85.36% $36,009 89.65%
Home equity (second mortgage) 767 1.89 330 .84 198 .52 227 .57
Multifamily 179 .44 303 .78 63 .16 219 .54
Nonresidential real estate loans 3,901 9.62 3,725 9.53 3,370 8.83 2,510 6.25
Construction loans 3,095 7.63 2,392 6.12 1,729 4.53 873 2.17
------- ------- ------- ------- ------- ------- ------- -------
Total real estate loans 40,098 98.84 38,673 98.93 37,942 99.40 39,838 99.18
Consumer loans:
Loans on deposits 286 .70 215 .55 229 .60 328 .82
Other consumer loans 185 .46 203 .52 - - - -
------- ------- ------- ------- ------- ------- ------- -------
Total consumer loans 471 1.16 418 1.07 229 .60 328 .82
------- ------- ------- ------- ------- ------- ------- -------
Total loans 40,569 100.00% 39,091 100.00% 38,171 100.00% 40,166 100.00%
====== ====== ====== ======
Less:
Unearned and deferred (income)
expense, net 76 74 28 (40)
Loans in process (2,144) (1,064) (1,061) (217)
Allowance for loan losses (193) (80) (68) (68)
------- ------- ------- -------
Net loans $38,308 $38,021 $37,070 $39,841
======= ======= ======= =======
</TABLE>
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<PAGE> 52
LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of March 31, 1996, regarding the dollar amount of loans maturing
in Peoples Federal's portfolio based on their contractual terms to maturity.
Demand loans and loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the year ending
March 31, Due 4-5 Due 6-10 Due 11-20 Due more than
----------------------------- years after years after years after 20 years after
1997 1998 1999 3/31/96 3/31/96 3/31/96 3/31/96 Total
------ ------ ------ ------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family
(first mortgage) $4,574 $2,363 $2,401 $4,836 $ 9,782 $7,938 $3,357 $35,251
Home equity (second
mortgage) 26 28 30 73 259 351 - 767
Multifamily 12 13 14 32 52 32 24 179
Nonresidential 843 197 210 482 1,436 712 21 3,901
Consumer loans 144 120 87 75 45 - - 471
------ ------ ------ ------ ------- ------ ------ -------
Total loans $5,599 $2,721 $2,742 $5,498 $11,574 $9,033 $3,402 $40,569
====== ====== ====== ====== ======= ====== ====== =======
</TABLE>
Of the loans due more than one year after March 31, 1996, loans with
aggregate balances of $34.8 million have fixed rates of interest, and loans with
aggregate balances of $187,000 have adjustable interest rates.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of Peoples Federal has been the origination of permanent conventional
loans secured by one- to four-family residences, primarily single-family
residences, located within Peoples Federal's designated lending area. Peoples
Federal also originates loans for the construction of one- to four-family
residences and home equity loans secured by first or second mortgages on
single-family, owner occupied residential real estate. Each of such loans is
secured by a mortgage on the underlying real estate and improvements thereon, if
any.
OTS regulations limit the amount that Peoples Federal may lend in
relationship to the appraised value of the real estate and improvements at the
time of loan origination. In accordance with such regulations, Peoples Federal
makes fixed-rate first mortgage loans on single-family or duplex, owner occupied
residences up to 95% of the value of the real estate and improvements (the
"Loan-to-Value Ratio" or "LTV"). Low to moderate income loans are granted up to
95% on single-family or duplex, owner occupied residences. Home equity loans
secured by first or second mortgages are made with a maximum combined LTV for
the first and second mortgage of 80%. Peoples Federal makes adjustable-rate
first mortgage loans for investment purposes on one- to four-family, non-owner
occupied residences in amounts up to 75% LTV. Peoples Federal requires private
mortgage insurance ("PMI") for the amount of loans in excess of 80% of the value
of the real estate securing such loans. PMI is required for the amount of any
loan in excess of 85% of the value of the real estate and improvements for low-
to moderate-income loans. Fixed-rate residential real estate loans are offered
by Peoples Federal for terms of up to 30 years.
Peoples Federal commenced the origination of adjustable-rate mortgage
loans ("ARMs") in July 1995. ARMs are offered by Peoples Federal for terms of up
to 30 years and with various alternative features. The interest rate adjustment
periods on the ARMs are either one year, three years or a fixed rate for 10
years followed by one-year adjustment periods. The interest rate adjustments on
ARMs presently originated by Peoples Federal are tied to changes in the weekly
average yield on the one- and three-year U.S. Treasury constant maturities
index, respectively. Rate adjustments are computed by adding a stated margin,
typically 2.75%, to the index. The maximum allowable adjustment at each
adjustment date is usually 1% with a maximum adjustment of 3% over the term of
the loan, although Peoples Federal will make available an ARM with a 2% maximum
adjustment at each adjustment date and a maximum adjustment of 6% over the term
of the loan. The initial rate is dependent, in part, on how often the rate can
be adjusted. Peoples Federal also offers an ARM on two- to four-family
properties with a margin of 3.5% over the index and 2% and 6% maximum
adjustments at each adjustment date and over the term of the loan, respectively.
Peoples Federal originates ARMs which have initial interest rates lower than the
sum of the index plus the margin. Such loans are subject to increased risk of
delinquency or default due to increasing monthly payments as the interest rates
on such loans increase to the fully-indexed level, although such increase is
considered in Peoples Federal's underwriting of any such loans with a one-year
adjustment period. See "USE OF PROCEEDS."
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<PAGE> 53
The aggregate amount of Peoples Federal's one- to four-family
residential real estate loans equaled approximately $32.2 million at March 31,
1996, and represented 79.3% of loans at such date. The largest individual loan
balance on a one- to four-family loan at such date was $543,000. At such date,
loans secured by one- to four-family residential real estate with outstanding
balances of $110,000, or .34% of its one- to four-family residential real estate
loan balance, were more than 90 days delinquent or nonaccruing. See "Delinquent
Loans, Non-performing Assets and Classified Assets."
MULTIFAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans on one-
to four-family properties, Peoples Federal makes loans secured by multifamily
properties containing over four units. Such loans are made with adjustable
interest rates, a maximum LTV of 75% and a maximum term of 30 years.
Multifamily lending is generally considered to involve a higher degree
of risk because the loan amounts are larger and the borrower typically depends
upon income generated by the project to cover operating expenses and debt
service. The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower.
Peoples Federal attempts to reduce the risk associated with multifamily lending
by evaluating the credit-worthiness of the borrower and the projected income
from the project and by obtaining personal guarantees on loans made to
corporations and partnerships. Peoples Federal currently requires that borrowers
agree to submit financial statements, rent rolls and tax returns annually to
enable Peoples Federal to monitor the loans.
At March 31, 1996, loans secured by multifamily properties totaled
approximately $179,000, or less than one-half percent of total loans, all of
which were secured by property located within Peoples Federal's primary market
area, and all of which were performing in accordance with their terms. The
largest property securing such a loan is a 12-unit apartment building.
CONSTRUCTION LOANS. Peoples Federal makes loans for the construction of
residential and nonresidential real estate. Such loans are structured as
permanent loans with fixed rates of interest and for terms of up to 30 years.
Although most of the construction loans originated by Peoples Federal
historically were made to owner-occupants for the construction of single-family
homes by a general contractor, since January 1, 1996, most have been made to
developers who did not have a purchaser for the property at the time the loan
was made.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developments, developers,
managers and builders. In addition, such loans are more difficult to evaluate
and monitor. Loan funds are advanced upon the security of the project under
construction, which is more difficult to value before the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, it is relatively difficult to evaluate accurately the LTV
and the total loan funds required to complete a project. In the event a default
on a construction loan occurs and foreclosure follows, Peoples Federal must take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. Additional risk exists with
respect to loans made to developers who do not have a buyer for the property, as
the developer may lack funds to pay the loan if the property is not sold upon
completion. Peoples Federal attempts to reduce such risks on loans to developers
by requiring personal guarantees and reviewing current personal financial
statements and tax returns and other projects undertaken by the developers.
At March 31, 1996, a total of $3.1 million, or approximately 7.6% of
Peoples Federal's total loans, consisted of construction loans. All of Peoples
Federal's construction loans are secured by property located within Peoples
Federal's primary market area, and the economy of such lending area has been
relatively stable. At March 31, 1996, all of such loans were performing in
accordance with their terms.
NONRESIDENTIAL REAL ESTATE LOANS. Peoples Federal also makes loans
secured by nonresidential real estate consisting of retail stores, office
buildings, churches, a theater, a manufacturing facility and a party center.
Such loans generally are originated with terms of up to 20 years and a minimum
loan amount of $20,000 and a maximum loan amount of $500,000. Such loans have a
maximum LTV of 75%. Peoples Federal makes loans for land development in amounts
up to 75% LTV and a maximum term of three years. Peoples Federal also makes
loans on undeveloped land in amounts up to 65% LTV and a maximum term of five
years.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of
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<PAGE> 54
income-producing properties. If the cash flow on the property is reduced, for
example, as leases are not obtained or renewed, the borrower's ability to repay
may be impaired. Peoples Federal has endeavored to reduce such risk by
evaluating the credit history and past performance of the borrower, the location
of the real estate, the quality of the management constructing and operating the
property, the debt service ratio, the quality and characteristics of the income
stream generated by the property and appraisals supporting the property's
valuation. Peoples Federal also requires personal guarantees on such loans.
At March 31, 1996, Peoples Federal had a total of $3.9 million invested
in nonresidential real estate loans, including one undeveloped land loan, all of
which were secured by property located within Peoples Federal's primary market
area. Such loans comprised approximately 9.6% of Peoples Federal's total loans
at such date. At such date, Peoples Federal had $572,000 in delinquent
nonresidential real estate loans, or 1.4% of total loans. See "Delinquent Loans,
Non-performing Assets and Classified Assets."
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its tangible capital. At March 31,
1996, Peoples Federal's nonresidential mortgage loans totaled 38.8% of Peoples
Federal's tangible capital.
CONSUMER LOANS. Peoples Federal makes various types of consumer loans,
including unsecured loans and loans secured by deposits. Such loans are made
only at fixed rates of interest for terms of up to 5 years. Peoples Federal has
been attempting to increase its consumer loan portfolio as part of its interest
rate risk management efforts and because a higher rate of interest is received
on consumer loans. See "RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL."
Consumer loans may entail greater credit risk than do residential
mortgage loans. The risk of default on consumer loans increases during periods
of recession, high unemployment and other adverse economic conditions. Although
Peoples Federal has not had significant delinquencies on consumer loans, no
assurance can be provided that delinquencies will not increase.
At March 31, 1996, Peoples Federal had approximately $471,000, or 1.2%
of its total loans, invested in consumer loans, and none of such loans were more
than 90 days delinquent or nonaccruing. See "Delinquent Loans, Non-performing
Assets and Classified Assets."
COMMERCIAL LOANS. Peoples Federal does not issue any letters of credit
or originate or purchase any loans for commercial, business or agricultural
purposes, other than loans secured by real estate.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, borrowers
and real estate developers, periodic newspaper and radio advertisements,
solicitations by Peoples Federal's lending staff and walk-in customers.
Loan applications for permanent mortgage loans are taken by loan
personnel. Peoples Federal obtains a credit report, verification of employment
and other documentation concerning the credit-worthiness of the borrower.
Peoples Federal limits the ratio of mortgage loan payments to the borrower's
income to 28% and the ratio of the borrower's total debt payments to income to
36%. An appraisal of the fair market value of the real estate on which Peoples
Federal will be granted a mortgage to secure the loan is prepared by an
independent fee appraiser approved by the Board of Directors. Commencing in
1993, Peoples Federal has required a survey of the property for every real
estate loan. In 1994, Peoples Federal adopted an environmental policy. Pursuant
to such policy, Peoples Federal requires a Phase I Environmental Site Assessment
by an approved environmental consultant during processing of an application for
any commercial real estate loan in the amount of $250,000 or greater and before
foreclosing on any real estate. For nonresidential real estate loans of less
than $250,000, single-family homes, duplexes and multi-family homes, the
borrower is required to complete an Environmental Inspection Questionnaire. For
larger multi-tenant properties, including apartment buildings, nursing homes and
day care centers, tests for lead paint, lead in the drinking water and radon are
performed. Significant negative information from any such questionnaire or tests
may result in further investigation.
For multifamily and nonresidential mortgage loans, a personal guarantee
of the borrower's obligation to repay the loan is required. Peoples Federal also
obtains information with respect to prior projects completed by the borrower.
Upon the completion of the appraisal and the receipt of information on the
borrower, the application for a loan is submitted to the
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<PAGE> 55
Loan Committee, comprised of certain management officials, for approval or
rejection if the loan amount does not exceed $300,000. If the loan amount
exceeds $300,000, or if the application does not conform in all respects with
Peoples Federal's underwriting guidelines, the application is accepted or
rejected by the Board of Directors.
If a mortgage loan application is approved, title insurance is now
obtained on the title to the real estate which will secure the mortgage loan.
Prior to April 1, 1994, Peoples Federal did not require title insurance but did
obtain an attorney's opinion of title. Borrowers are required to carry
satisfactory fire and casualty insurance and flood insurance, if applicable, and
to name Peoples Federal as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. Peoples Federal
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
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.
Peoples Federal's loans carry no pre-payment penalties but do provide
that the entire balance of the loan is due upon sale of the property securing
the loan. Peoples Federal generally enforces such due-on-sale provisions.
LOAN ORIGINATIONS, PURCHASES AND SALES. Peoples Federal originated only
fixed-rate loans until July 1995. Peoples Federal has never sold loans and does
not originate its loans in accordance with secondary market guidelines, although
it is in the process of making the necessary changes to its loan origination
procedures in order to start originating loans in accordance with such
guidelines. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF PEOPLES FEDERAL - Asset and Liability Management."
Peoples Federal occasionally participates in loans originated by other
institutions. For a discussion of Peoples Federal's strategy for loan
originations, see "THE BUSINESS OF PEOPLES FEDERAL - General."
The following table presents Peoples Federal's mortgage loan
origination and participation activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
Six months ended ----------------------------------------
March 31, 1996 1995 1994 1993
-------------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Loans originated:
One- to four-family residential(1) $ 4,477 $ 6,691 $ 8,565 $12,612
Multifamily residential - - - -
Nonresidential 325 545 1,145 638
Consumer 93 439 174 182
------- ------- ------- -------
Total loans originated 4,895 7,675 9,884 13,432
------- ------- ------- -------
Reductions:
Principal repayments (3,417) (6,755) (11,879) (17,981)
Increase (decrease) in other items,
net(2) 1,191 (31) 776 (1,043)
------- ------- ------- -------
Net increase (decrease) $ 287 $ 951 $(2,771) $(3,506)
======= ======= ======= ========
- -----------------------------
<FN>
(1) Includes construction loans.
(2) Consists of unearned and deferred fees, costs and the allowance for
loan losses.
</TABLE>
OTS regulations generally limit the aggregate amount that a savings
association may lend to any one borrower to an amount equal to 15% of the
association's total capital under the regulatory capital requirements plus any
additional loan reserve not included in total capital. A savings association may
lend to one borrower an additional amount not to exceed 10% of total capital
plus additional reserves if the additional amount is fully secured by certain
forms of "readily marketable collateral." Real estate is not considered "readily
marketable collateral." In addition, the regulations require that loans to
-41-
<PAGE> 56
certain related or affiliated borrowers be aggregated for purposes of such
limits. An exception to these limits permits loans to one borrower of up to
$500,000 "for any purpose."
Based on such limits, Peoples Federal was able to lend approximately
$1.4 million to one borrower at March 31, 1996. The largest amount Peoples
Federal had outstanding to one borrower at March 31, 1996, was $1.2 million.
Such loans were secured by a single-family residence, a nonresidential real
estate loan and two construction loans for which the contractor had no purchaser
when construction started. All of such loans were current at March 31, 1996.
DELINQUENT LOANS, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, Peoples Federal attempts to
cause the delinquency to be cured by contacting the borrower. In most cases,
delinquencies are cured promptly.
When a loan is fifteen days or more delinquent, the borrower is sent a
delinquency notice. When a loan is thirty days delinquent, Peoples Federal
generally telephones the borrower. Depending upon the circumstances, Peoples
Federal may also inspect the property and inform the borrower of the
availability of credit counseling from Peoples Federal and counseling agencies.
Before a loan becomes 90 days delinquent, Peoples Federal will make further
contact with the borrower and, depending upon the circumstances, may arrange
appropriate alternative payment arrangements. After a loan becomes 90 days
delinquent, Peoples Federal may refer the matter to an attorney for foreclosure.
A decision as to whether and when to initiate foreclosure proceedings is based
on such factors as the amount of the outstanding loan in relation to the
original indebtedness, the extent of the delinquency and the borrower's ability
and willingness to cooperate in curing delinquencies. If a foreclosure occurs,
the real estate is sold at public sale and may be purchased by Peoples Federal.
Real estate acquired, or deemed acquired, by Peoples Federal as a
result of foreclosure proceedings is classified as real estate owned ("REO")
until it is sold. When property is so acquired, or deemed to have been acquired,
it is initially recorded by Peoples Federal at the lower of cost or fair value
of the real estate, less estimated costs to sell. Any reduction in fair value is
reflected in a valuation allowance account established by a charge to income.
Costs incurred to carry other real estate are charged to expense. Peoples
Federal had no REO property at March 31, 1996.
Peoples Federal places a loan on nonaccrual status when the principal
and interest is delinquent 90 days or more and deducts from income the interest
previously accrued.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
March 31, 1996 1995 1994 1993
------------------------------- --------------- ------------------------ --------------------------
Percent Percent Percent Percent
of total of total of total of total
Number Amount loans Number Amount loans Number Amount loans Number Amount loans
----- ------ ----- ------ ------ -------- ------ ------ ------- ------ ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for
(1):
30 - 59 days 12 $235 .58% 9 $281 .72% 6 $103 .27% 17 $248 .62%
60 - 89 days 2 10 .02 2 13 .03 4 55 .14 5 61 .15
90 days and over 7 682 1.68 5 648 1.66 - - - 1 7 .02
-- ---- ---- --- ----- ---- --- -------- ----- --- ------- ---
Total delinquent
loans 21 $927(2) 2.28% 16 $942(3) 2.41% 10 $158 .41% 23 $316 .79%
== ==== ==== == ==== ==== == ==== === == ==== ===
<FN>
----------------------------
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
(2) Of such amount, $342,000 is secured by one- to four-family real estate,
and $572,000 is secured by nonresidential real estate.
(3) Of such amount, $370,000 is secured by one- to four-family real estate,
and $572,000 is secured by nonresidential real estate.
</TABLE>
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<PAGE> 57
The following table sets forth information with respect to the accrual
and nonaccrual status of Peoples Federal's loans which are 90 days or more past
due and other non-performing assets at the dates indicated:
<TABLE>
<CAPTION>
At March 31, At September 30,
-------------------- ----------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential 110 41 76 - 7
Nonresidential 572 - 572 - -
Consumer - - - - -
----- ------ ----- ---- ------
Total nonperforming loans 682 41 648 - 7
Real estate owned - - - - -
----- ------ ----- ---- ------
Total non-performing assets $682 $41 $648 $ - $ 7
===== ====== ===== ==== ======
Total loan loss allowance 193 68 $ 80 $ 68 $ 68
Total non-performing assets as
a percentage of total assets .87% .05% .84% -% .01%
Loan loss allowance as a percent
of non-performing loans 28.30% 165.85% 12.35% -% 971.43%
===== ====== ===== ==== ======
</TABLE>
The nonaccruing residential real estate loan was paid in full in May
1996. The $572,000 of nonaccruing nonresidential loans is comprised of loans
secured by a shopping center and a building rented for parties (the "Partnership
Loans"). The individual borrowers transferred the property to a partnership in
which some of the borrowers were partners and then defaulted on the loans when
one of the borrower/partners died in December 1994. The remaining partners
arranged for refinancing of two of the three parcels through a loan at an area
bank (the "Bank") in July 1995. The funds for refinancing were advanced from the
Bank to a title company, which held the funds pending appointment of a fiduciary
for the estate of the deceased partner. The funds were returned to the Bank at
the request of the partners in March 1996. In January 1996, management was
informed that no further payment would be made on such loans and that
foreclosure would be necessary absent certain concessions regarding late payment
penalties. The loans have been classified as substandard, and discussions with
the borrowers and partners are ongoing.
During the year ended September 30, 1995, $75,000 would have been
recorded as interest income on nonaccruing loans had such loans been accruing
pursuant to contractual terms. During such period, $46,000 of interest income
was recorded on nonaccruing loans. During the periods shown, Peoples Federal had
no restructured loans within the meaning of SFAS No. 15. There are no loans
which are not currently classified as nonaccrual, more than 90 days past due or
restructured but which may be so classified in the near future because
management has concerns as to the ability of the borrowers to comply with
repayment terms.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. "Doubtful" assets
have the same weaknesses as "substandard" assets, with the additional
characteristics that (i) the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions and values
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<PAGE> 58
questionable and (ii) there is a high possibility of loss. An asset classified
"loss" is considered uncollectible and of such little value that its continuance
as an asset of the institution is not warranted. The regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving management's
close attention.
Generally, Peoples Federal classifies as "substandard" all loans that
are delinquent more than 90 days, unless management believes the delinquency
status is short-term due to unusual circumstances. Loans delinquent fewer than
90 days may also be classified if the loans have the characteristics described
above rendering classification appropriate.
Peoples Federal had no classified assets at December 31, 1994, nor at
September 30, 1995, 1994 or 1993. At March 31, 1996, Peoples Federal had
$572,000 of assets classified as substandard, consisting of the Partnership
Loans.
Federal examiners are authorized to classify an association's assets.
If an association does not agree with an examiner's classification of an asset,
it may appeal this determination to the Regional Director of the OTS. Peoples
Federal had no disagreements with the examiners regarding the classification of
assets at the time of the last examination.
OTS regulations require that Peoples Federal establish prudent general
allowances for loan losses for any loan classified as substandard or doubtful.
If an asset, or portion thereof, is classified as loss, the association must
either establish specific allowances for losses in the amount of 100% of the
portion of the asset classified loss, or charge off such amount.
ALLOWANCE FOR LOAN LOSSES. Peoples Federal maintains an allowance for
loan losses based upon a number of relevant factors, including, but not limited
to, trends in the level of non-performing assets and classified loans, current
and anticipated economic conditions in the primary lending area, past loss
experience, possible losses arising from specific problem assets and changes in
the composition of the loan portfolio.
The single largest component of Peoples Federal's loan portfolio
consists of one- to four-family residential real estate loans. Substantially all
of these loans are secured by residential real estate and require a down payment
of 20% of the lower of the sales price or appraisal value of the real estate. In
addition, these loans are secured by property in Peoples Federal's lending area
of a 50-mile radius from Massillon, Ohio. Peoples Federal's practice of making
loans only in its local market area and requiring a 20% down payment have
contributed to a low historical charge-off history.
In addition to one- to four-family residential real estate loans,
Peoples Federal makes additional real estate loans including home equity,
multifamily residential real estate, nonresidential real estate and construction
loans. These real estate loans are secured by property in Peoples Federal's
lending area and also require the borrower to provide a down payment. Peoples
Federal has not experienced any charge-offs from these other real estate loan
categories. In December 1995, however, Peoples Federal recorded an addition of
$105,000 to its loan loss allowance as nonperforming nonresidential real estate
loans had increased from $0 to $572,000, and nonperforming residential real
estate loans increased from $0 to $109,000 over the 15-month period since
September 30, 1994. The nonresidential real estate loan and $62,000 of the
residential real estate loans are the Partnership Loans, which first became
nonperforming in July 1995. Although the Partnership Loans were in default early
in 1995, no loss provision was recorded for the nonresidential real estate loan
prior to December 31, 1995, as the remaining partners arranged for refinancing
of two of the three parcels through a loan at the Bank in July 1995. The funds
for refinancing were advanced from the Bank to a title company, which held the
funds pending appointment of a fiduciary for the estate of the deceased partner.
Management of Peoples Federal expected to be paid by the title company upon
appointment of the fiduciary. The funds were returned to the Bank in March 1996
at the request of the partners. In December 1995, management of Peoples Federal
became aware that the Bank might not release the funds and recorded the
provision. Although the collateral for such loans appears adequate, management
believed such an addition to the allowance was prudent. The residential real
estate loan was paid in full in May 1996. See "Delinquent Loans, Non-performing
Assets and Classified Assets."
A small portion of Peoples Federal's total loans consists of consumer
loans. Peoples Federal has recorded less than $1,000 of charge-offs on consumer
loans during the last five years.
The allowance for loan losses is reviewed quarterly by the Board of
Directors. While the Board of Directors believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions
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<PAGE> 59
could result in material adjustments, and net earnings could be significantly
adversely affected, if circumstances differ substantially from the assumptions
used in making the final determination.
The following table sets forth an analysis of Peoples Federal's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
For the six months
-------------------- ------------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 80 $68 $68 $68 $68
Charge-offs - - - 5 21
Recoveries 8 - - - -
Provision for loan losses (charged to
operations) 105 - 12 5 21
---- --- --- --- ---
Balance at end of period $193 $68 $80 $68 $68
==== === === === ===
Ratio of net charge-offs (recoveries)
to average net loans outstanding
during the period (.02) - - .01% .05%
Ratio of allowance for loan losses to
total loans .48% .18% .20% .18% .17%
</TABLE>
At March 31, 1996, $108,000 of the allowance for loan losses was
allocated to nonresidential real estate loans and $85,000 was allocated to
residential loans. At September 30, 1995, 1994 and 1993, the allowance for loan
losses was unallocated.
MORTGAGE-BACKED AND RELATED SECURITIES
Peoples Federal maintains a significant portfolio of mortgage-backed
securities in the form of FHLMC, FNMA and GNMA participation certificates, as
well as two mortgage-backed securities not issued by government agencies.
Mortgage-backed securities generally entitle Peoples Federal to receive a
portion of the cash flows from an identified pool of mortgages. FHLMC, FNMA and
GNMA securities are each guaranteed by their respective agencies as to principal
and interest.
The FHLMC is a corporation chartered by the U.S. Government and
guarantees the timely payment of interest and the ultimate return of principal
on participation certificates. The FNMA is a corporation chartered by the U.S.
Congress and guarantees the timely payment of principal and interest on FNMA
securities. Although FHLMC and FNMA securities are not backed by the full faith
and credit of the U.S. Government, these securities are generally considered
among the highest quality investments with minimal credit risk. The GNMA is a
government agency. GNMA securities are backed by FHA-insured and VA-guaranteed
loans. The timely payment of principal and interest on GNMA securities is
guaranteed by the GNMA and backed by the full faith and credit of the U.S.
Government.
Peoples Federal has also invested in mortgage-backed securities issued
by two other issuers. The first security represents a $999,000 interest in a
trust fund consisting primarily of a pool of conventional adjustable-rate
mortgage loans secured by first liens on multifamily residential real estate
originated by Guardian Savings and Loan Association located in California
("Guardian Savings"). Peoples Federal receives a portion of the principal and
interest payments made on the underlying loans. The risks of such securities
include the possibility that borrowers will default on the loans or that
borrowers will pay the loans before maturity, reducing the yield on Peoples
Federal's investment.
The second such security represents the right to receive principal and
interest payments from mortgage loans obtained by persons purchasing timeshare
units in Discovery Beach Resort and Tennis Club in Cocoa Beach, Florida. The
loans are secured by mortgages on the underlying timeshare units. As with the
Guardian Savings securities, this security's risks include default on or early
repayment of the loans. As the collateral for the loans is vacation property, it
can reasonably be anticipated that a borrower might default on such a loan
rather than default on a loan secured by a primary residence. The market value
of such security at March 31, 1996, was $350,000.
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<PAGE> 60
Neither of the privately issued mortgage-backed securities is
guaranteed. Peoples Federal is receiving timely payments on both securities.
Peoples Federal has also invested in CMOs. CMOs are securities issued
by special purpose entities and secured by mortgage-backed securities. The cash
flow from the mortgages underlying a CMO is segmented and paid in accordance
with a predetermined priority to investors holding various CMO classes. Each
class has its own stated maturity, estimated average life, coupon rate and
prepayment characteristics. All of Peoples Federal's CMOs are performing in
accordance with their terms. All of People's Federal's CMOs are issued by and
guaranteed by FNMA and FHLMC. None of Peoples Federal's CMOs are considered
"high risk" under OTS pronouncements.
Mortgage-backed and related securities generally yield less than
individual loans originated by Peoples Federal. In addition, a high rate of
prepayment of the underlying loans could have a material negative effect on the
yield on the securities, which are purchased at a premium over their original
principal amounts. Mortgage-backed and related securities present less credit
risk than loans originated by Peoples Federal and held in its portfolio, and
Peoples Federal has purchased adjustable-rate mortgage-backed and related
securities as part of its effort to reduce its interest rate risk. If interest
rates rise in general, including the interest paid by Peoples Federal on its
liabilities, the interest rates on the loans backing the mortgage-backed and
related securities will also adjust upward. At March 31, 1996, $15.5 million of
Peoples Federal's mortgage-backed and related securities had adjustable rates.
See "RISK FACTORS - Interest Rate Risk" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL -
Asset and Liability Management."
The following table sets forth the book value of Peoples Federal's
mortgage-backed and related securities (which is also the market value because
all of such securities are available for sale) at the dates indicated.
<TABLE>
<CAPTION>
At March 31, ---------------------------
1996 1995 1994
------------ ------ ------
(In thousands)
<S> <C> <C> <C>
FNMA certificates $ 3,054 $ 3,377 $ 4,188
GNMA certificates 8,652 9,380 5,523
FHLMC certificates 7,823 8,969 8,526
Guardian Savings and Loan Certificate 999 1,036 1,164
Discovery Resort Limited Partnership Notes 350 405 -
FNMA and FHLMC REMIC 2,415 2,841 3,469
-------- ------- -----
Total mortgage-backed and related
securities $23,293 $26,008 $22,870
======= ======= =======
</TABLE>
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<PAGE> 61
The following table sets forth information regarding scheduled
maturities, amortized costs, market value and weighted average yields of Peoples
Federal's mortgage-backed and related securities at March 31, 1996. Expected
maturities will differ from contractual maturities due to scheduled repayments
and because borrowers may have the right to call or prepay obligations with or
without prepayment penalties. The following table does not take into
consideration the effects of scheduled repayments or the effects of possible
prepayments.
<TABLE>
<CAPTION>
At March 31, 1996
--------------------------------------------------------------------------------------------
One year or less After one to five years After five to ten years After ten years
------------------- ----------------------- ----------------------- -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
value yield value yield value yield value yield
------ ------ ------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA certificates $ - -% $ - -% $ - -% $ 3,054 6.71%
GNMA certificates - - - - - - 8,652 6.14
FHLMC certificates 1,033 5.17 1,466 6.97 451 8.38 4,873 7.07
Guardian Savings and
Loan certificate - - - - - - 999 7.10
------ ---- ------- ---- ------- ---- -------- ----
Discovery Resort
Limited Partnership
Notes - - - - 350 7.68 - -
------ ---- ------- ---- ------- ---- -------- ----
FNMA and FHLMC and
REMICs - - - - 29 5.99 2,386 6.13
------ ---- ------- ---- ------- ---- -------- ----
Total $1,033 5.17% $ 1,466 6.97% $ 830 8.00% $ 19,964 6.50%
====== ==== ======= ==== ======= ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1996
-------------------------------------
Total mortgage-backed
Portfolio
-------------------------------------
Carrying Market Average
value value yield
-------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
FNMA certificates $ 3,054 $ 3,132 6.71%
GNMA certificates 8,652 8,693 6.14
FHLMC certificates 7,823 7,867 6.87
Guardian Savings and
Loan certificate 999 999 7.10
------- ------- ----
Discovery Resort
Limited Partnership
Notes 350 350 7.68
------- ------- ----
FNMA and FHLMC and
REMICs 2,415 2,415 6.13
------- ------- ----
Total $23,293 $23,456 6.52%
======= ======= ====
</TABLE>
For additional information, see Note C of the Notes to Consolidated
Financial Statements.
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<PAGE> 62
INVESTMENT ACTIVITIES
OTS regulations require that Peoples Federal maintain a minimum amount
of liquid assets, which may be invested in U. S. Treasury obligations,
securities of various federal agencies, certificates of deposit at insured
banks, bankers' acceptances and federal funds. Peoples Federal is also
permitted to make investments in certain commercial paper, corporate debt
securities rated in one of the four highest rating categories by one or more
nationally recognized statistical rating organizations, and mutual funds, as
well as other investments permitted by federal regulations. See "REGULATION"
and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PEOPLES FEDERAL."
Peoples Federal's investments include automobile loan pass-through
certificates. Such certificates represent interests in pools of automobile
loans. Most of such loans have higher-than-normal interest rates and have been
made to high-risk borrowers. The cash flows from the loans are segmented and
paid to certificate holders in accordance with a predetermined priority to
investors holding various classes. Peoples Federal's certificates all represent
the highest priority class in each pool. Peoples Federal receives portions of
the loan payments made by the borrowers.
The automobile loan pass-through certificates have two principal risks.
First, there is a risk that if interest rates decrease, borrowers will repay
their loans early, refinancing their loans at a lower rate. Peoples Federal
might experience a lower yield on the certificates due to such prepayments.
Second, because the borrowers are typically low-income individuals with
either no credit history or adverse credit ratings, a higher-than-average
default rate can be expected. Moreover, upon repossession, the full amount owed
on the loan may not be recovered, the security interest in the vehicle may not
be perfected, and in some states, other persons or governmental entities might
have a prior security interest in the vehicles. Although some of such
certificates have insurance against such risks of loss, the amount of such
insurance might not cover all loss. The Trustee holding the loans and security
interests and distributing payments is required to maintain a certain amount of
cash in a reserve fund for the benefit of the certificate holders in the event
of a shortfall in a scheduled distribution. In February 1996, however, Duff &
Phelps, a security rating service, lowered its ratings on some of the
certificates from A+ to BBB- due to failure of the Trustee to maintain the
required reserve amount. The certificates are still performing in accordance
with their terms.
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<PAGE> 63
The following table sets forth the composition of Peoples Federal's
investment securities at the dates indicated:
<TABLE>
<CAPTION> At September 30,
At March 31, -------------------------------------
1996 1995
----------------------------------- -------------------------------------
Carrying % of Market % of Carrying % of Market % of
value Total value Total value Total value Total
------- ----- ------ ----- -------- ----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit
in the FHLB $5,500 60.10% $5,500 59.90% $5,500 58.47% $5,500 58.29%
Investment Securities:
U.S. government and
federal agency
securities 199 2.17 202 2.20 199 2.12 203 2.15
FHLB and FHLMC stock 1,752 19.15 1,752 19.08 1,494 15.88 1,494 15.83
Automobile loan
pass-through
certificates 712 7.78 712 7.75 1,108 11.79 1,111 11.78
Municipal securities 988 10.80 1,016 11.07 1,105 11.74 1,127 11.95
------ ----- ------ ------ ------ ------ ------ ------
Total interest-bearing
deposits and
investment securities $9,151 100.0% $9,182 100.00% $9,406 100.00% $9,435 100.00%
====== ===== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------
1994 1993
------------------------------------ ------------------------------------
Carrying % of Market % of Carrying % of Market % of
value Total value Total value Total value Total
------ ----- ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit
in the FHLB $ 8,000 68.72% $ 8,000 65.62% $ - -% $ - -%
Investment Securities:
U.S. government and
federal agency
securities 1,200 10.31 1,205 9.89 2,202 38.52 2,267 35.74
FHLB and FHLMC stock 699 6.00 1,277 10.48 666 11.65 1,212 19.11
Automobile loan
pass-through
certificates 1,376 11.82 1,350 11.07 2,471 43.22 2,492 39.29
Municipal securities 367 3.15 359 2.94 378 6.61 372 5.86
------- ------ ------- ------ ------- ------ ------ ------
Total interest-bearing
deposits and
investment securities $11,642 100.00% $12,191 100.00% $ 5,717 100.00% $6,343 100.00%
======= ====== ======= ====== ======= ====== ====== ======
</TABLE>
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<PAGE> 64
The following tables set forth the contractual maturities, carrying
values, market values and average yields for Peoples Federal's certificates of
deposit in the FHLB and investment securities at March 31, 1996, and September
30, 1995.
<TABLE>
<CAPTION>
At March 31, 1996
-------------------------------------------------------------------------------------
One year or less After one to five years After five years
------------------------ ------------------------ -----------------------
Carrying Average Carrying Average Carrying Average
value yield value yield value yield
-------- ------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit in the
FHLB $5,500 6.13% $ - -% $ - -%
Investment securities:
U.S. government and federal
agency securities 199 7.56 - - - -
FHLB and FHLMC stock 1,752 3.75 - - - -
Automobile loan
pass-through certificates - - 363 7.14 349 7.64
Municipal securities 12 6.31 48 6.30 928 6.13
------ ---- ------- ---- --------- ----
Total $7,463 5.61% $411 7.04% $ 1,277 6.54%
====== ==== ==== ===== ====== ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1995
-------------------------------------------------------------------------------------
One year or less After one to five years After five years
------------------------ ------------------------ -----------------------
Carrying Average Carrying Average Carrying Average
value yield value yield value yield
-------- ------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit in the
FHLB $5,000 6.00% $ 500 7.45% $ - -%
Investment securities:
U.S. government and federal
agency securities - - 199 7.57 - -
FHLB and FHLMC stock 1,494 4.18 - - - -
Automobile loan
pass-through certificates 24 7.37 585 6.92 500 7.26
Municipal securities 112 7.13 48 6.29 944 6.13
------ ---- ------- ---- --------- ----
Total $6,630 5.61% $ 1,332 7.19% $ 1,444 6.52%
====== ==== ======= ==== ========= ====
</TABLE>
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<PAGE> 65
<TABLE>
<CAPTION>
At March 31, 1996
---------------------------------------
Average Weighted
life Carrying Market average
in years value value yield
-------- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Certificates of deposit .29 $ 5,500 $ 5,500 6.13%
in the FHLB
Investment securities:
U.S. government and federal
agency securities .81 199 202 7.56
FHLB and FHLMC stock -- 1,752 1,752 3.75
Automobile loan pass-
through certificates 2.34 712 712 7.38
Municipal securities 7.42 988 1,016 6.14
-------- --------
Total 2.17 $ 9,151 $ 9,182 5.80%
======== ========
<CAPTION>
At September 30, 1995
---------------------------------------
Average Weighted
life Carrying Market average
in years value value yield
-------- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Certificates of deposit .79 $ 5,500 $ 5,500 6.13%
in the FHLB
Investment securities:
U.S. government and federal
agency securities 1.31 199 203 7.57
FHLB and FHLMC stock -- 1,494 1,494 4.18
Automobile loan pass-
through certificates 2.19 1,108 1,111 7.08
Municipal securities 7.10 1,105 1,127 6.24
-------- --------
Total 2.28 $ 9,406 $ 9,435 5.97%
======== ========
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of Peoples
Federal's funds for use in lending and other investment activities. In addition
to deposits, Peoples Federal derives funds from interest payments and principal
repayments on loans and mortgage-backed and related securities, income on
earning assets, service charges and gains on the sale of assets. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PEOPLES FEDERAL." Loan payments are a relatively stable source of
funds, while deposit inflows and outflows fluctuate more in response to general
interest rates and money market conditions. Peoples Federal has never borrowed
funds. See "MANAGEMENT'S DISCUSSION OF RECENT RESULTS - Financial Condition."
DEPOSITS. Deposits are attracted principally from within Peoples
Federal's primary market area through the offering of a broad selection of
deposit instruments, including NOW accounts, money market accounts, passbook
savings accounts and term certificate accounts. Although Peoples Federal has
some individual retirement accounts ("IRAs"), Peoples Federal has not offered
new IRAs for several years. Interest rates paid, maturity terms, service fees
and withdrawal penalties for the various types of accounts are established
periodically by the management of Peoples Federal based on Peoples Federal's
liquidity requirements, growth goals and interest rates paid by competitors.
Peoples Federal does not use brokers to attract deposits.
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<PAGE> 66
At March 31, 1996, Peoples Federal's certificates of deposit totaled
$49.3 million, or 73.2% of total deposits. Of such amount, approximately $27.0
million in certificates of deposit mature within one year. Based on past
experience and Peoples Federal's prevailing pricing strategies, management
believes that a substantial percentage of such certificates will renew with
Peoples Federal at maturity. If there is a significant deviation from historical
experience, Peoples Federal can utilize borrowings from the FHLB as an
alternative to this source of funds.
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Peoples Federal at the dates
indicated:
<TABLE>
<CAPTION>
At September 30,
At March 31, ----------------------------------------------------------------
1996 1995 1994 1993
------------------ ------------------ ------------------- ------------------
Percent Percent Percent Percent
of total of total of total of total
Amount deposits Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
- ---------------------
NOW accounts(1) $ 1,569 2.33% $ 1,035 1.56% $ 880 1.34% $ 673 .99%
Money market accounts(2) 3,544 5.26 3,723 5.59 4,433 6.74 4,546 6.66
Passbook savings accounts(3) 12,940 19.21 12,524 18.81 13,551 20.59 13,928 20.39
------- ------ ------- ------ ------- ------ ------- ------
Total transaction accounts 18,053 26.80 17,282 25.96 18,864 28.67 19,147 28.04
Certificates of deposit:
- ------------------------
2.01 - 4.00% 409 .61 1,263 1.90 11,776 17.90 15,462 22.64
4.01 - 6.00% 29,600 43.93 23,404 35.16 23,264 35.35 14,132 20.69
6.01 - 8.00% 17,543 26.04 21,015 31.57 7,731 11.75 14,394 21.08
8.01 - 10.00% 1,769 2.62 3,600 5.41 4,165 6.33 5,158 7.55
------- ------ ------- ------ ------- ------ ------- ------
Total certificates of deposit 49,321 73.20 49,282 74.04 46,936 71.33 49,146 71.96
------- ------ ------- ------ ------- ------ ------- ------
Total deposits(4) $67,374 100.00% $66,564 100.00% $65,800 100.00% $68,293 100.00%
======= ====== ======= ====== ======= ====== ======= ======
- -----------------------------
<FN>
(1) Peoples Federal's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At March 31,
1996, and September 30, 1995, 1994 and 1993, the weighted average rates
on NOW accounts were 1.30%, 1.41%, 1.40% and 1.59%, respectively.
(2) Peoples Federal's weighted average interest rate paid on money market
accounts fluctuates with the general movement of interest rates. At
March 31, 1996, and September 30, 1995, 1994 and 1993, the weighted
average rates on money market accounts were 2.49%, 2.65%, 2.65% and
2.85%, respectively.
(3) Peoples Federal's weighted average rate on passbook savings accounts
fluctuates with the general movement of interest rates. The weighted
average interest rate on passbook accounts was 2.49%, 2.47%, 2.50% and
2.75%, at March 31, 1996, and September 30, 1995, 1994 and 1993,
respectively.
(4) IRAs are included in the various certificates of deposit balances. IRAs
totaled $220,000, $267,000, $347,000 and $347,000 as of March 31, 1996,
and September 30, 1995, 1994 and 1993, respectively.
</TABLE>
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<PAGE> 67
The following table shows rate and maturity information for Peoples
Federal's certificates of deposit as of March 31, 1996:
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
------------------ ------- ------- ------ ---------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
2.01 - 4.00% $ 327 $ 76 $ 6 $ -- $ 409
4.01 - 6.00 20,857 4,635 1,844 2,264 29,600
6.01 - 8.00 4,016 8,041 4,505 981 17,543
8.01 - 10.00 1,769 -- -- -- 1,769
------- ------- ------ ---------- -------
Total certificates
of deposit $26,969 $12,752 $6,355 $ 3,245 $49,321
======= ======= ====== ========== =======
</TABLE>
The following table presents the amount of Peoples Federal's
certificates of deposit of $100,000 or more by the time remaining until maturity
as of March 31, 1996:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ 317
Over 3 months to 6 months 431
Over 6 months to 12 months 733
Over 12 months 2,336
-------
Total $3,817
======
</TABLE>
The following table sets forth Peoples Federal's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Six months ended March 31, Year ended September 30,
-------------------------- ---------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance $ 66,564 $ 65,800 $ 65,800 $ 68,293 $ 67,422
Deposits 17,515 19,912 42,618 38,589 35,694
Withdrawals 17,985 21,306 43,383 39,505 36,749
-------- -------- -------- -------- --------
Net increases (decreases) before (470) (1,394) (1,613) (4,697) (1,613)
interest credited
Interest credited 1,280 1,077 2,377 2,204 2,484
-------- -------- -------- -------- --------
Ending balance $ 67,374 $ 65,483 $ 66,564 $ 65,800 $ 68,293
======== ======== ======== ======== ========
Net increase (decrease) $ 810 $ (317) $ 764 $ (2,493) $ 871
Percent increase (decrease) 1.22% (.48)% 1.16% (3.65)% 1.29%
</TABLE>
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<PAGE> 68
BORROWINGS. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. See "REGULATION - Federal Home Loan Banks." As a member in good
standing of the FHLB of Cincinnati, Peoples Federal is authorized to apply for
advances from the FHLB of Cincinnati, provided certain standards of
creditworthiness have been met. Under current regulations, an association must
meet certain qualifications to be eligible for FHLB advances. The extent to
which an association is eligible for such advances will depend upon whether it
meets the Qualified Thrift Lender Test (the "QTL Test"). See "REGULATION - OTS
Regulations -- Qualified Thrift Lender Test." If an association meets the QTL
Test, it will be eligible for 100% of the advances it would otherwise be
eligible to receive. If an association does not meet the QTL Test, it will be
eligible for such advances only to the extent it holds specified QTL Test
assets. At March 31, 1996, Peoples Federal was in compliance with the QTL Test.
Peoples Federal has not utilized FHLB advances during the three fiscal years
ended September 30, 1995, or during the six months ended March 31, 1996.
COMPETITION
Peoples Federal competes for deposits with other savings associations,
commercial banks and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, Peoples Federal competes with other savings
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, mortgage companies and other lenders. Peoples Federal
competes for loan originations primarily through the interest rates and loan
fees offered and through the efficiency and quality of services provided.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors which are not readily predictable. Three savings
associations, 11 banks and 24 credit unions have offices in Stark County,
although Peoples Federal is the only savings association with its headquarters
located in Stark County. At June 30, 1995, Peoples Federal had approximately
1.8% of all financial institution deposits in Stark County and 13% of all
financial institution deposits in Massillon, Ohio.
The size of financial institutions competing with Peoples Federal is
likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon Peoples
Federal.
SUBSIDIARIES
Peoples Federal owns all of the outstanding shares of Massillon
Community Service Corporation ("MCSC"), the only asset of which was stock of
Intrieve, a data processing company. Such shares were redeemed by Intrieve on
October 20, 1995.
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<PAGE> 69
PROPERTIES
The following table sets forth certain information at March 31, 1996,
regarding the properties on which the main office, the branch office and the
lending office of Peoples Federal are located:
<TABLE>
<CAPTION>
Owned Date Square Net
Location or leased acquired footage book value(1) Deposits
- -------- --------- -------- ------- ------------- --------
<S> <C> <C> <C> <C> <C>
Main Office:
211 Lincoln Way East
Massillon, Ohio 44646 Owned 1958 7,200 $693,000 $54,791,000
Branch Office:
2312 Lincoln Way N.W.
Massillon, Ohio 44647 Owned 1978 1,400 $454,000 $12,583,000
Lending Office:
4344 Metro Circle, N.W.
North Canton, Ohio 44720 Leased N/A - N/A N/A
- -----------------------------
<FN>
(1) At March 31, 1996, Peoples Federal's office premises and equipment had
a total net book value of $1,502,000. For additional information
regarding Peoples Federal's office premises and equipment, see Notes A
and F of Notes to Financial Statements.
</TABLE>
PERSONNEL
As of March 31, 1996, Peoples Federal had 19 full-time employees and
three part-time employees. Peoples Federal believes that relations with its
employees are good. Peoples Federal offers health and life insurance benefits.
None of the employees of Peoples Federal are represented by a collective
bargaining unit.
LEGAL PROCEEDINGS
Peoples Federal is not presently involved in any legal proceedings of a
material nature. From time to time, Peoples Federal is a party to legal
proceedings incidental to its business to enforce its security interest in
collateral pledged to secure loans made by Peoples Federal.
MANAGEMENT OF PFC
The Board of Directors of PFC consists of six members divided into two
classes. Each of the directors of Peoples Federal is also a director of PFC. The
terms of Messrs. Baker, Matecheck and von Gunten expire in 1997, and the terms
of Messrs. Bordner, Shelt and Stephan expire in 1998. The following persons are
officers of PFC: Vince E. Stephan, Chairman of the Board; Paul von Gunten,
President and Chief Executive Officer; Vincent G. Matecheck, Secretary; and
James R. Rinehart, Treasurer. After the consummation of the Conversion, PFC
intends to have quarterly meetings of the Board of Directors. PFC does not
currently pay directors' fees.
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<PAGE> 70
MANAGEMENT OF PEOPLES FEDERAL
DIRECTORS AND EXECUTIVE OFFICERS
The Charter of Peoples Federal provides for a Board of Directors
consisting of not less than five nor more than 15 directors, such number to be
fixed or changed in the Bylaws or by the members. The Board of Directors
currently consists of six directors divided into three classes. One class of
directors is elected each year. Each director serves for a three-year term. The
Board of Directors met 17 times during the fiscal year ended September 30, 1995,
for regular and special meetings. No director attended fewer than 75% of the
aggregate of such meetings and all meetings of the committees of which such
director was a member.
The following table presents certain information with respect to the
present directors and executive officers of Peoples Federal:
<TABLE>
<CAPTION>
Date of Term
Name Age(1) Position with Peoples Federal service expires
- ---- ------ ----------------------------- ------- -------
<S> <C> <C> <C> <C>
Victor C. Baker 72 Director, Vice Chairman of the 1984 1997
Board
James P. Bordner 53 Director 1992 1998
Vincent G. Matecheck 51 Director, Attorney 1987 1997
Thomas E. Shelt 62 Director 1978 1999
Vince E. Stephan 79 Director, Chairman of the Board 1970 1998
Paul von Gunten 69 Director, President, CEO 1968 1999
William P. Hart 58 Vice President - -
Linda L. Fowler 51 Secretary - -
James R. Rinehart 52 Treasurer - -
Cindy A. Wagner 44 Assistant Treasurer - -
- ------------------------------
<FN>
(1) At March 31, 1996.
</TABLE>
Mr. Baker retired in 1982 after owning and operating Sunny Slope
Orchard, a family operated, wholesale and retail fruit market, bakery and sweet
shop located in Massillon, Ohio, for 40 years.
Mr. Bordner has been the President of P.J. Bordner and Company, Inc., a
grocery store chain in Massillon, Ohio, since 1980.
Mr. Matecheck has served as legal counsel to Peoples Federal since 1992
and as Vice President from February 1995 to January 1996. Mr. Matecheck has been
a sole practitioner since 1971. He is also the Secretary and a director of P.J.
Bordner and Company, Inc., and Polymer Packaging, Inc., of Canton, Ohio; a
partner of Federal Avenue Office Building Company; a director of Gordy Graybill,
Inc.; and the President and a member of the Board of Trustees of the United Way
of Western Stark County.
Mr. Shelt was employed by Peoples Federal from 1961 until his
retirement in December 1994. For the last fifteen years of his employment, he
served as Vice President. Mr. Shelt served for 26 years on the Board of
Governors of the Canton-Massillon Chapter of the Institute of Financial
Education and held all offices in such Chapter. He is currently engaged in
farming and real estate investment.
Mr. Stephan has been Chairman of the Board of Peoples Federal since
1989. He is Vice President of Manchester Hardware, Inc., a hardware store
located in Manchester, Ohio, and retired in 1980 after serving for 25 years as
an insurance agent for Nationwide Insurance Company in Canal Fulton, Ohio. He
currently operates a family farm.
Mr. von Gunten has been employed by Peoples Federal since 1948 and has
served as President and Chief Executive Officer since 1979.
-56-
<PAGE> 71
Mr. Hart joined Peoples Federal in January 1996. Prior to joining
Peoples Federal, Mr. Hart was employed by Citizens Savings Bank in Canton, Ohio,
serving as Vice President of Loan Originations since 1978. Mr. Hart has also
taught real estate finance in the Continuing Adult Education Programs at Malone
College since 1983 and at Kent State University since 1979.
Ms. Fowler has been employed by Peoples Federal since 1962. She served
as Treasurer from 1986 to 1991 and has served as Secretary since 1991.
Mr. Rinehart has been employed by Peoples Federal since May 1994, first
serving as Accountant and then as Assistant Treasurer from January 1995 to March
1996, when he became the Treasurer. Prior to joining Peoples Federal, Mr.
Rinehart was an accountant with Hall, Kistler & Company from 1963 to 1993, with
a two-year interruption for military service.
Ms. Wagner has been employed by Peoples Federal since 1986. She served
as Treasurer from 1991 until March 1996, when she became Assistant Treasurer.
COMMITTEES OF DIRECTORS
The Board of Directors of Peoples Federal has an Audit Committee. The
Audit Committee recommends audit firms to the full Board of Directors and
reviews and approves the annual independent audit report. The members of the
Audit Committee are Messrs. Baker, Bordner, Shelt and Stephan. During fiscal
year 1995, the entire Board of Directors of Peoples Federal acted as an Audit
Committee.
COMPENSATION
Each director of Peoples Federal receives a retainer fee of $2,400 per
year for service as a director of Peoples Federal, plus $500 for each monthly
meeting attended. Each director also receives $150 per committee meeting
attended. During fiscal year 1995, Peoples Federal paid a total of $60,800 in
directors' compensation. The Chairman of the Board and Vice Chairman of the
Board also receive monthly fees of $600 and $350, respectively.
The following table presents certain information regarding the cash
compensation received by the President and Chief Executive Officer of Peoples
Federal. No other executive officer of Peoples Federal received compensation
exceeding $100,000 during the fiscal year ended September 30, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Annual Compensation All Other
Compensation
---------------------------------
Name and Year Salary ($) Bonus ($)
Principal
Position
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Paul von Gunten 1995 $105,796(1) $11,000 $21,812(2)
President and Chief
Executive Officer
- -----------------------------
<FN>
(1) Includes a salary of $97,496 and directors' fees of $8,300. Does not
include amounts attributable to other miscellaneous benefits received
by executive officers. The cost to Peoples Federal of providing such
benefits to Mr. von Gunten was less than 10% of his cash compensation
(2) Consists of Peoples Federal's contribution to Mr. von Gunten's 401(k)
defined contribution plan account in the amount of $21,711 and the
premium of $101 paid by Peoples Federal for insurance on the life of
Mr. von Gunten payable to a beneficiary designated by Mr. von Gunten.
</TABLE>
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<PAGE> 72
EMPLOYEE STOCK OWNERSHIP PLAN
PFC has established the ESOP for the benefit of employees of PFC and
Peoples Federal age 21 or older who have completed at least one year of
full-time service with PFC or Peoples Federal. The establishment of the ESOP and
the purchase by the ESOP of the Common Shares of PFC are subject to the receipt
of a favorable determination letter on the qualified status of the ESOP under
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), from the Commissioner of Internal Revenue ("Commissioner"). PFC will
submit to the Commissioner an application for a favorable determination letter
on the qualified status of the ESOP. Although no assurances can be given, PFC
expects that the ESOP will receive a favorable determination letter from the
Commissioner.
PFC intends to accept a promissory note from the ESOP in payment for
four percent of the Common Shares sold in connection with the Conversion. The
loan will be secured by the shares purchased with the loan proceeds and will be
repaid by the ESOP with funds from Peoples Federal's discretionary contributions
to the ESOP and earnings on ESOP assets. Shares purchased with such loan
proceeds will be held in a suspense account for allocation among participants as
the loan is repaid. As payments are made and the shares are released from the
suspense account, such shares will be validly issued, fully paid and
non-assessable.
Contributions to the ESOP and shares released from the suspense account
will be allocated pro rata to participants on the basis of compensation. Except
for participants who retire, become disabled, or die during the plan year, all
other participants must have completed at least 1,000 hours of service and be
employed on the last day of the plan year in order to receive an allocation.
Benefits become vested at a rate of 20% per year commencing after three years of
service and are fully vested after seven years of service. Vesting will be
accelerated upon retirement at or after age 59 1/2, death, disability,
termination of the ESOP or a change in control of PFC or Peoples Federal.
Forfeitures will be reallocated among remaining participating employees.
Benefits may be paid either in PFC Common Shares or in cash. Benefits may be
payable upon retirement, death, disability or separation from service. Benefits
payable under the ESOP cannot be estimated.
A Committee appointed by the Board of Directors of PFC will administer
the ESOP. The Common Shares and other ESOP funds will be held and invested by a
trustee (the "ESOP Trustee"). The ESOP Committee may instruct the ESOP Trustee
regarding investments of funds contributed to the ESOP. The ESOP Trustee must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Shares for which employees do not give
instructions and unallocated shares will be voted by the ESOP Trustee in its
sole discretion.
From time to time, the ESOP may purchase additional Common Shares of
PFC through purchases in the market or directly from PFC. No such purchases are
currently contemplated. If the ESOP purchases newly issued shares from PFC, such
purchases would have a dilutive effect on the interests of PFC's shareholders.
STOCK OPTION PLAN
The Board of Directors of PFC expects to adopt the Stock Option Plan,
subject to the approval by the shareholders of PFC. A number of Common Shares
equal to 10% of the Common Shares to be issued in connection with the Conversion
is expected to be reserved for issuance by PFC upon the exercise of options to
be granted to certain directors, officers and employees of Peoples Federal and
PFC from time to time under the Stock Option Plan. The purposes of the Stock
Option Plan include retaining and providing incentives to the directors,
officers and employees of PFC and Peoples Federal by facilitating their purchase
of a stock interest in PFC.
Options granted to the officers and employees under the Stock Option
Plan may be "incentive stock options" within the meaning of Section 422 of the
Code (an "ISO"). Options granted under the Stock Option Plan to directors who
are not full-time employees of PFC or Peoples Federal will not qualify under the
Code and thus will not be incentive stock options ("non-qualified stock
options"). Although any eligible director, officer or employee of Peoples
Federal and PFC may receive non-qualified stock options, Peoples Federal
anticipates that the non-employee directors of Peoples Federal and PFC will
receive non-qualified stock options, and other eligible participants will
receive incentive stock options.
The option exercise price of each option granted under the Stock Option
Plan will be determined by the committee of directors appointed to administer
the Stock Option Plan at the time of grant, with the exception that the exercise
price for an option must not be less than 100% of the fair market value of the
shares on the date of the grant. No stock option will be exercisable after the
expiration of ten years from the date that it is granted, except that in the
case of an ISO granted to an employee who owns more than 10% of PFC's
outstanding Common Shares at the time an ISO is granted under the Stock
-58-
<PAGE> 73
Option Plan, the exercise price of such an ISO may not be less than 110% of the
fair market value of the shares on the date of the grant, and the ISO shall not
be exercisable after the expiration of five years from the date it is granted.
An option recipient cannot transfer or assign an option other than by
will or in accordance with the laws of descent and distribution. "Termination
for cause," as defined in the Stock Option Plan, will result in the annulment of
any outstanding options.
PFC will receive no monetary consideration for the granting of options
under the Stock Option Plan. Upon the exercise of options, PFC will receive
payment of cash, PFC Common Shares or a combination of cash and Common Shares
from option recipients in exchange for shares issued.
The Stock Option Plan will be administered by a committee of directors
composed of at least three directors of PFC (the "Committee"). The Committee may
grant options under the Stock Option Plan at such times as the committee members
deem most beneficial to Peoples Federal and PFC on the basis of the individual
participant's position, duties and responsibilities, the value of his or her
services to Peoples Federal and PFC and any other factors deemed relevant. A
grant of options under the Stock Option Plan is expected to occur on the date of
approval of the Stock Option Plan by the shareholders of PFC. The members of the
Committee have not yet been appointed, and specific grants have not been
proposed. The directors of PFC intend, however, to make such grants in
accordance with OTS regulations which provide that no individual may receive
options to purchase more than 25% of the shares which may be the subject of
options pursuant to the Stock Option Plan, and directors who are not employees
of PFC or Peoples Federal may not receive options to purchase more than 5% of
such shares individually or 30% in the aggregate.
Pursuant to OTS regulations, the Stock Option Plan may not be approved
by the shareholders of PFC until at least six months after the Conversion is
completed. It is expected that options will be granted immediately after the
shareholders approve the Stock Option Plan.
RECOGNITION AND RETENTION PLAN AND TRUST
The Board of Directors of Peoples Federal intends to adopt the RRP,
subject to approval of the shareholders of PFC as a means of providing directors
and certain key employees of Peoples Federal with an ownership interest in PFC
in a manner designed to compensate such directors and key employees for services
to Peoples Federal. Peoples Federal expects to contribute sufficient funds to
enable the RRP to purchase Common Shares in the open market or to purchase
authorized but unissued shares from PFC in an amount equal to up to 4% of the
Common Shares sold in connection with the Conversion. Assuming the sale of
1,300,000 shares in connection with the Conversion, 52,000 shares would be
purchased by the RRP. The purchase of authorized but unissued shares would have
a dilutive effect on the interests of PFC's shareholders. See "CAPITALIZATION"
and "PRO FORMA DATA." While no specific awards have yet been proposed, the
directors of Peoples Federal intend to make such awards in accordance with OTS
regulations which provide that no individual may receive more than 25% of the
shares awarded pursuant to the RRP, and directors who are not employees of PFC
or Peoples Federal may not receive more than 5% of such shares individually or
30% in the aggregate.
Until shares awarded are earned by the participant, such shares will be
forfeited in the event that the employment of the employee is terminated for
cause. One-fifth of such shares will be earned and nonforfeitable on each of the
first five anniversaries of the date of the awards. In the event of the death or
disability of a participant, however, the participant's shares will be deemed to
be earned and nonforfeitable upon such date. A committee to be appointed by the
Board of Directors of Peoples Federal will administer the RRP and determine the
number of shares to be awarded to eligible participants. Two directors of
Peoples Federal are expected to serve as the trustees. Each participant will be
entitled to the benefit of any dividends or other distributions paid on shares
awarded but not yet earned, but such unearned shares will be voted by the
trustees in their discretion. Compensation expense in the amount of the fair
market value of the Common Shares at the date of the award to the employee will
be recognized as the shares are earned. In the event of a termination of a
participant's employment following a change in control of Peoples Federal or
PFC, all shares awarded to such participant in the RRP become earned and
nonforfeitable.
The RRP must be approved by the shareholders of PFC. Pursuant to OTS
regulations, the shareholders may not approve the RRP until six months after the
completion of the Conversion. It is expected that the RRP will purchase shares
of PFC and that awards will be made immediately after shareholder approval of
the RRP.
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<PAGE> 74
RETIREMENT BENEFIT PLANS
Peoples Federal provides a 401(k) defined contribution plan (the
"401(k) Plan") for all employees who have completed six months of service with
Peoples Federal and have attained age 21.
Peoples Federal contributes an amount equal to a certain percentage of
the employee's contribution, up to the first 10% of the employee's salary. The
matching percentage is determined by the Board of Directors of Peoples Federal
annually and is currently 40%. In addition, Peoples Federal may make additional
discretionary contributions. An employee becomes vested in the employer matching
contributions to his account to the extent of 20% after two years of employment
with Peoples Federal and an additional 20% each year thereafter, with full
vesting after six years. In addition, participants are immediately fully vested
in matching contributions at age 55.
EMPLOYMENT AGREEMENTS
Peoples Federal intends to enter into an employment agreement with Paul
von Gunten (the "Employment Agreement"), as well as three other officers of
Peoples Federal. Peoples Federal currently has no employment agreements with any
of its officers. The Employment Agreement, which will become effective upon
completion of the Conversion, provides for a term of three years and a salary
and performance review by the Board of Directors not less often than annually,
as well as inclusion of the employee in any formally established employee
benefit, bonus, pension and profit-sharing plans for which senior management
personnel are eligible. The Employment Agreement also provides for vacation and
sick leave.
The Employment Agreement is terminable by Peoples Federal at any time.
In the event of termination by Peoples Federal for "just cause," as defined in
the Employment Agreement, Mr. von Gunten will have no right to receive any
compensation or other benefits for any period after such termination. In the
event of termination by Peoples Federal other than for just cause, at the end of
the term of the Employment Agreement or in connection with a "change of
control," as defined in the Employment Agreement, Mr. von Gunten will be
entitled to a continuation of salary payments for a period of time equal to the
term of the Employment Agreement and a continuation of benefits substantially
equal to those being provided at the date of termination of employment until the
earliest to occur of the end of the term of the Employment Agreement or the date
the employee becomes employed full-time by another employer.
The Employment Agreement also contains provisions with respect to the
occurrence within one year of a "change of control" of (1) the termination of
employment of Mr. von Gunten for any reason other than just cause, retirement or
termination at the end of the term of the agreement, (2) a change in the
capacity or circumstances in which he is employed or (3) a material reduction in
his responsibilities, authority, compensation or other benefits provided under
the Employment Agreement without his written consent. In the event of any such
occurrence, Mr. von Gunten will be entitled to payment of an amount equal to (a)
the amount of compensation to which he would be entitled for the remainder of
the term of the Employment Agreement, plus (b) the difference between (i) three
times his average annual compensation for the three taxable years immediately
preceding the termination of employment, less (ii) the amount paid to Mr. von
Gunten as compensation for the remainder of the employment term. In addition,
Mr. von Gunten would be entitled to continued coverage under all benefit plans
until the earliest of the end of the term of the Employment Agreement or the
date on which he is included in another employer's benefit plans as a full-time
employee. The maximum he may receive, however, is limited to an amount which
will not result in the imposition of a penalty tax pursuant to Section
280G(b)(3) of the Code or exceed limitations imposed by the OTS. "Control," as
defined in the Employment Agreement, generally refers to the acquisition by any
person or entity of the ownership or power to vote 10% or more of the voting
stock of Peoples Federal or PFC, the control of the election of a majority of
Peoples Federal's or PFC's directors or the exercise of a controlling influence
over the management or policies of Peoples Federal or PFC.
The aggregate payment that would have been made to Mr. von Gunten
assuming his termination at September 30, 1995, following a change of control,
would have been approximately $307,224.
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CERTAIN TRANSACTIONS WITH PEOPLES FEDERAL
In accordance with OTS regulations, Peoples Federal makes loans to
executive officers and directors of Peoples Federal in the ordinary course of
business and on the same terms and conditions, including interest rates and
collateral, as those of comparable loans to other persons. All outstanding loans
to executive officers and directors were made pursuant to such policy, do not
involve more than the normal risk of collectibility or present other unfavorable
features and are current in their payments. Loans to all directors and executive
officers of Peoples Federal and their immediate family members totaled $58,000
at March 31, 1996, which would equal less than one percent of PFC's
shareholder's equity assuming completion of the Conversion at the mid-point of
the Valuation Range.
During the fiscal year ended September 30, 1995, Peoples Federal
retained the services of Vincent G. Matecheck, an attorney engaged in private
practice in the Massillon area. Mr. Matecheck is a director of Peoples Federal
and serves as general counsel to Peoples Federal. During fiscal year 1995, Mr.
Matecheck was paid $13,549 for services rendered as general counsel to Peoples
Federal. Mr. Matecheck will continue to serve as general counsel to Peoples
Federal after the completion of the Conversion.
PROXY HOLDERS
When a deposit account is established at Peoples Federal, a general
proxy is typically obtained from the depositor, authorizing the Board of
Directors to cast all votes which the depositor is entitled to cast on all
matters to be submitted to a vote of Peoples Federal's members. In the past, the
proxyholders appointed by the Board of Directors have been able to elect all
members of the Board of Directors and otherwise control the affairs of Peoples
Federal. After the Conversion, only PFC, as the sole shareholder of Peoples
Federal, will be entitled to vote on matters requiring approval by the
shareholders of Peoples Federal.
REGULATIONREGULATION
GENERAL
As a savings association organized under the laws of the United States,
Peoples Federal is subject to regulatory oversight by the OTS. Because Peoples
Federal's deposits are insured by the FDIC, Peoples Federal is also subject to
examination and regulation by the FDIC. Peoples Federal must file periodic
reports with the OTS concerning its activities and financial condition.
Examinations are conducted periodically by the OTS to determine whether Peoples
Federal is in compliance with various regulatory requirements and is operating
in a safe and sound manner. Peoples Federal is a member of the FHLB of
Cincinnati.
PFC also will be subject to regulation, examination and oversight by
the OTS as the holding company of Peoples Federal and will be required to submit
periodic reports to the OTS.
Congress is considering legislation to recapitalize the SAIF. See
"Federal Deposit Insurance Corporation-Assessments." In connection with such
legislation, Congress may eliminate the OTS and may require that Peoples Federal
be regulated under federal law in the same fashion as a bank. As a result,
Peoples Federal may become subject to additional regulation, examination and
oversight by the FDIC. In addition, PFC might become a bank holding company
subject to examination, regulation and oversight by the FRB, including greater
activity and capital requirements than imposed on it by the OTS.
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OTS REGULATIONS
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all savings associations the
deposits of which are insured by the FDIC in the SAIF and all federally
chartered savings institutions. The OTS issues regulations governing the
operation of savings associations, regularly examines such institutions and
imposes assessments on savings associations based on their asset size to cover
the costs of this supervision and examination. It also promulgates regulations
that prescribe the permissible investments and activities of federally chartered
savings associations, including the type of lending that such associations may
engage in and the investments in real estate, subsidiaries and securities they
may make. The OTS also may initiate enforcement actions against savings
associations and certain persons affiliated with them for violations of laws or
regulations or for engaging in unsafe or unsound practices. If the grounds
provided by law exist, the OTS may appoint a conservator or receiver for a
savings association.
Federally chartered savings associations are subject to regulatory
oversight by the OTS under various consumer protection and fair lending laws.
These laws govern, among other things, truth-in-lending disclosure, equal credit
opportunity, fair credit reporting and community reinvestment. Failure to abide
by federal laws and regulations governing community reinvestment could limit the
ability of an association to open a new branch or engage in a merger
transaction. Community reinvestment regulations evaluate how well and to what
extent an institution lends and invests in its designated service area, with
particular emphasis on low-to-moderate income areas and borrowers. Peoples
Federal has received a "Satisfactory" examination rating under those
regulations.
REGULATORY CAPITAL REQUIREMENTS. Peoples Federal is required by OTS
regulations to meet certain minimum capital requirements. These requirements
call for tangible capital of 1.5% of adjusted total assets, core capital (which
for Peoples Federal is equal to tangible capital) of 3% of adjusted total
assets, and risk-based capital (which for Peoples Federal consists of core
capital and general valuation allowances) equal to 8% of risk-weighted assets.
Assets and certain off balance sheet items are weighted at percentage levels
ranging from 0% to 100% depending on their relative risk.
The OTS has proposed to amend the core capital requirement so that
those associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. Peoples
Federal does not anticipate that it will be adversely affected if the core
capital requirement regulation is amended as proposed. Peoples Federal's core
capital ratio at March 31, 1996, was 12.2% and will increase to 17.5% on a pro
forma basis at March 31, 1996, assuming the receipt of approximately $12.4
million in net proceeds from the sale of the Common Shares at the mid-point of
the Valuation Range and the investment of 50% of the net proceeds by PFC in
Peoples Federal. For information concerning Peoples Federal's capital, see
"REGULATORY CAPITAL COMPLIANCE."
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the association will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. In
general, an association with less than $300 million in assets and a risk-based
capital ratio in excess of 12% will not be subject to the interest rate risk
component, and Peoples Federal currently qualifies for such exemption. Pending
implementation of the interest rate risk component, the OTS has the authority to
impose a higher individualized capital requirement on any savings association it
deems to have excess interest rate risk. The OTS also may adjust the risk-based
capital requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. In addition, the OTS can downgrade an
association's designation notwithstanding its capital level, based on less than
satisfactory examination ratings in areas other than capital or, after notice
and an opportunity for hearing, if the institution is deemed to be in an unsafe
or unsound condition or to be engaging in an unsafe or unsound practice. Each
undercapitalized association must submit a capital restoration plan to the
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OTS within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. A critically undercapitalized institution must be placed
in conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. Peoples Federal's
capital at March 31, 1996, meets the standards for a well-capitalized
association.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with the terms of an
OTS-approved capital plan until the institution has been adequately capitalized
on an average during each of four consecutive calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution at the time the
institution fails to comply with its capital restoration plan.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions according to ratings of associations based on their capital level
and supervisory condition. Capital distributions, for purposes of such
regulation, include, without limitation, payments of cash dividends, repurchases
and certain other acquisitions by an association of its shares and payments to
stockholders of another association in an acquisition of such other association.
The first rating category is Tier 1, consisting of associations that,
before and after the proposed capital distribution, meet their fully phased-in
capital requirement. Associations in this category may make capital
distributions during any calendar year equal to the greater of 100% of its net
income, current year-to-date, plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning of
the calendar year, or the amount authorized for a Tier 2 association. The second
category, Tier 2, consists of associations that, before and after the proposed
capital distribution, meet their current minimum, but not fully phased-in
capital requirement. Associations in this category may make capital
distributions up to 75% of their net income over the most recent four quarters.
Tier 3 associations do not meet their current minimum capital requirement and
must obtain OTS approval of any capital distribution. A Tier 1 association
deemed to be in need of more than normal supervision by the OTS may be treated
as a Tier 2 or a Tier 3 association.
Peoples Federal meets the requirements for a Tier 1 association and has
not been notified of any need for more than normal supervision. As a subsidiary
of PFC, Peoples Federal will also be required to give the OTS 30 days' notice
prior to declaring any dividend on its common shares. The OTS may object to the
dividend during that 30-day period based on safety and soundness concerns.
Moreover, the OTS may prohibit any capital distribution otherwise permitted by
regulation if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
In December 1994, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, an association not owned by a holding
company and having a CAMEL examination rating of 1 or 2 could make a capital
distribution without notice to the OTS, if it remains adequately capitalized, as
described above, after the distribution is made. Any other association seeking
to make a capital distribution that would not cause the association to fall
below the capital levels to qualify as adequately capitalized or better would
have to provide notice to the OTS. Except under limited circumstances and with
OTS approval, no capital distribution would be permitted if it would cause the
association to become undercapitalized or worse.
LIQUIDITY. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each member institution to maintain an average
daily balance of short-term liquid assets of 1% of the total of its net
withdrawable savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed upon member institutions failing to meet these
liquidity requirements. The eligible liquidity of Peoples Federal, as computed
under current regulations, at March 31, 1996, was approximately $14.0 million,
or 20.9%, and exceeded the then applicable 5% liquidity requirement by
approximately $10.6 million, or 15.9%.
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QUALIFIED THRIFT LENDER TEST. Savings associations are required to
maintain a specified level of investments in assets that are designated as
qualifying thrift investments. Such investments are generally related to
domestic residential real estate and manufactured housing and include stock
issued by any FHLB, the FHLMC or the FNMA. The QTL test requires that 65% of an
institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets) consist
of qualified thrift investments on a monthly average basis in 9 out of every 12
months. The OTS may grant exceptions to the QTL test under certain
circumstances. If a savings association fails to meet the QTL Test, the
association and its holding company will be subject to certain operating
restrictions. A savings association that fails to meet the QTL Test will not be
eligible for FHLB advances to the fullest possible extent. See "Federal Home
Loan Banks." At March 31, 1996, Peoples Federal had QTL investments equal to
approximately 94.3% of its total portfolio assets.
LENDING LIMIT. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's total capital under the regulatory capital requirements plus
any additional loan reserve not included in total capital. A savings association
may loan to one borrower an additional amount not to exceed 10% of total capital
plus additional reserves if the additional loan amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral." Certain types of loans are not subject to these
limits. In applying these limits, loans to certain borrowers may be aggregated.
Notwithstanding the specified limits, an association may lend to one borrower up
to $500,000 "for any purpose." See "THE BUSINESS OF PEOPLES FEDERAL - Lending
Activities -- Loan Originations, Purchases and Sales."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform
to the lending limits on loans to one borrower and the total of such loans
cannot exceed the association's total regulatory capital plus additional loan
reserves (or 200% of such capital amount for qualifying institutions with less
than $100 million in assets). Most loans to directors, executive officers and
principal shareholders must be approved in advance by a majority of the
"disinterested" members of the board of directors of the association with any
"interested" director not participating. All loans to directors, executive
officers and principal shareholders must be made on terms substantially the
same as offered in comparable transactions to the general public. Loans to
executive officers are subject to additional limitations. Peoples Federal was
in compliance with such restrictions at March 31, 1996. See "MANAGEMENT OF
PEOPLES FEDERAL - Certain Transactions with Peoples Federal."
Savings associations must comply with Sections 23A and 23B of the
Federal Reserve Act (the "FRA") pertaining to transactions with affiliates. An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. After the
Conversion, PFC will be an affiliate of Peoples Federal. Generally, Sections 23A
and 23B of the FRA (i) limit the extent to which the savings institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, (ii) limit
the aggregate of all such transactions with all affiliates to an amount equal to
20% of such capital stock and surplus, and (iii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
institution, as those provided in transactions with a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and other similar types of transactions. In addition to the
limits in Sections 23A and 23B, a savings association may not make any loan or
other extension of credit to an affiliate unless the affiliate is engaged only
in activities permissible for a bank holding company and may not purchase or
invest in securities of any affiliate except shares of a subsidiary. Peoples
Federal was in compliance with these requirements and restrictions at March 31,
1996.
HOLDING COMPANY REGULATION. Upon consummation of the Conversion, PFC
will be a savings and loan holding company within the meaning of the Home
Owners' Loan Act (the "HOLA"). As such, PFC will register with the OTS and will
be subject to OTS regulations, examination, supervision and reporting
requirements, in addition to the reporting requirements of the Securities and
Exchange Commission (the "SEC"). Congress is considering legislation which may
require that PFC become a bank holding company regulated by the FRB. Bank
holding companies with more than $150 million in assets are subject to capital
requirements similar to those imposed on Peoples Federal and have more extensive
interstate acquisition authority than savings and loan holding companies. They
are also subject to more restrictive activity and investment limits than savings
and loan holding companies. No assurances can be given that such legislation
will be enacted, and PFC cannot be certain of the legislation's impact on its
future operations until it is enacted.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company
without prior approval of the OTS, or from acquiring or retaining more than 5%
of
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the voting shares of a savings association or holding company thereof which is
not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
The Board of Directors presently intends to operate PFC as a unitary
savings and loan holding company. There are generally no restrictions on the
activities of a unitary savings and loan holding company, and such companies
are the only financial institution holding companies which may engage in
commercial, securities and insurance activities without limitation. Congress is
considering, however, either limiting unitary savings and loan holding
companies to the same activities as other financial institution holding
companies or permitting certain bank holding companies to engage in commercial
activities and expanded securities and insurance activities. PFC cannot predict
if and in what form these proposals might become law. The broad latitude to
engage in activities under current law can be restricted, however, 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
association. The OTS may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
association, (ii) transactions between the savings association and its
affiliates, and (iii) any activities of the savings association that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association. Notwithstanding the
foregoing rules as to permissible business activities of a unitary savings and
loan holding company, if the savings association subsidiary of a holding
company fails to meet the QTL Test, then such unitary holding company would
become subject to the activities restrictions applicable to multiple holding
companies. At March 31, 1996, Peoples Federal met the QTL Test. See "Qualified
Thrift Lender Test." institution other than through a merger or other business
combination with Peoples Federal, PFC would thereupon become a multiple savings
and loan holding company. Except where such acquisition is pursuant to the
authority to approve emergency thrift acquisitions and where each subsidiary
savings association meets the QTL Test, the activities of PFC and any of its
subsidiaries (other than Peoples Federal or other subsidiary savings
associations) would thereafter be subject to further restrictions. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings institution shall commence, or
shall continue after becoming a multiple savings and loan holding company or
subsidiary thereof, any business activity other than (i) furnishing or
performing management services for a subsidiary savings institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing or
liquidating assets owned by or acquired from a subsidiary savings institution,
(iv) holding or managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by federal regulation as of March 5, 1987, to be
engaged in by multiple holding companies, or (vii) those activities authorized
by the FRB as permissible for bank holding companies, unless the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the OTS prior to being engaged in by a multiple holding company.
The OTS may also approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state, if the multiple savings and loan holding company involved
controls a savings association which operated a home or branch office in the
state of the association to be acquired as of March 5, 1987, or if the laws of
the state in which the institution to be acquired is located specifically permit
institutions to be acquired by state-chartered institutions or savings and loan
holding companies located in the state where the acquiring entity is located (or
by a holding company that controls such state-chartered savings institutions).
As under prior law, the OTS may approve an acquisition resulting in a multiple
savings and loan holding company controlling savings associations in more than
one state in the case of certain emergency thrift acquisitions.
FDIC REGULATIONS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and thrifts and safeguards the safety and soundness of the bank and thrift
industries. The FDIC administers two separate insurance funds, the BIF for
commercial banks and state savings banks and the SAIF for savings associations
and banks that have acquired deposits from savings associations. The FDIC is
required to
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maintain designated levels of reserves in each fund. The reserves of the SAIF
are below the level required by law because a significant portion of the
assessments paid into the fund are used to pay the cost of prior thrift
failures. The reserves of the BIF met the level required by law in May 1995.
Depository institutions are generally prohibited from converting from
one insurance fund to the other until the SAIF meets its designated reserve
level, except with the prior approval of the FDIC in certain limited cases,
provided applicable exit and entrance fees are paid. The insurance fund
conversion provisions do not prohibit a SAIF member from converting to a bank
charter or merging with a bank during the moratorium, as long as the resulting
bank continues to pay the applicable insurance assessments to the SAIF during
that period and certain other conditions are met.
Peoples Federal is a member of the SAIF and its deposit accounts are
insured by the FDIC up to the prescribed limits. The FDIC has examination
authority over all insured depository institutions, including Peoples Federal,
and has authority to initiate enforcement actions against federally insured
savings associations if the FDIC does not believe the OTS has taken appropriate
action to safeguard safety and soundness and the deposit insurance fund.
ASSESSMENTS. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance each for members of the BIF and 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 its target level within a
reasonable time and may decrease such rates if such target level has been met.
The reserves of the SAIF are below the level required by law because a
significant portion of the assessments paid into the SAIF are used to pay the
cost of prior thrift failures.
The BIF has, however, met its required reserve level. The assessments
paid by healthy savings associations exceeded those paid by healthy BIF members
by approximately $.19 per $100 in deposits for 1995, and no BIF assessments will
be required of healthy commercial banks in 1996 except a $2,000 minimum fee. The
disparity in the premiums paid between savings associations and commercial banks
could have a negative competitive impact on Peoples Federal and other savings
associations.
Congress is considering legislation to recapitalize the SAIF and
eliminate the significant premium disparity. Currently, the recapitalization
plan provides for a special assessment of approximately $.85 per $100 of SAIF
deposits held at some date in 1995, currently March 31, 1995, in order to
increase SAIF reserves to the level required by law. Certain associations
holding SAIF-insured deposits would pay a lower special assessment. In addition,
the cost of prior thrift failures would be shared by both the SAIF and the BIF,
which might increase BIF assessments by $.02 to $.025 per $100 in deposits. SAIF
assessments for healthy savings associations would initially be set at a
significantly lower level but could never be reduced below the level set for
healthy BIF institutions.
Peoples Federal had $65.7 million in deposits at March 31, 1995. If a
special assessment of $.85 per $100 in deposits is imposed, Peoples Federal will
pay an additional assessment of approximately $559,000. Such assessment should
be tax-deductible, but it will reduce earnings and capital for the quarter in
which it is recorded by approximately $.56 per $100 in deposits, or $369,000
based upon $65.7 million in deposits.
The recapitalization plan also provides for the merger of the SAIF and
the BIF on January 1, 1998. The SAIF recapitalization legislation currently
eliminates the thrift charter or separate thrift regulation under federal law
prior to the merger of the deposit insurance funds. As a result, Peoples Federal
would be regulated as a bank under federal law and would be subject it to the
more restrictive activity limits imposed on national banks. If required to
convert to a bank charter, Peoples Federal would be required to recapture as
income, before taxes, over a six-year period the approximately $500,000 of its
bad debt reserve taken after 1987. In addition, Peoples Federal's proposed
holding company would become a bank holding company, which would become subject
to more restrictive activity limits and capital requirements similar to those
imposed on Peoples Federal. Congress is considering legislation requiring,
generally, that even if a savings association does not convert to a bank, bad
debt reserves taken after 1987 using the percentage of taxable income method
must be included in future taxable income of the association over a six-year
period, although a two-year delay may be permitted for institutions meeting a
residential mortgage loan origination test.
No assurance can be given that the SAIF recapitalization plan or the
proposed tax legislation will be enacted into law or in what form they may be
enacted. Moreover, Peoples Federal can give no assurance that the disparity
between BIF and SAIF assessments will be eliminated. Finally, Peoples Federal
cannot predict the impact of conversion to, or regulation as, a bank until the
legislation requiring such change is enacted.
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FRB REGULATIONS
RESERVE REQUIREMENTS. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW accounts) of
3% of deposits in net transaction accounts up to $52 million (subject to an
exemption of up to $4.3 million), and that reserves of 10% be maintained against
that portion of total transaction accounts in excess of $52 million. These
percentages are subject to adjustment by the FRB. At March 31, 1996, Peoples
Federal was in compliance with its reserve requirements.
FEDERAL HOME LOAN BANKS
The FHLBs, under the regulatory oversight of the Federal Housing
Financing Board, provide credit to their members in the form of advances.
Peoples Federal is a member of the FHLB of Cincinnati and must maintain an
investment in the capital stock of the FHLB of Cincinnati in an amount equal to
the greater of 1.0% of the aggregate outstanding principal amount of Peoples
Federal's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB.
Peoples Federal is in compliance with this requirement with an investment in
FHLB of Cincinnati stock of $722,000 at March 31, 1996.
FHLB advances to members such as Peoples Federal who meet the QTL test
are generally limited to the lower of (i) 25% of the member's assets and (ii) 20
times the member's investment in FHLB stock. At September 30, 1995, Peoples
Federal's maximum limit on advances was approximately $13,710,000. The granting
of advances is subject also to the FHLB's collateral and credit underwriting
guidelines. At March 31, 1996, the FHLB of Cincinnati offered advances with
fixed and variable interest rates ranging from 5.6% to 7.0%, which included the
following types of borrowings: short-term advances with terms ranging from one
day to one year, including cash management accounts and lines of credit;
fixed-rate, long-term advances with terms ranging from seven months to 20 years;
and various customized advances with terms ranging from one month to 30 years
and with call, balloon or mortgage-matching features.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
United States government or an agency thereof; deposits in any FHLB; or other
real estate related collateral (up to 30% of the member association's capital)
acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
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 Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance. The FHLBs have established an "Affordable
Housing Program" to subsidize the interest rate of advances to member
associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. Peoples Federal has not participated in such program.
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TAXATION
FEDERAL TAXATION
PFC is subject to the federal tax laws and regulations that apply to
corporations generally. With certain exceptions, Peoples Federal is also subject
to the federal tax laws and regulations that apply to corporations generally.
One such exception permits thrift institutions such as Peoples Federal that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Code to establish a reserve for bad debts and to
make annual additions thereto which may, within specified limits, be taken as a
deduction in computing taxable income. For purposes of the bad debt reserve
deduction, loans are categorized as "qualifying real property loans," which
generally include loans secured by improved real estate, and "nonqualifying
loans," which include all other types of loans. The amount of the bad debt
reserve deduction for "nonqualifying loans" is computed under the experience
method. A thrift institution may elect annually to compute its allowable
addition to its bad debt reserves for qualifying loans under either the
experience method or the percentage of taxable income method. For tax years
1993, 1992, and 1991, Peoples Federal used the percentage of taxable income
method because such method provided a higher bad debt deduction than the
experience method.
Under the experience method, the bad debt deduction for an addition to
the reserve for "qualifying real property loans" or "nonqualifying loans" is an
amount determined under a formula based upon a moving average of the bad debts
actually sustained by a thrift institution over a period of years or an amount
necessary to maintain a minimum reserve level amount for a statutory base year.
The percentage of specially computed taxable income that is used to
compute the percentage bad debt deduction is 8%. The percentage bad debt
deduction thus computed is reduced by the amount permitted as a deduction for
nonqualifying loans under the experience method. The availability of the
percentage of taxable income method permits qualifying thrift institutions to be
taxed at a lower effective federal income tax rate than that applicable to
corporations generally. The effective maximum federal income tax rate applicable
to a qualifying thrift institution (exclusive of any minimum tax or
environmental tax), assuming the maximum percentage bad debt deduction, is
approximately 31.3%.
If less than 60% of the total dollar amount of an institution's assets
(on a tax basis) consist of specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
governmental obligations), such institution may not deduct any addition to a bad
debt reserve and generally must include reserves in excess of that allowable
under the experience method in income over a four-year period. At March 31,
1996, at least 60% of Peoples Federal's total assets were specified assets. No
representation can be made as to whether Peoples Federal will meet the 60% test
for subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year. Additionally, the total bad
debt deduction attributable to "qualifying real property loans" cannot exceed
the greater of (i) the amount deductible under the experience method or (ii) the
amount which, when added to the bad debt deduction for "nonqualifying loans,"
equals the amount by which 12% of the amount comprising savings accounts at
year-end exceeds the sum of surplus, undivided profits and reserves at the
beginning of the year. At September 30, 1995, and for all prior years, the 6%
limitation did not restrict the percentage bad debt deduction available to
Peoples Federal. For the years ended September 30, 1995 and 1994 the 12%
limitation eliminated the bad debt deduction. For all prior years, the 12%
limitation did not reduce the bad debt deduction. Based on Peoples Federal's
capital after the Conversion, the bad debt deduction will be limited to the
amount deductible under the experience method for the year ended September 30,
1995, and for the foreseeable future.
Legislation pending in Congress may eliminate this bad debt reserve
provision in 1996 and may require the recapture of post-1987 bad debt reserves
over a six-year period beginning in 1998. See "REGULATION-Federal Deposit
Insurance Corporation -- Assessments."
In addition to the regular income tax, PFC and Peoples Federal are
subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax
rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include (i) 100% of the excess of a thrift institution's bad debt deduction over
the amount that would have been allowable based on actual experience and (ii)
interest on certain tax-exempt bonds issued after August 7, 1986. In addition,
75% of the amount by which a corporation's "adjusted current earnings" exceeds
its alternative
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minimum taxable income computed without regard to this preference item and prior
to reduction by net operating losses, is included in alternative minimum taxable
income. Net operating losses can offset no more than 90% of alternative minimum
taxable income. The alternative minimum tax is imposed to the extent it exceeds
the corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. In addition,
for taxable years after 1986 and before 1996, PFC and Peoples Federal are also
subject to an environmental tax equal to 0.12% of the excess of alternative
minimum taxable income for the taxable year (determined without regard to net
operating losses and the deduction for the environmental tax) over $2.0 million.
To the extent earnings appropriated to a thrift institution's bad debt
reserves for qualifying real property loans and deducted for federal income tax
purposes exceed the allowable amount of such reserves computed under the
experience method, and to the extent of the institution's supplemental reserves
for losses on loans (the "Excess"), such Excess may not, without adverse tax
consequences, be utilized for payment of cash dividends or other distributions
to a shareholder (including distributions in dissolution or liquidation) or for
any other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the Excess; and third, out of such other accounts as may be proper. To the
extent a distribution by Peoples Federal to PFC is deemed paid out of its Excess
under these rules, the Excess would be reduced and Peoples Federal's gross
income for tax purposes would be increased by the amount which, when reduced by
the income tax, if any, attributable to the inclusion of such amount in its
gross income, equals the amount deemed paid out of the Excess. As of September
30, 1995, Peoples Federal's Excess for tax purposes totaled approximately $2.5
million. Peoples Federal believes it had approximately $7.3 million of
accumulated earnings and profits for tax purposes as of September 30, 1995,
which would be available for dividend distributions, provided regulatory
restrictions applicable to the payment of dividends are met. See "DIVIDEND
POLICY." No representation can be made as to whether Peoples Federal will have
current or accumulated earnings and profits in subsequent periods.
The tax returns of Peoples Federal have been audited or closed without
audit through fiscal year 1992. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Peoples Federal.
OHIO TAXATION
PFC is subject to the Ohio corporation franchise tax, which, as applied
to PFC, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times
taxable net worth.
In computing its tax under the net worth method, PFC may exclude 100%
of its investment in the capital stock of Peoples Federal after the Conversion,
as reflected on the balance sheet of PFC, in computing its taxable net worth as
long as it owns at least 25% of the issued and outstanding capital stock of
Peoples Federal. The calculation of the exclusion from net worth is based on the
ratio of the excludable investment (net of any appreciation or goodwill included
in such investment) to total assets multiplied by the net value of the stock. As
a holding company, PFC may be entitled to various other deductions in computing
taxable net worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations, including
PFC, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Peoples Federal is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of Peoples
Federal's book net worth determined in accordance with GAAP. As a "financial
institution," Peoples Federal is not subject to any tax based upon net income or
net profits imposed by the State of Ohio.
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THE CONVERSION
THE OTS HAS APPROVED THE PLAN, SUBJECT TO THE APPROVAL OF THE PLAN BY
THE MEMBERS OF PEOPLES FEDERAL ENTITLED TO VOTE ON THE PLAN AND SUBJECT TO THE
SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS. OTS APPROVAL DOES
NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN.
GENERAL
On October 16, 1995, the Board of Directors of Peoples Federal
unanimously adopted a Plan of Conversion and recommended that the voting members
of Peoples Federal approve the Plan at the Special Meeting to be held on
____________, 1996. During and upon completion of the Conversion, Peoples
Federal will continue to provide the services presently offered to depositors
and borrowers, will maintain its existing offices and will retain its existing
management and employees.
Based on the current Valuation Range, between 1,105,000 and 1,495,000
Common Shares are expected to be offered in the Subscription Offering and the
Community Offering in which preference will be given to natural persons residing
in Stark County, Ohio, at a price of $10 per share. Federal regulations require,
with certain exceptions, that shares offered in connection with the Conversion
must be sold up to at least the minimum point of the Valuation Range in order
for the Conversion to become effective. The actual number of shares sold in
connection with the Conversion will be determined upon completion of the
Conversion in the sole discretion of the Board of Directors based upon the final
determination of the pro forma market value of Peoples Federal at the completion
of the Subscription Offering and the Community Offering. See "Pricing and Number
of Common Shares to be Sold."
The Common Shares will be offered in the Subscription Offering to (1)
each account holder of Peoples Federal who, as of September 30, 1994, had a
Qualifying Deposit, (2) the ESOP, (3) each account holder of Peoples Federal
who, as of March 31, 1996, had a Qualifying Deposit, and (4) each account holder
of Peoples Federal having a savings deposit of record with Peoples Federal on
_____, 1996 (the "Voting Record Date"), and each borrower of record on the
Voting Record Date whose loan was outstanding on April 25, 1996 (such depositors
and borrowers as of April 25, 1996, collectively, the "Voting Members"). Any
Common Shares not subscribed for in the Subscription Offering may be sold to the
general public in the Community Offering in a manner which will seek to achieve
the widest distribution of the Common Shares, but which will give preference to
natural persons residing in Stark County, Ohio. Under OTS regulations, the
Community Offering must be completed within 45 days after completion of the
Subscription Offering, unless such period is extended by Peoples Federal with
the approval of the OTS. If the Community Offering is determined not to be
feasible, an occurrence that is not currently anticipated, the Board of
Directors of Peoples Federal will consult with the OTS to determine an
appropriate alternative method of selling unsubscribed Common Shares. No
alternative sales methods are currently planned.
OTS regulations require the completion of the Conversion within 24
months after the date of the approval of the Plan by the Voting Members of
Peoples Federal. The commencement and completion of the Conversion will be
subject to market conditions and other factors beyond Peoples Federal's control.
Due to changing economic and market conditions, no assurance can be given as to
the length of time that will be required to complete the sale of the Common
Shares. If delays are experienced, significant changes may occur in the
estimated pro forma market value of Peoples Federal, together with corresponding
changes in the aggregate offering price and the net proceeds realized by PFC
from the sale of the Common Shares. In such circumstances, Peoples Federal may
also incur substantial additional printing, legal and accounting expenses in
completing the Conversion. In the event the Conversion is not successfully
completed, Peoples Federal will be required to charge all Conversion expenses
against current earnings.
The following is a summary of the material aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of the
Plan, a copy of which may be inspected at each office of Peoples Federal and at
the office of the OTS. The Plan is also filed as an exhibit to the Registration
Statement of which this Prospectus is a part, and copies of the Registration
Statement may be obtained from the SEC. See "ADDITIONAL INFORMATION."
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PRINCIPAL EFFECTS OF THE CONVERSION
VOTING RIGHTS. Savings account holders who are members of Peoples
Federal in its mutual form will have no voting rights in Peoples Federal as
converted and will not participate, therefore, in the election of directors or
otherwise control Peoples Federal's affairs. After the Conversion, voting rights
in Peoples Federal will be vested exclusively in PFC as the sole shareholder of
Peoples Federal. Voting rights in PFC will be held exclusively by its
shareholders. Each holder of PFC's Common Shares will be entitled to one vote
for each Common Share owned on any matter to be considered by PFC's
shareholders. See "DESCRIPTION OF AUTHORIZED SHARES."
SAVINGS ACCOUNTS AND LOANS. Savings accounts in Peoples Federal, as
converted, will be equivalent in amount, interest rate and other terms to the
present savings accounts in Peoples Federal, and the existing FDIC insurance on
such deposits will not be affected by the Conversion. The Conversion will not
affect the terms of loan accounts or the rights and obligations of borrowers
under their individual contractual arrangements with Peoples Federal.
TAX CONSEQUENCES. The consummation of the Conversion is expressly
conditioned on receipt by Peoples Federal of a private letter ruling from the
IRS or an opinion of counsel to the effect that the Conversion will constitute a
tax-free reorganization as defined in Section 368(a) of the Code. Peoples
Federal intends to proceed with the Conversion based upon an opinion rendered by
its special counsel, Vorys, Sater, Seymour and Pease, addressing the following
federal tax consequences, which are all of the material federal tax consequences
of the Conversion:
(1) The Conversion constitutes a reorganization within the meaning of
Section 368(a)(1)(F) of the Code, and no gain or loss will be
recognized by Peoples Federal in its mutual form or in its stock form
as a result of the Conversion. Peoples Federal in its mutual form and
Peoples Federal in its stock form will each be a "party to a
reorganization" within the meaning of Section 368(B) of the Code;
(2) No gain or loss will be recognized by Peoples Federal upon the
receipt of money from PFC in exchange for the capital stock of Peoples
Federal, as converted;
(3) The assets of Peoples Federal will have the same basis in its hands
immediately after the Conversion as it had in its hands immediately
prior to the Conversion, and the holding period of the assets of
Peoples Federal after the Conversion will include the period during
which the assets were held by Peoples Federal before the Conversion;
(4) No gain or loss will be recognized to the deposit account holders
of Peoples Federal upon the issuance to them, in exchange for their
respective withdrawable deposit accounts in Peoples Federal immediately
prior to the Conversion, of withdrawable deposit accounts in Peoples
Federal immediately after the Conversion, in the same dollar amount as
their withdrawable deposit accounts in Peoples Federal immediately
prior to the Conversion, plus, in the case of Eligible Account Holders
(hereinafter defined) and Supplemental Account Holders (hereinafter
defined), the interests in the Liquidation Account of Peoples Federal,
as described below;
(5) The basis of the withdrawable deposit accounts in Peoples Federal
held by its deposit account holders immediately after the Conversion
will be the same as the basis of their deposit accounts in Peoples
Federal immediately prior to the Conversion. The basis of the interests
in the Liquidation Account received by the Eligible Account Holders and
Supplemental Account Holders will be zero. The basis of the
nontransferable subscription rights received by Eligible Account
Holders, Supplemental Account Holders and Other Eligible Members
(hereinafter defined) will be zero (assuming that at distribution such
rights have no ascertainable fair market value);
(6) No gain or loss will be recognized to Eligible Account Holders,
Supplemental Account Holders or Other Eligible Members upon the
distribution to them of nontransferable subscription rights to purchase
Common Shares (assuming that at distribution such rights have no
ascertainable fair market value), and no taxable income will be
realized by such Eligible Account Holders, Supplemental Account Holders
or Other Eligible Members as a result of their exercise of such
nontransferable subscription rights;
(7) The basis of the Common Shares purchased by members of Peoples
Federal pursuant to the exercise of subscription rights will be the
purchase price thereof (assuming that such rights have no ascertainable
fair market value and that the purchase price is not less than the fair
market value of the shares on the date of such exercise), and the
holding period of such shares will commence on the date of such
exercise. The basis of the Common Shares
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purchased other than by the exercise of subscription rights will be the
purchase price thereof (assuming in the case of the other subscribers
that the opportunity to buy in the Subscription Offering has no
ascertainable fair market value), and the holding period of such shares
will commence on the day after the date of the purchase;
(8) For purposes of Section 381 of the Code, Peoples Federal will be
treated as if there had been no reorganization. The taxable year of
Peoples Federal will not end on the effective date of the Conversion
and, immediately after the Conversion, Peoples Federal in its stock
form will succeed to and take into account the tax attributes of
Peoples Federal in its mutual form immediately prior to the Conversion,
including Peoples Federal's earnings and profits or deficit in earnings
and profits;
(9) The bad debt reserves of Peoples Federal in its mutual form
immediately prior to the Conversion will not be required to be restored
to the gross income of Peoples Federal in its stock form as a result of
the Conversion, and immediately after the Conversion such bad debt
reserves will have the same character in the hands of Peoples Federal
in its stock form as they would have had if there had been no
Conversion. Peoples Federal in its stock form will succeed to and take
into account the dollar amounts of those accounts of Peoples Federal in
its mutual form which represent bad debt reserves in respect of which
Peoples Federal in its mutual form has taken a bad debt deduction for
taxable years ending on or before the Conversion; and
(10) Regardless of book entries made for the creation of the
Liquidation Account, the Conversion will not diminish the accumulated
earnings and profits of Peoples Federal available for the subsequent
distribution of dividends within the meaning of Section 316 of the
Code. The creation of the Liquidation Account on the records of Peoples
Federal will have no effect on its taxable income, deductions for
additions to reserves for bad debts under Section 593 of the Code or
distributions to stockholders under Section 593(e) of the Code.
Peoples Federal has received an opinion from Keller to the effect that
the subscription rights have no ascertainable fair market value because the
rights are received by specified persons at no cost, may not be transferred and
are of short duration. The IRS could challenge the assumption that the
subscription rights have no ascertainable fair market value.
For Ohio tax purposes, the tax consequences of the Conversion will be
as follows:
(1) Peoples Federal is a "financial institution" for State of Ohio tax
purposes, and the Conversion will not change such status;
(2) Peoples Federal is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5%
of Peoples Federal's equity capital determined in accordance with GAAP,
and the Conversion will not change such status;
(3) As a "financial institution," Peoples Federal is not subject to any
tax based upon net income or net profit imposed by the State of Ohio,
and the Conversion will not change such status;
(4) The Conversion will not be a taxable transaction to Peoples Federal
in its mutual or stock form for purposes of the Ohio corporate
franchise tax; however, as a consequence of the Conversion, the annual
Ohio corporate franchise tax liability of Peoples Federal will increase
if the taxable net worth of Peoples Federal (i.e., book net worth
computed in accordance with GAAP at the close of Peoples Federal's
taxable year for federal income tax purposes) increases thereby; and
(5) The Conversion will not be a taxable transaction to any deposit
account holder or borrower member of Peoples Federal in its mutual or
stock form for purposes of the Ohio corporate franchise tax and the
Ohio personal income tax.
Each Eligible Account Holder, Supplemental Account Holder and Other
Eligible Member is urged to consult his or her own tax advisor with respect to
the effect of such tax consequences on his or her own particular facts and
circumstances.
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LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
Peoples Federal in its present mutual form, each depositor in Peoples Federal
would receive a pro rata share of any assets of Peoples Federal remaining after
payment of the claims of all creditors, including the claims of all depositors
to the withdrawable value of their savings accounts. A depositor's pro rata
share of such remaining assets would be the same proportion of such assets as
the value of such depositor's savings deposits bears to the total aggregate
value of all savings deposits in Peoples Federal at the time of liquidation.
In the event of a complete liquidation of Peoples Federal in its stock
form after the Conversion, each savings depositor as of September 30, 1994, and
March 31, 1996, would have a claim of the same general priority as the claims of
all other general creditors of Peoples Federal. Except as described below, each
depositor's claim would be solely in the amount of the balance in such
depositor's savings account plus accrued interest. The depositor would have no
interest in the assets of Peoples Federal above that amount. Such assets would
be distributed to PFC as the sole shareholder of Peoples Federal.
For the purpose of granting a limited priority claim to the assets of
Peoples Federal in the event of a complete liquidation thereof to Eligible
Account Holders who continue to maintain savings accounts at Peoples Federal
after the Conversion, Peoples Federal will, at the time of Conversion, establish
the Liquidation Account in an amount equal to the regulatory capital of Peoples
Federal as of the latest practicable date prior to the Conversion at which such
regulatory capital can be determined. For this purpose, Peoples Federal shall
use the regulatory capital figure no later than that set forth in its latest
statement of financial condition contained in the Prospectus. The Liquidation
Account will not operate to restrict the use or application of any of the
regulatory capital of Peoples Federal.
Each Eligible Account Holder will have a separate inchoate interest
(the "Subaccount") in a portion of the Liquidation Account for savings accounts
held on the Eligibility Record Date or the Supplemental Eligibility Record Date,
as the case may be, the aggregate balance of which is equal to or greater than
$50 (the "Qualifying Deposit").
The balance of each initial Subaccount shall be an amount determined by
multiplying the amount in the Liquidation Account by a fraction, the numerator
of which is the closing balance in the account holder's account as of the close
of business on the Eligibility Record Date or the Supplemental Eligibility
Record Date, as the case may be, and the denominator of which is the total
amount of all Qualifying Deposits of Eligible Account Holders and Supplemental
Account Holders on the corresponding record date. The balance of each Subaccount
may be decreased but will never be increased. If, at the close of business on
any annual closing date of Peoples Federal subsequent to the respective record
dates the balance in the savings account to which a Subaccount relates is less
than the lesser of (i) the deposit balance in such savings account at the close
of business on any other annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date or (ii) the amount of the
Qualifying Deposit as of the Eligibility Record Date or the Supplemental
Eligibility Record Date, the balance of the Subaccount for such savings account
shall be adjusted proportionately to the reduction in such savings account
balance. In the event of any such downward adjustment, such Subaccount balance
shall not be subsequently increased notwithstanding any increase in the deposit
balance of the related savings account. If any savings account is closed, its
related Subaccount shall be reduced to zero upon such closing.
In the event of a complete liquidation of the converted Peoples Federal
(and only in such event), each Eligible Account Holder and Supplemental Account
Holder shall receive from the Liquidation Account a distribution equal to the
current balance in each of such account holder's Subaccounts before any
liquidation distribution may be made to PFC as the sole shareholder of Peoples
Federal. Any assets remaining after satisfaction of such liquidation rights and
the claims of Peoples Federal's creditors would be distributed to PFC as the
sole shareholder of Peoples Federal. No merger, consolidation, purchase of bulk
assets or similar combination or transaction with another institution, the
deposits of which are insured by the FDIC, will be deemed to be a complete
liquidation for this purpose and, in any such transaction, the Liquidation
Account shall be assumed by the surviving institution.
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COMMON SHARES. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE
INSURED BY THE FDIC. For a description of the characteristics of the Common
Shares, see "DESCRIPTION OF AUTHORIZED SHARES."
INTERPRETATION AND AMENDMENT OF THE PLAN
The Boards of Directors of Peoples Federal and PFC will interpret the
Plan. To the extent permitted by law, all interpretations of the Plan by the
Boards of Directors of Peoples Federal and PFC will be final. The Plan may be
amended by the Boards of Directors of Peoples Federal and PFC at any time before
completion of the Conversion with the concurrence of the OTS. If Peoples Federal
and PFC determine upon advice of counsel and after consultation with the OTS
that any such amendment is material, subscribers will be notified of the
amendment and will be provided the opportunity to affirm, increase, decrease or
cancel their subscriptions. Any person who does not affirmatively elect to
continue his subscription or elects to rescind his subscription before the date
specified in the notice will have all of his funds promptly refunded with
interest. Any person who elects to decrease his subscription will have the
appropriate portion of his funds promptly refunded with interest.
CONDITIONS AND TERMINATION
The completion of the Conversion requires the approval of the Plan and
the Federal Stock Charter by the Voting Members of Peoples Federal at the
Special Meeting and the sale of the requisite amount of Common Shares within 24
months following the date of such approval. If these conditions are not
satisfied, the Plan will automatically terminate and Peoples Federal will
continue its business in the mutual form of organization. The Plan may be
voluntarily terminated by the Board of Directors at any time before the Special
Meeting and at any time thereafter with the approval of the OTS.
SUBSCRIPTION OFFERING
THE SUBSCRIPTION OFFERING WILL EXPIRE AT _:__ P.M., EASTERN TIME, ON
THE SUBSCRIPTION EXPIRATION DATE. SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE THE
SUBSCRIPTION EXPIRATION DATE WILL BE VOID, WHETHER OR NOT PFC HAS BEEN ABLE TO
LOCATE EACH PERSON ENTITLED TO SUCH SUBSCRIPTION RIGHTS.
Nontransferable subscription rights to purchase Common Shares are being
issued at no cost to all eligible persons and entities in accordance with the
preference categories established by the Plan, as described below. Each
subscription right may be exercised only by the person to whom it is issued and
only for his or her own account. Each person subscribing for shares must
represent to PFC that he or she is purchasing such shares for his or her own
account and that he or she has no agreement or understanding with any other
person for the sale or transfer of such shares.
The number of Common Shares which a person who has subscription rights
may purchase will be determined, in part, by the total number of Common Shares
to be issued and the availability of such shares for purchase under the
preference categories set forth in the Plan and certain other limitations. See
"Limitations on Purchases of Common Shares." The sale of any Common Shares
pursuant to subscriptions received is contingent upon approval of the Plan by
the Voting Members of Peoples Federal at the Special Meeting.
The preference categories for the allocation of Common Shares, which
have been established by the Plan in accordance with applicable regulations, are
as follows:
CATEGORY 1. All persons having a Qualifying Deposit on the
Eligibility Record Date ("Eligible Account Holders") will receive,
without payment, nontransferable subscription rights to purchase up to
the greater of (i) the amount permitted to be purchased in the
Community Offering, (ii) .10% of the total number of Common Shares sold
in connection with the Conversion, or (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the
total number of Common Shares sold in connection with the Conversion by
a fraction of which the numerator is the amount of the Eligible Account
Holder's Qualifying Deposit and the denominator of which is the total
amount of Qualifying Deposits of all Eligible Account Holders, in each
case on the Eligibility Record Date, subject to the overall purchase
limitations set forth in Section 10 of the Plan. See "Limitations on
Purchases of Common Shares."
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If the exercise of subscription rights in this Category 1
results in an over-subscription, Common Shares will be allocated among
subscribing Eligible Account Holders in a manner which will, to the
extent possible, make the total allocation of each subscriber equal 100
shares or the amount subscribed for, whichever is lesser. Any Common
Shares remaining after such allocation has been made will be allocated
among the subscribing Eligible Account Holders whose subscriptions
remain unfilled in the proportion which the amount of their respective
Qualifying Deposits on the Eligibility Record Date bears to the total
Qualifying Deposits of all Eligible Account Holders on such date. No
fractional shares will be issued. The subscription rights of the
Eligible Account Holders are subordinate to the limited priority right
of the ESOP set forth in the following paragraph.
CATEGORY 2. The ESOP will receive, without payment,
nontransferable subscription rights to purchase up to 10% of the Common
Shares sold in connection with the Conversion. The subscription rights
of the ESOP will be subordinate to the subscription rights in Category
1, except that if the final pro forma market value of Peoples Federal
exceeds the maximum of the Valuation Range, the ESOP shall have first
priority with respect to the amount sold in excess of the maximum of
the Valuation Range. If the ESOP is unable to purchase all or part of
the Common Shares for which it subscribes due to an oversubscription in
Category 1, the ESOP may purchase Common Shares on the open market or
may purchase authorized but unissued shares of PFC. If the ESOP
purchases authorized but unissued shares from PFC, such purchases would
have a dilutive effect on the interests of PFC's shareholders.
CATEGORY 3. All persons having a Qualifying Deposit on March
31, 1996 ("Supplemental Account Holders"), will receive, without
payment, non-transferable subscription rights to purchase up to the
greater of (i) the amount permitted to be purchased in the Community
Offering, (ii) .10% of the total number of Common Shares sold in
connection with the Conversion, or (iii) 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number
of Common Shares sold in connection with the Conversion by a fraction
of which the numerator is the amount of the Supplemental Eligible
Account Holder's Qualifying Deposit and the denominator of which is the
total amount of Qualifying Deposits of all Supplemental Eligible
Account Holders, in each case on the Supplemental Eligibility Record
Date, subject to the overall purchase limitations set forth in Section
10 of the Plan. See "Limitations on Purchases of Common Shares."
If the exercise of subscription rights in this Category 3
results in an over-subscription, Common Shares will be allocated among
subscribing Supplemental Account Holders in a manner which will, to the
extent possible, make the total allocation of each subscriber equal 100
shares or the amount subscribed for, whichever is lesser. Any Common
Shares remaining after such allocation has been made will be allocated
among the subscribing Supplemental Account Holders whose subscriptions
remain unfilled in the proportion which the amount of their respective
Qualifying Deposits on the Supplemental Eligibility Record Date bears
to the total Qualifying Deposits of all Supplemental Account Holders on
such date. No fractional shares will be issued.
Subscription rights received in this Category 3 will be
subordinate to the subscription rights in Categories 1 and 2.
CATEGORY 4. Other depositors and borrowers who are Voting
Members but who are not Eligible Account Holders or Supplemental
Account Holders ("Other Eligible Members") will receive nontransferable
subscription rights to purchase Common Shares in an amount up to the
greater of the amount permitted to be purchased in the Community
Offering or .10% of the total number of Common Shares sold in
connection with the Conversion, subject to the overall purchase
limitations set forth in Section 10 of the Plan. See "Limitations on
Purchases of Common Shares." In the event of an oversubscription in
this Category 4, the available shares will be allocated among
subscribing Other Eligible Members on an equitable basis in the same
proportion that their respective subscriptions bear to the total amount
of all subscriptions in this Category 4.
Subscription rights received in this Category 4 will be
subordinate to the subscription rights in Categories 1 through 3.
The Board of Directors may reject any one or more subscriptions if,
based upon the Board of Directors' interpretation of applicable regulations,
such subscriber is not entitled to the shares for which he or she has subscribed
or if the sales of the shares subscribed for would be in violation of any
applicable statutes, regulations or rules.
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PFC will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons having subscription rights
reside. However, no such person will be offered or receive any Common Shares
under the Plan who resides in a foreign country or in a state of the United
States with respect to which all of the following apply: (i) a small number of
persons otherwise eligible to subscribe for shares under the Plan resides in
such country or state; (ii) under the securities laws of such country or state,
the granting of subscription rights or the offer or sale of Common Shares to
such persons would require PFC or its officers or directors, to register as a
broker or dealer or to register or otherwise qualify its securities for sale in
such country or state; and (iii) such registration or qualification would be
impracticable for reasons of cost or otherwise.
The term "resident" as used herein with respect to the Subscription
Offering means any person who, on the date of submission of a stock order form,
maintained a bona fide residence within Stark County or a jurisdiction in which
the Common Shares are being offered for sale. If a person is a business entity,
the person's residence shall be the location of the principal place of business.
If the person is a personal benefit plan, the residence of the beneficiary shall
be the residence of the plan. In the case of all other benefit plans, the
residence of the trustee shall be the residence of the plan. In all cases, the
determination of a subscriber's residency shall be in the sole discretion of
Peoples Federal and PFC.
COMMUNITY OFFERING
Concurrently with the Subscription Offering, PFC is hereby offering
Common Shares in the Community Offering, subject to the limitations set forth
below, to the extent such shares remain available after the satisfaction of all
orders received in the Subscription Offering. If subscriptions are received in
the Subscription Offering for at least 1,719,250 Common Shares, Common Shares
may not be available for purchase in the Community Offering. If subscriptions
for at least 1,719,250 Common Shares have not been received by the Subscription
Expiration Date, PFC anticipates selling Common Shares in the Community Offering
to the extent such shares remain available after the satisfaction of all orders
received in the Subscription Offering. All sales of Common Shares in the
Community Offering will be at the same price per share as the sales of Common
Shares in the Subscription Offering. THE COMMUNITY OFFERING MAY EXPIRE AT ANY
TIME WHEN ORDERS FOR AT LEAST 1,719,250 COMMON SHARES HAVE BEEN RECEIVED, BUT IN
NO EVENT LATER THAN ____________, 1998 (THE "COMMUNITY EXPIRATION DATE").
In the event shares are available in the Community Offering, members of
the general public may purchase up to 1% of the Common Shares sold, which is
17,192 Common Shares at the maximum of the Valuation Range, as adjusted. See
"Limitations on Purchases of Common Shares." If an insufficient number of shares
is available to fill all of the orders received in the Community Offering, the
available shares will be allocated in a manner to be determined by the Board of
Directors of PFC, subject to the following:
(i) Preference will be given to natural persons who are residents of
Stark County, Ohio, the county in which the offices of Peoples Federal
are located;
(ii) Orders received in the Community Offering will first be filled up
to a maximum of 2% of the total number of Common Shares offered, with
any remaining shares allocated on an equal number of shares per order
basis until all orders have been filled;
(iii) No person, together with any Associate and groups Acting in
Concert, may purchase more than 1% of the Common Shares; and
(iv) The right of any person to purchase Common Shares in the Community
Offering is subject to the right of PFC and Peoples Federal to accept
or reject such purchases in whole or in part.
The term "resident" as used herein with respect to the Community
Offering means any natural person who, on the date of submission of a stock
order form, maintained a bona fide residence within, as appropriate, Stark
County or a jurisdiction in which the Common Shares are being offered for sale.
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LIMITATIONS ON PURCHASES OF COMMON SHARES
The Plan provides for certain additional limitations to be placed upon
the purchase of Common Shares. To the extent such shares are available, the
minimum number of shares that may be purchased by any party is 25. No fractional
shares will be issued.
Currently, no person, together with Associates (hereinafter defined)
and groups Acting in Concert, may purchase more than 2% of the Common Shares.
Subject to any required regulatory approval and the requirements of applicable
laws and regulations, but without further approval of the members of Peoples
Federal, purchase limitations may be increased or decreased at the sole
discretion of the Boards of Directors of PFC and Peoples Federal at any time. If
such amount is increased, persons who subscribed for the maximum amount will be
given the opportunity to increase their subscriptions up to the then applicable
limit, subject to the rights and preferences of any person who has priority
subscription rights. The Boards of Directors of PFC and Peoples Federal may, in
their sole discretion, increase the maximum purchase limitation referred to
above up to 10%, provided that orders for shares exceeding 5% of the shares to
be issued in the Conversion shall not exceed, in the aggregate, 10% of the
shares to be issued in the Conversion. In the event that the purchase limitation
is decreased after commencement of the Subscription Offering, the order of any
person who subscribed for the maximum number of Common Shares shall be decreased
by the minimum amount necessary so that such person shall be in compliance with
the then maximum number of shares permitted to be subscribed for by such person.
"Acting in Concert" is defined as "knowing participation in a joint
activity or independent conscious parallel action towards a common goal" or "a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose." Persons shall be presumed to be Acting in Concert
with each other if: (i) both are purchasing Common Shares in the Conversion and
are (a) executive officers, directors, trustees, or any one who performs, or
whose nominee or representative performs, a similar policy making function at a
company (other than Peoples Federal or PFC) or principal business units or
subsidiaries of a company, or (b) any person who directly or indirectly owns or
controls 10% or more of the stock of a company (other than Peoples Federal or
PFC); or (ii) one person provides credit to the other for the purchase of Common
Shares or is instrumental in obtaining that credit. In addition, if a person is
presumed to be Acting in Concert with another person, then the person is
presumed to Act in Concert with anyone else who is, or is presumed to be, Acting
in Concert with that other person.
For purposes of the Plan, (i) the directors of Peoples Federal are not
deemed to be Acting in Concert solely by reason of their membership on the Board
of Directors of Peoples Federal; (ii) an associate of a person (an "Associate")
is (a) any corporation or organization (other than Peoples Federal) of which
such person is an officer, partner or, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities; (b) any trust or other
estate in which such person has a substantial beneficial interest or as to which
such person serves as trustee or in a similar fiduciary capacity; and (c) any
relative or spouse of such person, or relative of such spouse, who either has
the same home as such person or who is a director or officer of Peoples Federal.
Executive officers and directors of Peoples Federal and their Associates may not
purchase, in the aggregate, more than 34.4% of the total number of Common Shares
sold in the Conversion. Shares acquired by the ESOP will not, pursuant to
regulations governing the Conversion, be aggregated with the shares purchased by
the directors, officers and employees of Peoples Federal.
Purchases of Common Shares are also subject to the change in control
regulations of the OTS. Such regulations restrict direct and indirect purchases
of 10% or more of the stock of any savings association by any person or group of
persons Acting in Concert. See "RESTRICTIONS ON ACQUISITION OF PEOPLES FEDERAL
AND PFC AND RELATED ANTI-TAKEOVER PROVISIONS - Federal Law and Regulation."
After the Conversion, Common Shares, except for shares purchased by
officers and directors of PFC, will be freely transferable, subject to OTS
regulations. See "Restrictions on Transferability of Common Shares by Directors
and Officers."
PLAN OF DISTRIBUTION
The offering of the Common Shares is made only pursuant to this
Prospectus, which is available to all eligible subscribers by mail. See
"ADDITIONAL INFORMATION." Additional copies are available at the offices of
Peoples Federal. Sales of Common Shares will be made primarily by registered
representatives affiliated with McDonald & Company and Trident. PFC will rely on
Rule 3a4-1 under the Exchange Act, and sales of Common Shares will be conducted
within the requirements of Rule 3a4-1, which will permit officers, directors and
employees of PFC and Peoples
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Federal to participate in the sale of Common Shares, except that officers,
directors and employees will not participate in the sale of Common Shares to
residents of any state in which such persons have not met such state's
requirements for participation. No officer, director or employee of PFC or
Peoples Federal will be compensated in connection with his participation by the
payment of commissions or other remuneration based either directly or indirectly
on the transactions in the Common Shares.
To assist PFC in marketing the Common Shares, PFC has retained McDonald
& Company and Trident, which are broker-dealers registered with the SEC and
members of the National Association of Securities Dealers, Inc. (the "NASD").
McDonald & Company and Trident will consult with and advise PFC and assist with
the sale of the Common Shares on a best efforts basis in connection with the
Conversion. The services to be rendered by McDonald & Company and Trident
include assisting PFC in conducting the Subscription Offering and the Community
Offering and educating Peoples Federal personnel about the Conversion process.
Neither McDonald & Company nor Trident is obligated to purchase any of the
Common Shares.
For its services, McDonald & Company and Trident will receive a
commission equal to 2% of the aggregate purchase price paid for shares sold in
the Subscription Offering, excluding any amounts paid by Peoples Federal's
directors, executive officers and ESOP and any associates of Peoples Federal's
directors and executive officers. McDonald & Company and Trident will also
receive a commission equal to 2.5% of the aggregate purchase price paid for
Common Shares sold in the Community Offering. No commission will be paid,
however, on Common Shares sold in excess of the mid-point of the final Valuation
Range. Peoples Federal will reimburse McDonald & Company and Trident for all
reasonable out-of-pocket expenses, including legal fees, not to exceed $45,000.
Peoples Federal has agreed to indemnify McDonald & Company and Trident
against certain claims or liabilities, including certain liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
EFFECT OF EXTENSION OF COMMUNITY OFFERING
If the Community Offering extends beyond 45 days after the Subscription
Expiration Date, persons who have subscribed for Common Shares in the
Subscription Offering or in the Community Offering will receive a written notice
that until a date specified in the notice, they have the right to increase,
decrease or rescind their subscriptions for Common Shares. Any person who does
not affirmatively elect to continue his subscription or elects to rescind his
subscription during any such extension will have all of his funds promptly
refunded with interest. Any person who elects to decrease his subscription
during any such extension shall have the appropriate portion of his funds
promptly refunded with interest.
USE OF ORDER FORMS
Subscriptions for Common Shares in the Subscription Offering and the
Community Offering may be made only by completing and submitting an order form
(the "Order Form"). Any person who desires to subscribe for Common Shares in the
Subscription Offering must do so by delivering to PFC at 211 Lincoln Way East,
Massillon, Ohio 44646, or 2312 Lincoln Way, N.W., Massillon, Ohio 44647, by mail
or in person, prior to _:__ _.m., Eastern Time, on ____________, 1996, a
properly executed and completed original Order Form, together with full payment
of the subscription price of $10 for each share for which subscription is made.
Photocopies or telecopies of Order Forms will not be accepted. See "ADDITIONAL
INFORMATION." THE FAILURE TO DELIVER A PROPERLY EXECUTED ORIGINAL ORDER FORM AND
FULL PAYMENT IN A MANNER BY WHICH THEY ARE ACTUALLY RECEIVED BY PFC NO LATER
THAN __:__ P.M. ON THE SUBSCRIPTION EXPIRATION DATE WILL PRECLUDE THE PURCHASE
OF COMMON SHARES IN THE OFFERING.
AN EXECUTED ORDER FORM, ONCE RECEIVED BY PFC, MAY NOT BE MODIFIED,
AMENDED OR RESCINDED WITHOUT THE CONSENT OF PFC, UNLESS THE COMMUNITY OFFERING
IS NOT COMPLETED WITHIN 45 DAYS AFTER THE SUBSCRIPTION EXPIRATION DATE, IN WHICH
CASE PERSONS WHO HAVE SUBSCRIBED FOR COMMON SHARES IN THE SUBSCRIPTION OFFERING
OR IN THE COMMUNITY OFFERING WILL RECEIVE WRITTEN NOTICE THAT UNTIL A DATE
SPECIFIED IN THE NOTICE, THEY HAVE A RIGHT TO AFFIRM, INCREASE, DECREASE OR
RESCIND THEIR SUBSCRIPTIONS. ANY PERSON WHO DOES NOT AFFIRMATIVELY ELECT TO
CONTINUE HIS SUBSCRIPTION OR ELECTS TO RESCIND HIS SUBSCRIPTION DURING ANY SUCH
EXTENSION WILL HAVE ALL OF HIS FUNDS PROMPTLY REFUNDED WITH INTEREST. ANY PERSON
WHO ELECTS TO DECREASE HIS SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE THE
APPROPRIATE PORTION OF HIS FUNDS PROMPTLY REFUNDED WITH INTEREST.
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PAYMENT FOR COMMON SHARES
Payment of the subscription price for all Common Shares for which
subscription is made must accompany all completed Order Forms and Forms of
Certification in order for subscriptions to be valid. Payment for Common Shares
may be made (i) in cash, if delivered in person, (ii) by check, bank draft or
money order payable to the order of Peoples Federal, or (iii) by authorization
of withdrawal from savings accounts in Peoples Federal (other than
non-self-directed IRAs). Wire transfers will not be accepted. Peoples Federal
cannot lend money or otherwise extend credit to any person to purchase Common
Shares, other than the ESOP.
Payments made in cash or by check, bank draft or money order will be
placed in a segregated savings account insured by the FDIC up to applicable
limits. Interest will be paid by Peoples Federal on such accounts at Peoples
Federal's passbook rate, currently ____ annual percentage yield, from the date
payment is received until the Conversion is completed or terminated. Payments
made by check will not be deemed to have been received until such check has
cleared for payment.
During the Community Offering, McDonald & Company may only solicit
indications of interest from its customers to place orders with Peoples Federal
as of a certain date (the "Order Date") for the purchase of Common Shares. When
and if Peoples Federal believes that enough indications of interest and orders
have been received to consummate the Conversion, McDonald & Company will, as of
the Order Date, submit orders to purchase shares for which it has previously
received indications of interest from its customers. McDonald & Company will
send confirmations of the orders to such customers on the next business day
after the Order Date. McDonald & Company will debit the accounts of its
customers on the date which will be three business days from the Order Date (the
"Settlement Date"). On the Settlement Date, funds received by McDonald & Company
will be remitted to Peoples Federal. Funds will be returned promptly in the
event the Conversion is not consummated.
Instructions for authorizing withdrawals from savings accounts are
provided in the Order Form. Once a withdrawal has been authorized, none of the
designated withdrawal amount may be used by a subscriber for any purpose other
than to purchase Common Shares, unless the Conversion is terminated. All sums
authorized for withdrawal will continue to earn interest at the contract rate
for such account or certificate until the completion or termination of the
Conversion. Interest penalties for early withdrawal applicable to certificate
accounts will be waived in the case of withdrawals authorized for the purchase
of Common Shares. If a partial withdrawal from a certificate account results in
a balance less than the applicable minimum balance requirement, the certificate
will be cancelled and the remaining balance will earn interest at Peoples
Federal's passbook rate subsequent to the withdrawal.
Persons who are beneficial owners of IRAs maintained at Peoples Federal
do not personally have subscription rights related to such account. The account
itself, however, may have subscription rights. In order to utilize funds in an
IRA maintained at Peoples Federal, the funds must be transferred to a
self-directed IRA that permits the IRA funds to be invested in stock. The
beneficial owner of the IRA must direct the trustee of the IRA to use funds from
such account to purchase Common Shares in connection with the Conversion.
Persons who are interested in utilizing IRAs at Peoples Federal to subscribe for
Common Shares should contact the Peoples Federal Conversion Center at (330)
832-7108 or for instructions and assistance.
Subscriptions will not be filled by PFC until subscriptions have been
received in the Subscription Offering and the Community Offering for up to
1,105,000 Common Shares, the minimum point of the Valuation Range. If the
Conversion is terminated, all funds delivered to PFC for the purchase of Common
Shares will be returned with interest, and all charges to savings accounts will
be rescinded. Subscribers and other purchasers will be notified by mail,
promptly on completion of the sale of the Common Shares, of the number of shares
for which their subscriptions have been accepted. Certificates representing
Common Shares will be delivered promptly thereafter.
If the ESOP subscribes for Common Shares in the Subscription Offering,
the ESOP will not be required to pay for the shares subscribed for at the time
it subscribes but may pay for such Common Shares upon consummation of the
Conversion.
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SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information regarding the
subscription rights intended to be exercised by the directors and executive
officers of Peoples Federal and their Associates. For purposes of this table, it
has been assumed that 1,300,000 Common Shares will be sold in connection with
the Conversion at $10 per share and that a sufficient number of Common Shares
will be available to satisfy the intended purchases by directors and executive
officers. The number of Common Shares purchased may increase if more than
1,300,000 Common Shares are sold in connection with the Conversion. See "Pricing
and Number of Common Shares to be Sold."
<TABLE>
<CAPTION>
Percent Aggregate
Total of total purchase
Name shares offering price
- ---- ------ -------- ---------
<S> <C> <C> <C>
Victor C. Baker 8,000 .62% $ 80,000
James P. Bordner 5,000 .38 50,000
Vincent G. Matecheck 7,500 .58 75,000
Thomas E. Shelt 19,000 1.46 190,000
Vince E. Stephan 10,000 .77 100,000
Paul von Gunten 26,000 2.00 260,000
William P. Hart 5,000 .38 50,000
Linda L. Fowler 10,500 .80 105,000
James R. Rinehart 2,500 .19 25,000
Cindy A. Wagner 2,000 .15 20,000
------ ---- --------
Total 95,500 7.35% $955,000
====== ==== ========
</TABLE>
All purchases by executive officers and directors of Peoples Federal
are made for investment purposes only and with no intent to resell.
PRICING AND NUMBER OF COMMON SHARES TO BE SOLD
The aggregate offering price of the Common Shares will be based on the
pro forma market value of the shares as determined by an independent appraisal
of Peoples Federal. Keller, a firm which evaluates and appraises financial
institutions, was retained by Peoples Federal to prepare an appraisal of the
estimated pro forma market value of Peoples Federal as converted. Keller will
receive a fee of $18,000 for its appraisal, which amount includes out-of-pocket
expenses.
The appraisal was prepared by Keller in reliance upon the information
contained herein. Keller also considered the following factors, among others:
the present and projected operating results and financial condition of Peoples
Federal and the economic and demographic conditions in Peoples Federal's
existing market area; the quality and depth of Peoples Federal's management and
personnel; certain historical financial and other information relating to
Peoples Federal and a comparative evaluation of the operating and financial
statistics of Peoples Federal with those of other thrift institutions; the
aggregate size of the offering; the impact of the Conversion on Peoples
Federal's regulatory capital and earnings potential; the trading market for
stock of comparable thrift institutions; the effect of Peoples Federal becoming
a subsidiary of PFC; and general conditions in the markets for such stocks.
Keller's valuation of the estimated pro forma market value of Peoples
Federal, as converted, is $13,000,000 as of March 8, 1995 (the "Pro Forma
Value"). PFC will issue the Common Shares at a fixed price of $10 per share and,
by dividing the price per share into the Pro Forma Value, will determine the
number of shares to be issued. Applicable regulations also require, however,
that the appraiser establish the Valuation Range of 15% on either side of the
Pro Forma Value to allow for fluctuations in the aggregate value of the Common
Shares due to changes in the market for thrift shares and other factors from the
time of commencement of the Subscription Offering until the completion of the
Conversion.
As of March 8, 1995, the Valuation Range was from $11,050,000 to
$14,950,000, which, based upon a per share offering price of $10, will result in
the sale of between 1,105,000 and 1,495,000 Common Shares. In the event that
Keller determines at the close of the Conversion that the aggregate pro forma
value of Peoples Federal is higher or lower than the Pro Forma Value, but is
nevertheless within the Valuation Range, or is not more than 15% above the
maximum point of the Valuation Range, PFC will make an appropriate adjustment by
raising or lowering the total number of Common Shares sold
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in the Conversion consistent with the final Valuation Range. The total number of
Common Shares sold in the Conversion will be determined in the discretion of the
Board of Directors consistent with the Valuation Range. If, due to changing
market conditions, the final valuation is not between the minimum of the
Valuation Range and 15% above the maximum of the Valuation Range, subscribers
will be given a notice of such final valuation and the right to affirm,
increase, decrease or rescind their subscriptions. Any person who does not
affirmatively elect to continue his subscription or elects to rescind his
subscription before the date specified in the notice will have all of his funds
promptly refunded with interest. Any person who elects to decrease his
subscription will have the appropriate portion of his funds promptly refunded
with interest.
THE APPRAISAL BY KELLER IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON SHARES
OR VOTING TO APPROVE THE CONVERSION. IN PREPARING THE VALUATION, KELLER HAS
RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF FINANCIAL AND
STATISTICAL INFORMATION PROVIDED BY PEOPLES FEDERAL AND ITS INDEPENDENT
AUDITORS. KELLER DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER
INFORMATION PROVIDED BY PEOPLES FEDERAL AND ITS INDEPENDENT AUDITORS, NOR DID
KELLER VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF PEOPLES FEDERAL OR PFC.
THE VALUATION CONSIDERS PEOPLES FEDERAL ONLY AS A GOING CONCERN AND SHOULD NOT
BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF PEOPLES FEDERAL.
MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND
PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME
TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING COMMON SHARES WILL
THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES WITHIN THE ESTIMATED PRICE
RANGE.
A copy of the complete appraisal is on file and open for inspection at
the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552, at the
Central Regional Office of the OTS, 111 East Wacker Drive, Chicago, Illinois
60601, and at each of the offices of Peoples Federal.
RESTRICTION ON REPURCHASE OF COMMON SHARES
Federal regulations prohibit PFC from repurchasing any of its capital
stock for three years following the date of completion of the Conversion, except
as part of an open-market stock repurchase program during the second and third
years following the Conversion involving no more than 5% of PFC's outstanding
capital stock during a twelve-month period. In addition, after such a
repurchase, Peoples Federal's regulatory capital must equal or exceed all
regulatory capital requirements. Before commencement of such a program, PFC must
provide notice to the OTS, and the OTS may disapprove the program if the OTS
determines that it would adversely affect the financial condition of Peoples
Federal or if it determines that there is no valid business purpose for such
repurchase. Such repurchase restrictions would not prohibit the ESOP or the RRP
from purchasing Common Shares during the first year following Conversion.
RESTRICTIONS ON TRANSFERABILITY OF COMMON SHARES BY DIRECTORS AND OFFICERS
Common Shares purchased by directors or executive officers of PFC or
their Associates will be subject to the restriction that such shares may not be
sold for a period of one year following completion of the Conversion, except in
the event of the death of the shareholder. The certificates evidencing Common
Shares issued by PFC to directors, executive officers and their Associates will
bear a legend giving appropriate notice of the restriction imposed upon the
transfer of such Common Shares. In addition, PFC will give appropriate
instructions to the transfer agent (if any) for PFC's Common Shares in respect
of the applicable restriction for transfer of any restricted shares. Any shares
issued as a stock dividend, stock split or otherwise in respect of restricted
shares will be subject to the same restrictions.
Subject to certain exceptions, for a period of three years following
the Conversion, no director or officer of PFC or Peoples Federal, or any of
their Associates, may purchase any common shares of PFC without the prior
written approval of the OTS, except through a broker-dealer registered with the
SEC. This restriction will not apply, however, to negotiated transactions
involving more than 1% of a class of outstanding common shares of PFC or shares
acquired by any stock benefit plan of Peoples Federal or PFC.
The Common Shares, like the stock of most public companies, are subject
to the registration requirements of the Securities Act. Accordingly, the Common
Shares may be offered and sold only in compliance with such registration
requirements or pursuant to an applicable exemption from registration. Common
Shares received in the Conversion by persons who are not "affiliates" of PFC may
be resold without registration. Common Shares received by affiliates of PFC will
be subject to resale restrictions. An "affiliate" of PFC, for purposes of Rule
144, is a person who directly, or indirectly through one or more intermediaries,
controls, or is controlled by or is under common control with, PFC. Rule 144
generally requires that there be publicly available certain information
concerning PFC and that sales subject to Rule 144 be made in
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routine brokerage transactions or through a market maker. If the conditions of
Rule 144 are satisfied, each affiliate (or group of persons acting in concert
with one or more affiliates) is entitled to sell in the public market, without
registration, in any three-month period, a number of shares which does not
exceed the greater of (i) 1% of the number of outstanding shares of PFC or (ii)
if the shares are admitted to trading on a national securities exchange or
reported through the automated quotation system of a registered securities
association, the average weekly reported volume of trading during the four weeks
preceding the sale.
RIGHTS OF REVIEW
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves the Plan may obtain review of such action
by filing in the Court of Appeals of the United States for the circuit in which
the principal office or residence of such person is located or in the United
States Court of Appeals for the District of Columbia, a written petition praying
that the final action of the OTS be modified, terminated or set aside. Such
petition must be filed within 30 days after the date of mailing of proxy
materials to the Voting Members of Peoples Federal or within 30 days after the
date of publication in the Federal Register of notice of approval of the Plan by
the OTS, whichever is later.
RESTRICTIONS ON ACQUISITION OF PEOPLES FEDERAL AND PFC
AND RELATED ANTI-TAKEOVER PROVISIONS
GENERAL
Federal law and regulation, Ohio law, the Articles of Incorporation and
Code of Regulations of PFC, the Amended Charter of Peoples Federal and certain
employee benefit plans to be adopted by Peoples Federal and PFC contain certain
provisions which may deter or prohibit a change of control of Peoples Federal or
PFC. Such provisions are intended to encourage any acquiror to negotiate the
terms of an acquisition with the Board of Directors of PFC, thereby reducing the
vulnerability of PFC to takeover attempts and certain other transactions which
have not been negotiated with and approved by the Board of Directors.
Anti-takeover devices and provisions may have the effect, however, of
discouraging sudden or hostile takeover attempts, even under circumstances in
which shareholders may deem such takeovers to be in their best interests or in
which shareholders may receive a substantial premium for their shares over then
current market prices. As a result, shareholders who might desire to participate
in such a transaction may not have an opportunity to participate because of such
devices and provisions. Moreover, such devices and provisions may also benefit
management by discouraging changes of control in which incumbent management
would be removed from office.
The following is a summary of certain provisions of such laws,
regulations and documents.
FEDERAL LAW AND REGULATION
FEDERAL DEPOSIT INSURANCE ACT. The FDIA provides that no person, acting
directly or indirectly or in concert with one or more persons, may acquire
control of any insured savings association or holding company unless both (i) 60
days' prior written notice has been given to the OTS and (ii) the OTS has not
issued a notice disapproving the proposed acquisition. Control, for purposes of
the FDIA, means the power, directly or indirectly, to direct the management or
policies of an insured institution or to vote 25% or more of any class of
securities of such institution. This provision of the FDIA is implemented by the
OTS in accordance with the Regulations for Acquisition of Control of an Insured
Institution, 12 C.F.R. Part 574 (the "Control Regulations"). Control, for
purposes of the Control Regulations, exists in situations in which either (a)
the acquiring party has direct or indirect voting control of at least 25% of the
institution's voting shares or controls in any manner the election of a majority
of the directors of such institution or (b) the Director of the OTS determines
that such person exercises a controlling influence over the management or
policies of such institution. In addition, control is presumed to exist, subject
to rebuttal, if the acquiring party (which includes a group "acting in concert")
has voting control of at least 10% of the institution's voting stock and any of
eight control factors specified in the Control Regulations exists. There are
also rebuttable presumptions in the Control Regulations concerning whether a
group "acting in concert" exists, including presumed action in concert among
members of an "immediate family." The Control Regulations apply to acquisitions
of Common Shares in connection with the Conversion and to acquisitions after the
Conversion.
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CHANGE IN CONTROL OF CONVERTED ASSOCIATIONS. A regulation of the OTS
provides that, for a period of three years after the date of the completion of
the Conversion, no person shall, directly or indirectly, offer to acquire or
acquire beneficial ownership of more than 10% of any class of equity security of
Peoples Federal or PFC without the prior written approval of the OTS. In
addition to the actual ownership of more than 10% of a class of equity
securities, a person is deemed to have acquired beneficial ownership of more
than 10% of the equity securities of PFC or Peoples Federal if the person holds
any combination of stock and revocable and/or irrevocable proxies of PFC under
circumstances that give rise to a conclusive control determination or rebuttable
control determination under the OTS's change of control regulations. Such
circumstances include (i) holding any combination of voting shares and revocable
and/or irrevocable proxies representing more than 25% of any class of voting
stock of PFC enabling the acquirer (a) to elect one-third or more of the
directors, (b) to cause PFC's or Peoples Federal's shareholders to approve the
acquisition or corporate reorganization of PFC or Peoples Federal, or (c) to
exert a controlling influence over a material aspect of the business operations
of PFC or Peoples Federal, and (ii) acquiring any combination of voting shares
and irrevocable proxies representing more than 25% of any class of voting
shares.
Such three-year restriction does not apply (i) to any offer with a view
toward public resale made exclusively to Peoples Federal or PFC or to any
underwriter or selling group acting on behalf of Peoples Federal or PFC, (ii)
unless made applicable by the OTS by prior written advice, to any offer or
announcement of an offer which, if consummated, would result in the acquisition
by any person, together with all other acquisitions by any such person of the
same class of securities during the preceding 12-month period, of not more than
1% of the class of securities, or (iii) to any offer to acquire or the
acquisition of beneficial ownership of more than 10% of any class of equity
security of Peoples Federal or PFC by a corporation whose ownership is or will
be substantially the same as the ownership of Peoples Federal or PFC if made
more than one year following the date of the Conversion. The foregoing
restriction does not apply to the acquisition of Peoples Federal or PFC's
capital stock by one or more tax-qualified employee stock benefit plans of PFC
or Peoples Federal, provided that the plan or plans do not have beneficial
ownership in the aggregate of more than 25% of any class of equity security of
Peoples Federal or PFC. See "Articles of Incorporation of Peoples Federal" for a
discussion of a five-year restriction on direct or indirect beneficial ownership
of 10% of the outstanding common stock of Peoples Federal.
HOLDING COMPANY RESTRICTIONS. Federal law generally prohibits a savings
and loan holding company, without prior approval of the Director of the OTS,
from (i) acquiring control of any other savings association or savings and loan
holding company, (ii) acquiring substantially all of the assets of a savings
association or holding company thereof, or (iii) acquiring or retaining more
than 5% of the voting shares of a savings association or holding company thereof
which is not a subsidiary. Acquisitions under the Holding Company Act are
governed by the Control Regulations. See "Federal Deposit Insurance Act."
Under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the previously unissued voting shares of an undercapitalized savings association
for cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's voting shares
may acquire control of any savings institution, other than a subsidiary
institution or any other savings and loan holding company.
OHIO LAW
MERGER MORATORIUM STATUTE. Ohio has adopted a merger moratorium statute
regulating certain takeover bids affecting certain public corporations with
significant ties to Ohio. The statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares that resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) an exception specifically enumerated in the statute is
applicable to the combination, (2) the combination is approved, at a meeting
held for such purpose, by the affirmative vote of the holders of the issuing
public corporation entitling them to exercise at least
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two-thirds of the voting power of the issuing public corporation in the election
of directors or of such different proportion as the articles may provide,
provided the combination is also approved by the affirmative vote of the holders
of at least a majority of the disinterested shares, or (3) the business
combination meets certain statutory criteria designed to ensure that the issuing
public corporation's remaining shareholders receive fair consideration for their
shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. The
Articles of Incorporation of PFC do not opt out of the protection afforded by
Chapter 1704. Therefore, the merger moratorium statute applies to PFC.
CONTROL SHARE ACQUISITION STATUTE. Section 1701.831 of the Ohio Revised
Code (the "Control Share Acquisition Statute") requires that certain
acquisitions of voting securities that would result in the acquiring shareholder
owning 20%, 33 1/3%, or 50% of the outstanding voting securities of PFC must be
approved in advance by the holders of at least a majority of the outstanding
voting shares represented at a meeting at which a quorum is present and a
majority of the portion of the outstanding voting shares represented at such a
meeting, excluding the voting shares owned by the acquiring shareholder. The
Control Share Acquisition Statute was intended, in part, to protect shareholders
of Ohio corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation. Such statute provides that no offeror
may make a takeover bid unless (i) at least 20 days prior thereto the offeror
announces publicly the terms of the proposed takeover bid and files with the
Ohio Division of Securities (the "Securities Division") and provides the target
company with certain information in respect of the offeror, his ownership of the
company's shares and his plans for the company, and (ii) within ten days
following such filing either (a) no hearing is required by the Securities
Division, (b) a hearing is requested by the target company within such time but
the Securities Division finds no cause for hearing exists, or (c) a hearing is
ordered and upon such hearing the Securities Division adjudicates that the
offeror proposes to make full, fair and effective disclosure to offerees of all
information material to a decision to accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
ARTICLES OF INCORPORATION OF PFC
RESTRICTION ON ACQUISITION OF MORE THAN 10% OF THE COMMON SHARES. The
Articles of Incorporation of PFC provide that for five years after the effective
date of the Conversion, no person, except the ESOP, may offer to acquire or
acquire the beneficial ownership of more than 10% of any class of outstanding
equity securities of PFC. If such a prohibited acquisition occurs, the
securities owned by such person in excess of the 10% limit may not be voted on
any matter submitted to the shareholders of PFC. The term "person" is defined as
an individual, a group acting in concert, a corporation, a partnership, an
association, a joint stock company, a trust, an unincorporated organization or
similar company, a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of the equity securities of PFC, but does not
include an employee stock ownership plan for the benefit of the employees of
Peoples Federal or PFC. The term "offer" includes every offer to buy or
otherwise acquire, solicitation of an offer to sell, tender offer for, or
request or invitation for tenders of PFC's Common Shares. The ability of
management or any other person to solicit revocable proxies from shareholders
will not be restricted by such 10% limit.
ABILITY OF THE BOARD OF DIRECTORS TO ISSUE ADDITIONAL SHARES. The
Articles of Incorporation of PFC permit the Board of Directors of PFC to issue
additional common shares and preferred shares. See "DESCRIPTION OF AUTHORIZED
SHARES - General." The ability of the Board of Directors to issue such
additional shares may create impediments to gaining, or otherwise discourage
persons from attempting to gain, control of PFC.
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MATTERS REQUIRING ENLARGED SHAREHOLDER VOTE. Generally, matters
requiring a vote of the shareholders of PFC may be approved by the holders of a
majority of the voting shares of PFC. Article Sixth of the Articles of
Incorporation of PFC provides, however, that, in the event the Board of
Directors recommends against the approval of any of the following matters, the
holders of at least 75% of the voting shares of PFC are required to adopt any
such matters:
(1) A proposed amendment to the Articles of Incorporation of
PFC;
(2) A proposed amendment to the Code of Regulations of PFC;
(3) A proposal to change the number of directors by action of
the shareholders;
(4) An agreement of merger or consolidation providing for the
proposed merger or consolidation of PFC with or into one or
more other corporations;
(5) A proposed combination or majority share acquisition
involving the issuance of shares of PFC and requiring
shareholder approval;
(6) A proposal to sell, exchange, transfer or otherwise
dispose of all, or substantially all, of the assets, with or
without the goodwill of PFC; or
(7) A proposed dissolution of PFC.
Officers and directors of PFC are expected to purchase approximately
7.35% of the shares issued in connection with the Conversion at the mid-point of
the Valuation Range. In addition, the ESOP intends to purchase approximately 4%
of the Common Shares, and it is anticipated that upon shareholder approval of
the RRP, the RRP will purchase 4% of the outstanding Common Shares. The ESOP
trustee must vote shares allocated under the ESOP as directed by the
participants to whom the shares are allocated and vote unallocated shares in his
sole discretion on mergers, sales of substantially all of PFC's assets and
similar transactions. The RRP trustee will be required to vote shares awarded
but not distributed under the RRP as directed by the persons to whom they have
been awarded and all unallocated shares and awarded shares for which no
direction has been received by the participants as directed by the RRP Committee
of the Board of Directors of Peoples Federal. Thus, officers and directors, who
are anticipated to be allocated or awarded shares under such plans, will have a
significant influence over the vote on such a transaction and may be able to
defeat such a proposal.
ELIMINATION OF CUMULATIVE VOTING. Section 1701.55 of the Ohio Revised
Code provides in substance and effect that shareholders of a for profit
corporation which is not a savings and loan association and which is
incorporated under Ohio law must initially be granted the right to cumulate
votes in the election of directors. The right to cumulate votes in the election
of directors will exist at a meeting of shareholders if notice in writing is
given by any shareholder to the President, a Vice President or the Secretary of
an Ohio corporation, not less than 48 hours before a meeting at which directors
are to be elected, that the shareholder desires that the voting for the election
of directors shall be cumulative and if an announcement of the giving of such
notice is made upon the convening of such meeting by the Chairman or Secretary
or by or on behalf of the shareholder giving such notice. If cumulative voting
is invoked, each shareholder would have a number of votes equal to the number of
directors to be elected, multiplied by the number of shares owned by him, and
would be entitled to distribute his votes among the candidates as he sees fit.
Section 1701.69 of the Ohio Revised Code provides that an Ohio
corporation may eliminate cumulative voting in the election of directors after
the expiration of 90 days after the date of initial incorporation by filing with
the Ohio Secretary of State an amendment to the articles of incorporation
eliminating cumulative voting. The Articles of Incorporation of PFC will be
amended prior to the consummation of the Conversion to eliminate cumulative
voting. The elimination of cumulative voting may make it more difficult for
shareholders to elect as directors persons whose election is not supported by
the Board of Directors.
FEDERAL STOCK CHARTER OF PEOPLES FEDERAL
For a five-year period following the date of the completion of the
Conversion, no person may, directly or indirectly, acquire or offer to acquire
the beneficial ownership of more than 10% of Peoples Federal's outstanding
common shares.
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The acquisition of more than 10% of the Common Shares of PFC would constitute an
indirect acquisition of the common shares of Peoples Federal and would,
therefore, be prohibited by the Federal Stock Charter of Peoples Federal. The
beneficial ownership limitation prohibition does not apply, however, to
purchases of Peoples Federal's common shares by one or more tax-qualified
employee stock benefit plans of Peoples Federal. Any holder of shares of PFC or
Peoples Federal beneficially owned in violation of such prohibition will not be
entitled to vote on matters submitted to a vote of shareholders, and such shares
shall not be voted by any person or be counted as voting shares in connection
with any matter submitted to shareholders for a vote. The term "person" includes
an individual, a group acting in concert, a corporation, a partnership, an
association, a joint stock company, a trust, an unincorporated organization or
similar company, a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of the equity securities of PFC or Peoples
Federal. The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of PFC's Common Shares or Peoples Federal's common shares.
EMPLOYEE BENEFIT PLANS
Adoption of the ESOP may also have an anti-takeover effect. The ESOP
may become the owner of a sufficient percentage of the total outstanding Common
Shares that the decision whether to tender the shares held by the ESOP to a
potential acquirer may prevent a takeover. See "DESCRIPTION OF AUTHORIZED
SHARES" and "MANAGEMENT OF PEOPLES FEDERAL - Employee Stock Ownership Plan."
DESCRIPTION OF AUTHORIZED SHARES
GENERAL
The Articles of Incorporation of PFC authorize the issuance of six
million common shares and one million preferred shares. The common shares and
the preferred shares authorized by PFC's Articles of Incorporation have no par
value. Upon receipt by PFC of the purchase price therefor and subsequent
issuance thereof, each Common Share will be fully paid and nonassessable. The
Common Shares of PFC will represent nonwithdrawable capital and will not and
cannot be insured by the FDIC. Each Common Share will have the same relative
rights and will be identical in all respects to every other Common Share.
None of the preferred shares of PFC will be issued in connection with
the Conversion. The Board of Directors of PFC is authorized, without shareholder
approval, to issue preferred shares and to fix and state the designations,
preferences or other special rights of such shares and the qualifications,
limitations and restrictions thereof. The preferred shares may rank prior to the
common shares as to dividend rights, liquidation preferences or both. Each
holder of preferred shares will be entitled to one vote for each preferred share
held of record on all matters submitted to a vote of shareholders. The issuance
of preferred shares and any conversion rights which may be specified by the
Board of Directors for the preferred shares could adversely affect the voting
power of holders of the common shares. The Board of Directors has no present
intention to issue any of the preferred shares.
The following is a summary description of the rights of the common
shares of PFC, including the material express terms of such shares as set forth
in PFC's Articles of Incorporation.
LIQUIDATION RIGHTS
In the event of the complete liquidation or dissolution of PFC, the
holders of the Common Shares will be entitled to receive all assets of PFC
available for distribution, in cash or in kind, after payment or provision for
payment of (i) all debts and liabilities of PFC, (ii) any accrued dividend
claims, and (iii) any interests in the Liquidation Account.
VOTING RIGHTS
The holders of the Common Shares will possess exclusive voting rights
in PFC, unless preferred shares are issued. Each holder of Common Shares will be
entitled to one vote for each share held of record on all matters submitted to a
vote of holders of common shares.
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MATTERS REQUIRING ENLARGED SHAREHOLDER VOTE. Generally, matters
requiring a vote of the shareholders of PFC may be approved by the holders of a
majority of the voting shares of PFC. Article Sixth of the Articles of
Incorporation of PFC provides, however, that, in the event the Board of
Directors recommends against the approval of any of the following matters, the
holders of at least 75% of the voting shares of PFC are required to adopt any
such matters.
(1) A proposed amendment to the Articles of Incorporation of
PFC;
(2) A proposed amendment to the Code of Regulations of PFC;
(3) A proposal to change the number of directors by action of
the shareholders;
(4) An agreement of merger or consolidation providing for the
proposed merger or consolidation of PFC with or into one or
more other corporations;
(5) A proposed combination or majority share acquisition
involving the issuance of shares of PFC and requiring
shareholder approval;
(6) A proposal to sell, exchange, transfer or otherwise
dispose of all, or substantially all, of the assets, with or
without the goodwill of PFC; or
(7) A proposed dissolution of PFC.
Officers and directors of PFC are expected to purchase approximately
7.35% of the shares issued in connection with the Conversion at the mid-point of
the Valuation Range. In addition, the ESOP intends to purchase approximately 4%
of the Common Shares, and it is anticipated that upon shareholder approval of
the RRP, the RRP will purchase 4% of the outstanding Common Shares. The ESOP
trustee must vote shares allocated under the ESOP as directed by the
participants to whom the shares are allocated and vote unallocated shares in his
sole discretion on mergers, sales of substantially all of PFC's assets and
similar transactions. The RRP trustees, who are expected to be two directors of
PFC, will vote shares held by the RRP in their discretion. Thus, officers and
directors will have a significant influence over the vote on such a transaction
and may be able to defeat such a proposal.
ELIMINATION OF CUMULATIVE VOTING. Section 1701.55 of the Ohio Revised
Code provides in substance and effect that shareholders of a for profit
corporation which is not a savings and loan association and which is
incorporated under Ohio law must initially be granted the right to cumulate
votes in the election of directors. The right to cumulate votes in the election
of directors will exist at a meeting of shareholders if notice in writing is
given by any shareholder to the President, a Vice President or the Secretary of
an Ohio corporation, not less than 48 hours before a meeting at which directors
are to be elected, that the shareholder desires that the voting for the election
of directors shall be cumulative and if an announcement of the giving of such
notice is made upon the convening of such meeting by the Chairman or Secretary
or by or on behalf of the shareholder giving such notice. If cumulative voting
is invoked, each shareholder would have a number of votes equal to the number of
directors to be elected, multiplied by the number of shares owned by him, and
would be entitled to distribute his votes among the candidates as he sees fit.
Section 1701.69 of the Ohio Revised Code provides that an Ohio
corporation may eliminate cumulative voting in the election of directors after
the expiration of 90 days after the date of initial incorporation by filing with
the Ohio Secretary of State an amendment to the articles of incorporation
eliminating cumulative voting. The Articles of Incorporation of PFC have been
amended to eliminate cumulative voting. The elimination of cumulative voting may
make it more difficult for shareholders to elect as directors persons whose
election is not supported by the Board of Directors.
DIVIDENDS
The holders of the Common Shares will be entitled to the payment of
dividends when, as and if declared by the Board of Directors and paid out of
funds, if any, available under applicable laws and regulations for the payment
of dividends. The payment of dividends is subject to federal and state statutory
and regulatory restrictions. See "DIVIDEND POLICY" and "TAXATION - Federal
Taxation" for a description of restrictions on the payment of cash dividends.
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PREEMPTIVE RIGHTS
After the consummation of the Conversion, no shareholder of PFC will
have, as a matter of right, the preemptive right to purchase or subscribe for
shares of any class, now or hereafter authorized, or to purchase or subscribe
for securities or other obligations convertible into or exchangeable for such
shares or which by warrants or otherwise entitle the holders thereof to
subscribe for or purchase any such share.
RESTRICTIONS ON ALIENABILITY
See "THE CONVERSION - Restrictions on Repurchase of Common Shares" for
a description of the limitations on the repurchase of stock by PFC; "THE
CONVERSION Restrictions on Transferability of Common Shares by Directors and
Officers" for a description of certain restrictions on the transferability of
Common Shares purchased by officers and directors; and "RESTRICTIONS ON
ACQUISITION OF PEOPLES FEDERAL AND PFC AND RELATED ANTI-TAKEOVER PROVISIONS" for
information regarding regulatory restrictions on acquiring Common Shares.
REGISTRATION REQUIREMENTS
PFC will register its common shares with the SEC pursuant to Section
12(g) of the Exchange Act prior to or promptly upon completion of the Conversion
and will not deregister such shares for a period of three years following the
completion of the Conversion. Upon such registration, the proxy and tender offer
rules, insider trading restrictions, annual and periodic reporting and other
requirements of the Exchange Act will apply.
LEGAL MATTERS
Certain legal matters pertaining to the Common Shares and the federal
and Ohio tax consequences of the Conversion will be passed upon for Peoples
Federal by Vorys, Sater, Seymour and Pease, 221 E. Fourth Street, Cincinnati,
Ohio 45202. The validity of the Common Shares to be issued in connection with
the Conversion will be passed upon for McDonald & Company and Trident by their
counsel, Muldoon, Murphy & Faucette, 5101 Wisconsin Avenue, N.W., Washington,
D.C. 20016.
EXPERTS
The consolidated financial statements of Peoples Federal as of
September 30, 1995 and 1994, and for the years ended September 30, 1993, 1994
and 1995 included in this Prospectus have been audited by Hall, Kistler &
Company, certified public accountants, as stated in their report appearing
herein and have been so included in reliance upon such report given upon the
authority of that firm as experts in accounting and auditing.
Keller has consented to the publication herein of the summary of its
letter to Peoples Federal setting forth its opinion as to the estimated pro
forma market value of Peoples Federal as converted and to the use of its name
and statements with respect to it appearing herein.
ADDITIONAL INFORMATION
PFC has filed with the SEC a Registration Statement on Form S-1 (File
No. 333-2690) under the Securities Act with respect to the Common Shares offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC. Such information may be inspected at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies may be obtained from the SEC at prescribed
rates.
Peoples Federal has filed an Application for Approval of Conversion
(the "Application") with the OTS. This document omits certain information
contained in the Application. The Application, the exhibits and the financial
statements that are part thereof may be inspected at the offices of the OTS,
1700 G Street, N.W., Washington, D.C. 20552, and the Central Regional Office,
200 W. Madison Street, Suite 1300, Chicago, Illinois 60606.
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PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants ........................................................... F-2
Consolidated statements of financial condition as of September 30, 1994 and 1995
and March 31, 1996 (unaudited) ........................................................................... F-3
Consolidated statements of income for the years ended September 30, 1993, 1994
and 1995 and the six months ended March 31, 1995 and 1996 (unaudited) .................................... F-4
Consolidated statements of retained earnings for the years ended September 30,
1993, 1994, 1995 and the six months ended March 31, 1996 (unaudited) ..................................... F-5
Consolidated statements of cash flows for the years ended September 30,
1993, 1994 and 1995 and the six months ended March 31, 1995 and
1996 (unaudited) ......................................................................................... F-6
Notes to consolidated financial statements ................................................................... F-8
</TABLE>
The financial statements of Peoples Financial Corporation have not been
provided as such corporation was inactive during all of the periods presented.
All schedules are omitted as the information is either not applicable
or is contained in the consolidated financial statements.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors
Peoples Federal Savings and Loan
Association of Massillon
Massillon, Ohio
We have audited the accompanying consolidated statements of financial
condition of Peoples Federal Savings and Loan Association of Massillon and
Subsidiary as of September 30, 1995 and 1994, and the related consolidated
statements of income, retained earnings and cash flows for each of the three
years in the period ended September 30, 1995. These consolidated financial
statements are the responsibility of the Association's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Peoples
Federal Savings and Loan Association of Massillon and Subsidiary as of September
30, 1995 and 1994, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended September 30, 1995,
in conformity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the
Association changed its method of accounting for investments in certain debt and
equity securities as of October 1, 1994.
/s/ Hall, Kistler & Company PLL
Canton, Ohio
October 30, 1995
F-2
<PAGE> 105
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of March 31, 1996 (unaudited) and September 30, 1995 and 1994
================================================================================
<TABLE>
<CAPTION>
AS OF
---------------------------
(In thousands) MARCH 31, SEPTEMBER 30,
- ------------------------------------------------------------------------- ---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
ASSETS (unaudited)
------ -----------
Cash and cash equivalents:
Cash $ 259 $ 218 $ 285
Interest-bearing deposits 4,937 1,646 1,527
------- ------- -------
Total Cash and Cash Equivalents 5,196 1,864 1,812
Investment securities:
Available for sale, at market 1,742 809 --
Held to maturity at amortized cost, market value of
$6,718 at March 31, 1996 and $7,941 and $11,538
at September 30, 1995 and 1994, respectively 6,687 7,912 10,989
Mortgage-backed and related securities:
Available for sale, at market 13,210 -- --
Held to maturity at amortized cost, market value of $10,246 at
March 31, 1996 and $25,820 and $22,150 at September 30,
1995 and 1994, respectively 10,083 26,008 22,870
Loans receivable, net 38,308 38,021 37,070
Federal Home Loan Bank stock, at cost 722 685 653
Accrued interest receivable 354 375 331
Premises and equipment, net 1,502 1,541 1,512
Prepaid Federal taxes on income 57 -- 9
Other assets 217 92 81
------- ------- -------
Total Assets $78,078 $77,307 $75,327
======= ======= =======
LIABILITIES AND RETAINED EARNINGS
---------------------------------
Liabilities:
Deposits $67,374 $66,564 $65,800
Accrued expenses and other liabilities 49 318 293
Advance payments by borrowers for taxes and insurance 1 -- --
Federal taxes on income:
Current -- 33 --
Deferred
604 510 250
------- ------- -------
Total Liabilities 68,028 67,425 66,343
Commitments and contingencies -- -- --
Retained earnings:
Unrealized gains on securities available for sale,
net of related tax effects 560 504 --
Retained earnings - substantially restricted
9,490 9,378 8,984
------- ------- -------
Total Retained Earnings 10,050 9,882 8,984
------- ------- -------
Total Liabilities and Retained Earnings $78,078 $77,307 $75,327
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 106
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
For the six months ended March 31, 1996 and 1995 (unaudited) and
the years ended September 30, 1995, 1994 and 1993
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
(In thousands) MARCH 31, SEPTEMBER 30,
- ----------------------------------------------- ---------------- ------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $1,568 $1,553 $3,103 $3,283 $3,827
Mortgage-backed and related securities 807 696 1,466 1,246 1,569
Investment securities 270 332 672 529 364
Deposits 102 61 118 92 165
------ ------ ------ ------ ------
Total interest income 2,747 2,642 5,359 5,150 5,925
Interest expense on deposit accounts 1,721 1,484 3,142 3,120 3,540
------ ------ ------ ------ ------
Net interest income 1,026 1,158 2,217 2,030 2,385
Provision for loan losses 105 -- 12 5 21
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 921 1,158 2,205 2,025 2,364
Noninterest income:
Other operating income 12 13 23 27 49
------ ------ ------ ------ ------
933 1,171 2,228 2,052 2,413
Noninterest expense:
Salaries and employee benefits 366 370 689 693 560
Occupancy and equipment 106 90 193 189 177
Federal insurance premium 76 77 150 155 135
Data processing services 32 41 103 72 65
Advertising 19 31 70 41 50
Franchise taxes 54 67 140 132 122
Directors' fees 29 27 61 54 45
Other 91 169 251 162 286
------ ------ ------ ------ ------
Total noninterest expense 773 872 1,657 1,498 1,440
------ ------ ------ ------ ------
Income before Federal
taxes on income 160 299 571 554 973
Federal taxes on income 48 92 177 175 315
------ ------ ------ ------ ------
Net Income $ 112 $ 207 $ 394 $ 379 $ 658
====== ====== ====== ====== ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 107
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
--------------------------------------------
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
For the six months ended March 31, 1996 (unaudited) and
the years ended September 30, 1995, 1994 and 1993
================================================================================
<TABLE>
<CAPTION>
UNREALIZED GAIN
ON SECURITIES TOTAL
AVAILABLE RETAINED RETAINED
(In thousands) FOR SALE EARNINGS EARNINGS
- ----------------------------------------------------- --------------- -------- --------
<S> <C> <C> <C>
Balance at October 1, 1992 $ -- $ 7,947 $ 7,947
Net income for the year ended
September 30, 1993 -- 658 658
--------------- -------- --------
Balance at September 30, 1993 -- 8,605 8,605
Net income for the year ended
September 30, 1994 -- 379 379
--------------- -------- --------
Balance at September 30, 1994 -- 8,984 8,984
Cumulative effect of adopting SFAS
No. 115, net of related tax effects 382 -- 382
Net income for the year ended
September 30, 1995 -- 394 394
Change in unrealized gains on available for
sale securities, net of related tax effects 122 -- 122
--------------- -------- --------
Balance at September 30, 1995 504 9,378 9,882
Net income for the six months ended
March 31, 1996 (unaudited) -- 112 112
Change in unrealized gains on available for sale
securities, net of related tax effects (unaudited) 56 -- 56
--------------- -------- --------
Balance at March 31, 1996
(unaudited) $ 560 $ 9,490 $ 10,050
=============== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 108
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
For the six months ended March 31, 1996 and 1995 (unaudited) and
the years ended September 30, 1995, 1994 and 1993
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
(In thousands) MARCH 31, SEPTEMBER 30,
- ----------------------------------------------- ------------------- -------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income $ 112 $ 207 $ 394 $ 379 $ 658
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of premises and equipment 45 42 82 79 74
Amortization of premiums and discounts
on investment securities and
mortgage-backed securities, net 30 20 62 220 52
Provision for loan losses 105 -- 12 5 21
Federal Home Loan Bank stock
dividends (37) (21) (32) (33) (27)
Change in assets and liabilities:
Loan loss recovery 8 -- -- -- --
(Increase) decrease in accrued interest 20 (48) (44) (62) (82)
receivable
(Increase) decrease in other assets (125) (15) (11) (1) (1)
Increase (decrease) in accrued
expenses and other liabilities (269) (48) 25 (45) 111
Increase (decrease) in Federal taxes
on income (25) 32 43 (27) (29)
------- ------- ------- -------- --------
Net cash provided by (used in)
operating activities (136) 169 531 515 777
CASH FLOWS FROM INVESTING
- -------------------------
ACTIVITIES
- ----------
Loan originations and principal repayments
on loans, net (400) 252 (963) 2,767 3,506
Proceeds from:
Principal repayments and maturities of
mortgage-backed securities held to
maturity 1,993 3,018 4,956 7,503 4,686
Principal repayments and maturities of
mortgage-backed securities available
for sale 588 -- -- -- --
Principal repayments and maturities of
investment securities held to maturity 193 4,960 7,281 10,297 769
Principal repayments and maturities of
investment securities available for sale 288 -- -- -- --
Sales of real estate acquired in
settlement of loans -- -- -- -- 26
Purchases of:
Mortgage-backed securities held to
maturity -- (3,587) (8,160) (3,828) (11,237)
Investment securities held to maturity -- (3,747) (4,246) (16,193) (1,200)
Premises and equipment (6) (10) (111) (77) (127)
------- ------- ------- -------- --------
Net cash provided by (used in)
investing activities 2,656 886 (1,243) 469 (3,577)
------- ------- ------- -------- --------
Subtotal 2,520 1,055 (712) 984 (2,800)
</TABLE>
F-6
<PAGE> 109
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
For the six months ended March 31, 1996 and 1995 (unaudited) and
the years ended September 30, 1995, 1994 and 1993
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
(In thousands) MARCH 31, SEPTEMBER 30,
- --------------------------------------------- ------------------- ---------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net increase (decrease) in deposits 811 (317)
764 (2,493) 871
Net increase in advance payments by
borrowers for taxes and insurance 1 -- -- -- --
------- ------- ------ ------- -------
Net cash provided by (used in) financing
activities 812 (317) 764 (2,493) 871
------- ------- ------ ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,332 738 52 (1,509) (1,929)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 1,864 1,812 1,812 3,321 5,250
------- ------- ------ ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,196 $ 2,550 $1,864 $ 1,812 $ 3,321
======= ======= ====== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
- -------------------------------------
INFORMATION
- -----------
Cash paid during the period for:
Interest on deposits $ 1,724 $ 1,484 $3,150 $ 3,125 $ 3,535
Income taxes 73 60 135 202 344
Noncash transactions:
Unrealized gain on securities designated
available for sale upon adoption of
SFAS No. 115 $ 86 $ 545 $ 763 $--- $---
Deferred Federal taxes related to
securities designated as available
for sale $ 29 $ 185 $ 259 $--- $---
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
--------------------
The accounting and reporting policies of Peoples Federal
Savings and Loan Association of Massillon and Subsidiary (the
Association) conform to generally accepted accounting
principles and to general practice within the savings and
loan industry. The Association is engaged in the business of
offering savings products through the issuance of passbook
savings accounts, money market accounts and certificates of
deposit, and lending such funds primarily for the purchase,
construction and improvement of real estate in the area of
Stark County, Ohio. The deposit accounts of the Association
are insured by the Savings Association Insurance Fund (SAIF)
of the Federal Deposit Insurance Corporation (FDIC).
Basis of Consolidation
----------------------
The consolidated financial statements include the accounts of
the Association and its wholly-owned subsidiary, Massillon
Community Service Corporation (the Corporation). All
intercompany transactions and accounts have been eliminated
in consolidation. The Association owns all of the outstanding
shares of the Corporation, the only asset of which was stock
of Intrieve, a data processing company. Such shares were
redeemed by Intrieve on October 20, 1995.
Use of Estimates
----------------
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the
allowance for loan losses and the valuation of real estate
acquired in connection with foreclosures or in satisfaction
of loans, if applicable. In connection with the determination
of the allowance for loan losses and foreclosed real estate,
management obtains independent appraisals for significant
properties.
While management uses available information and its best
judgment to recognize losses on loans, future additions to
the allowance may be necessary. The ultimate adequacy of the
allowance for loan losses is dependent on a variety of
factors, including performance of the Association's loan
portfolio, the economy, changes in real estate, and changes
in interest rates. The amount of the provision for loan
losses is based upon a number of relevant factors, including
trends in the level of non-performing assets and classified
loans, current and economic conditions in the lending area,
past loss experience, possible losses arising from specific
problem assets and changes in the composition of the loan
portfolio.
F-8
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
-------------------------
As of March 31, 1996, September 30, 1995 and 1994, cash and
cash equivalents consisted entirely of cash, demand deposits
and certificates of deposit with original maturities of less
than ninety days.
Investment Securities and Mortgage-Backed and Related
Securities
-----------------------------------------------------
The Association adopted the provisions for Statement of
Financial Accounting Standards No. 115 (SFAS No. 115),
"Accounting for Certain Investments in Debt and Equity
Securities" as of October 1, 1994. This Statement requires
that all debt and marketable equity securities be classified
into one of three categories: held to maturity, available for
sale, or trading. Securities classified as held to maturity
are carried at cost, adjusted for amortization of premiums
and accretions of discounts. Securities classified as
available for sale are carried at estimated fair value
(market value) with the net unrealized gains or losses being
reflected as a separate component of retained earnings.
Trading securities are carried at estimated fair value with
the net unrealized gains or losses reflected in the statement
of income. Management determines the appropriate
classification of debt securities at the time of purchase.
The initial impact of the adoption of SFAS No. 115 was to
increase retained earnings $381,917 on October 1, 1994,
representing the unrealized fair value appreciation on
investment securities designated as available for sale
(consisting solely of FHLMC stock), net of applicable
deferred Federal income taxes. Subsequent to October 1, 1994,
the unrealized gains on securities designated as available
for sale have increased to a net unrealized gain of $503,538.
Prior to the adoption of SFAS No. 115, securities available
for sale were carried at the lower of aggregate cost or
market value. Gains or losses on debt and equity securities
are based on the specific identification method.
In November 1995, the Financial Accounting Standards Board
issued a Special Report (the Special Report) on implementing
the provisions of SFAS No. 115. The Special Report allowed
the Association to reclassify securities, including
held-to-maturity debt securities, without calling into
question management's intent to hold debt securities to
maturity in the future. Pursuant to these provisions,
management reclassified $930,000 of corporate debt securities
and $13.9 million of mortgage-backed securities as available
for sale on December 31, 1995.
Pursuant to the foregoing, at September 30, 1994,
marketable equity securities consisting of the Association's
investment in FHLMC stock were carried at the lower of cost
or fair value. Declines in fair value of marketable equity
securities are deducted directly from equity unless the
decline is determined to be other than temporary, in which
case the basis was adjusted and the realized loss was
recorded in the consolidated statement of income. No
provision for an other than temporary decline in the value of
marketable equity securities was necessary for the six months
ended March 31, 1996 and 1995, or the years ended September
30, 1995, 1994 or 1993.
F-9
<PAGE> 112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans Receivable
----------------
The Association's loan portfolio consists primarily of
long-term conventional loans which are secured by first
mortgages on residential real estate and are stated at the
respective unpaid principal balances, adjusted for allowance
for loan losses and net deferred loan origination fees.
Interest on loans is accrued as earned unless the
collectibility of the loan is in doubt. An allowance based on
management's periodic evaluation, is established for
uncollectible interest on loans that are contractually past
due 90 days or more. The allowance is established by a charge
to interest income equal to all interest previously accrued,
and income is subsequently recognized only to the extent that
cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal
payments has returned to normal, in which case the loan is
returned to accrual status. If the ultimate collectibility of
a nonaccrual loan is in doubt, in whole or in part, all
payments received on such nonaccrual loan are applied to
reduce principal until such doubt is eliminated. In making
such determination, and in the absence of a loan classified as
well secured, the Association considers the loan principal to
be in doubt as to collectibility. Such policy with respect to
interest on loans contractually past due 90 days or more also
generally conforms with financial results historically
obtained by complying with regulatory requirements.
Allowance for Loan Losses
-------------------------
Allowance for loan losses is increased by charges to income
and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the
allowance is based on the Association's past loan loss
experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral,
current economic conditions in the primary lending area and
assumptions about future events. When the collection of a
loan becomes doubtful, or otherwise troubled, the Association
records a loan loss provision equal to the difference between
the fair value of the property securing the loan and the
loan's carrying value. Loans are reviewed periodically to
determine potential problems at an early date. While
management uses the best information available to make
evaluations, future adjustments to allowances may be
necessary if economic conditions or other factors change the
assumptions used in making such evaluations.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114 (SFAS No.
114), "Accounting by Creditors for Impairment of a Loan."
SFAS No. 114 was amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures." This statement requires that impaired loans be
measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or, as
a practical expedient, at the loan's observable market price
or fair value of the collateral. The Association adopted the
Statement effective October 1, 1995, without material effect
on consolidated financial condition or results of operations.
F-10
<PAGE> 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31,
1996 and 1995 (unaudited) and the years ended
September 30, 1995, 1994 and 1993
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses (Continued)
------------------------------------
A loan is defined under SFAS No. 114 as impaired when, based
on current information and events, it is probable that a
creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. In applying
the provisions of SFAS No. 114, the Association considers its
investment in one-to-four family, multi-family residential
loans and consumer installment loans to be homogeneous and
therefore excluded from separate identification for
evaluation of impairment. With respect to the Association's
investment in impaired nonresidential loans, such loans are
collateral dependent and, as a result, are carried as a
practical expedient, at the lower of cost or fair value. It
is the Association's policy to charge off unsecured credits
that are more than ninety days delinquent. Similarly,
collateral dependent loans which are more than ninety days
delinquent are considered to constitute more than a minimum
delay in repayment and are evaluated for impairment under
SFAS No. 114 at that time. As of March 31, 1996, the
Association had no loans that would be defined as impaired
under SFAS No. 114.
Loan Origination Fees, Commitment Fees and Related Costs
--------------------------------------------------------
Loan fees, net of certain direct loan origination costs are
deferred and recognized as an adjustment to interest income
over the contractual life of the loans, adjusted for
estimated prepayments based on the Association's historical
prepayment experience. The net amount deferred is reported as
a reduction of loans.
Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate acquired through foreclosure is carried at the
lower of cost (principal balance of former mortgage loan) or
fair value less estimated selling expenses. Costs relating to
the improvement of the property are capitalized, whereas
costs relating to holding the property are charged to
operations. The Association did not have any real estate
acquired in settlement of loans at March 31, 1996 (unaudited)
and September 30, 1995 and 1994.
Premises and Equipment
----------------------
Land is carried at cost. Buildings, furniture, and equipment
are carried at cost, less accumulated depreciation.
Buildings, furniture, and equipment are depreciated using the
straight-line method over the estimated useful lives of the
assets. Maintenance and repairs are charged to expense as
incurred.
Federal Taxes on Income
-----------------------
The Association retroactively adopted Statement of
Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS No. 109) as of October 1, 1991. The
major provisions of SFAS No. 109, as it affects the
Association, relate to a change in the computational
methodology of the effective tax rate for temporary
differences, the methodology utilized to recognize a
deferred tax liability for certain percentage of earnings bad
debt deductions, as well as the state franchise consequences
related thereto. The cumulative effect of the restatement to
SFAS No. 109, totaling $235,000, was charged to retained
earnings as of October 1, 1991. The effect of SFAS No. 109
F-11
<PAGE> 114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Federal Taxes on Income (continued)
----------------------------------
on fiscal 1992 net income was not material. Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or
deferred tax asset (benefit) is computed by applying the
current statutory tax rates to net taxable or deductible
temporary differences between the tax basis of an asset or
liability and its reported amount in the financial statements
that will result in taxable or deductible amounts in future
periods. Deferred tax benefits are recorded only to the extent
that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current period
earnings, carried back against prior years' earnings, offset
against taxable temporary differences reversing in future
periods, or utilized to the extent of management's estimate of
future taxable income. A valuation allowance is provided for
deferred tax benefits to the extent that the value of net
deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future
taxable income. Deferred tax liabilities are provided on the
total amount of net temporary differences taxable in the
future.
Retirement Plan
---------------
The amount of contributions by the Association to its
qualified cash or deferred arrangement (401(k)) retirement
plan is determined by amounts contributed by plan
participants.
Advertising Costs
-----------------
Advertising costs, except for costs associated with
direct-response advertising, are charged to operations when
incurred. The costs of direct-response advertising, if
significant, are capitalized and amortized over the period
during which future benefits are expected to be received. No
significant costs of direct response advertising were
incurred for the six months ended March 31, 1996 and 1995,
and years ended September 30, 1995, 1994 and 1993.
Advertising expense was $19,013 and $31,392 for the six
months ended March 31, 1996 and 1995, respectively, and
$70,130, $40,845 and $49,409 for the years ended September
30, 1995, 1994 and 1993, respectively.
Reclassifications
-----------------
Certain amounts for prior periods have been reclassified to
conform with the 1995 consolidated financial statement
presentation.
Interim Financial Information
-----------------------------
The unaudited consolidated statement of financial condition
as of March 31, 1996 and the related unaudited consolidated
statements of income, retained earnings and cash flows for
the six months ended March 31, 1996 and 1995 have been
prepared in a manner consistent with the audited financial
information presented. Management believes that all
adjustments, which were all of a normal and recurring nature,
have been recorded to the best of its knowledge and that the
unaudited consolidated financial information fairly presents
the financial position and results of operations and cash
flows of the Association and its wholly owned subsidiary in
accordance with generally accepted accounting principles.
F-12
<PAGE> 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE B - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized
losses and fair value of investment securities at September 30,
1994, summarized by contractual maturity, are shown below.
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.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
--------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(In thousands) COST GAINS LOSSES FAIR VALUE
--------------------------------- --------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Debt Securities:
Federal Home Loan Bank
certificates of deposit:
Due within one year $ 3,500 $ --- $ --- $ 3,500
Due in one to five years 4,500 --- --- 4,500
--------------- --------------- --------------- ---------------
8,000 --- --- 8,000
Automobile loan pass-through certificates:
Due in one to five years 1,376 --- 26 1,350
U.S. Government agency
securities:
Due within one year 1,001 2 --- 1,003
Due in one to five years 199 3 --- 202
--------------- --------------- --------------- ---------------
1,200 5 --- 1,205
Municipal securities:
Due within one year 11 --- --- 11
Due in one to five years 148 --- --- 148
Due in five to ten years 159 --- 5 154
Due after ten years 49 --- 3 46
--------------- --------------- --------------- ---------------
367 --- 8 359
--------------- --------------- --------------- ---------------
10,943 5 34 10,914
Marketable equity securities:
Common stock in Federal Home
Loan Mortgage Corporation 46 578 --- 624
--------------- --------------- --------------- ---------------
$ 10,989 $ 583 $ 34 $ 11,538
--------------- ---------------- --------------- ---------------
The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of investment securities designated as available for sale at September
30, 1995 were:
SEPTEMBER 30, 1995
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(In thousands) COST GAINS LOSSES FAIR VALUE
--------------------------------- --------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Marketable Equity Securities:
Common stock in Federal Home
Loan Mortgage Corporation $ 46 $ 763 $ --- $ 809
--------------- ---------------- --------------- ---------------
</TABLE>
F-13
<PAGE> 116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE B - INVESTMENT SECURITIES (CONTINUED)
The amortized cost, gross unrealized gains, gross unrealized
losses and fair value of investment securities classified as
held to maturity at September 30, 1995, summarized by
contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because issuers may have the
right to call obligations with or without call penalties.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(In thousands) COST GAINS LOSSES FAIR VALUE
--------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Debt Securities:
Federal Home Loan Bank
certificates of deposit:
Due within one year $ 5,000 $ --- $ --- $ 5,000
Due in one to five years 500 --- --- 500
--------------- --------------- --------------- ---------------
5,500 --- --- 5,500
Automobile loan pass-through
certificates:
Due within one year 23 --- --- 23
Due in one to five years 585 --- 2 583
Due in five to ten years 500 5 --- 505
--------------- --------------- --------------- ---------------
1,108 5 2 1,111
U.S. Government agency
securities:
Due in one to five years 199 4 --- 203
Municipal securities:
Due within one year 112 --- --- 112
Due in one to five years 48 --- --- 48
Due in five to ten years 280 3 --- 283
Due after ten years 665 19 --- 684
--------------- ---------------- --------------- ---------------
1,105 22 --- 1,127
--------------- ---------------- --------------- ---------------
$ 7,912 $ 31 $ 2 $ 7,941
--------------- ---------------- --------------- ---------------
</TABLE>
The Association has adequate liquidity and capital, and it is
management's intention to hold such assets to maturity. At
March 31, 1996 and September 30, 1995, neither a disposal nor
conditions that could lead to a decision not to hold these
securities to maturity were reasonably foreseen.
During the six months ended March 31, 1996, corporate debt
securities were reclassified from held to maturity to available
for sale. The amortized cost, gross unrealized gains, gross
unrealized losses and fair values of investment securities
designated available for sale at March 31, 1996 (unaudited)
were:
F-14
<PAGE> 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30,
1995, 1994 and 1993
================================================================================
NOTE B - INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
-------------------------------------------------------------------
(unaudited)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(In thousands) COST GAINS LOSSES FAIR VALUE
---------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Marketable Equity Securities:
Common stock in Federal Home
Loan Mortgage Corporation $ 46 $ 984 $ --- $ 1,030
Automobile loan pass-through
certificates:
Due in one to five years 378 --- 15 363
Due in five to ten years 367 --- 18 349
--------------- --------------- --------------- ---------------
745 --- 33 712
--------------- --------------- --------------- ---------------
$ 791 $ 984 $ 33 $ 1,742
--------------- ---------------- --------------- ---------------
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized
losses and fair value of investment securities classified as
held to maturity at March 31, 1996 (unaudited), summarized by
contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because issuers may have the
right to call obligations with or without call penalties.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------------------------------
(unaudited)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(In thousands) COST GAINS LOSSES FAIR VALUE
---------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Debt Securities:
Federal Home Loan Bank
certificates of deposit:
Due within one year $ 5,500 $ --- $ --- $ 5,500
U.S. Government agency
securities:
Due in one to five years 199 3 --- 202
Municipal securities:
Due within one year 12 --- --- 12
Due in one to five years 122 --- 1 121
Due in five to ten years 201 7 3 205
Due after ten years 653 27 2 678
--------------- ---------------- --------------- ---------------
988 34 6 1,016
--------------- ---------------- --------------- ---------------
$ 6,687 $ 37 $ 6 $ 6,718
--------------- ---------------- --------------- ---------------
</TABLE>
F-15
<PAGE> 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE C - MORTGAGE-BACKED AND RELATED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized
losses and fair value of mortgage-backed and related securities
at September 30, 1994, by contractual maturity, are shown
below.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(In thousands) COST GAINS LOSSES FAIR VALUE
----------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations:
Principally FNMA and FHLMC REMICs:
Due in five to ten years $ 921 $ --- $ 20 $ 901
Due after ten years
2,548 --- 151 2,397
--------------- --------------- --------------- ---------------
3,469 --- 171 3,298
GNMA Certificates:
Due after ten years 5,523 --- 306 5,217
FHLMC Certificates:
Due in one to five years 3,468 --- 98 3,370
Due after ten years 5,058 --- 93 4,965
--------------- --------------- --------------- ---------------
8,526 --- 191 8,335
FNMA Certificates:
Due within one year 1,791 --- 1 1,790
Due after ten years 2,397 --- 19 2,378
--------------- --------------- --------------- ---------------
4,188 --- 20 4,168
Guardian Savings & Loan, due after
ten years 1,164 --- 32 1,132
--------------- --------------- --------------- ---------------
$ 22,870 $ --- $ 720 $ 22,150
--------------- ---------------- --------------- ---------------
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized
losses and fair value of mortgage-backed and related securities
classified as held to maturity by contractual term to maturity
at September 30, 1995, are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(In thousands) COST GAINS LOSSES FAIR VALUE
----------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations:
Principally FNMA and FHLMC REMICs:
Due in five to ten years $ 359 $ --- $ 3 $ 356
Due after ten years
2,482 --- 73 2,409
--------------- --------------- --------------- ---------------
2,841 --- 76 2,765
GNMA Certificates:
Due after ten years 9,380 --- 36 9,344
FHLMC Certificates:
Due within one year 207 2 --- 209
Due in one to five years 2,647 --- 39 2,608
Due in five to ten years 524 8 --- 532
Due after ten years 5,591 --- 60 5,531
--------------- --------------- --------------- ---------------
8,969 10 99 8,880
FNMA Certificates:
Due after ten years 3,377 41 --- 3,418
Guardian Savings & Loan, due
after ten years 1,036 --- 28 1,008
Discovery Resort Limited, partnership
notes, due in five to ten years 405 --- --- 405
--------------- ---------------- --------------- ---------------
$ 26,008 $ 51 $ 239 $ 25,820
--------------- ---------------- --------------- ---------------
</TABLE>
F-16
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE C - MORTGAGE-BACKED AND RELATED SECURITIES (CONTINUED)
--------------------------------------------------
The Association has adequate liquidity and capital, and it is
management's intention to hold such assets to maturity. At
March 31, 1996 and September 30, 1995, neither a disposal nor
conditions that could lead to a decision not to hold these
securities to maturity were reasonably foreseen.
The amortized cost of mortgage-backed and related securities,
classified as held to maturity, by contractual terms to
maturity at September 30, 1995, are shown below. Expected
maturities will differ from contractual maturities because
borrowers may generally prepay obligations with or without
prepayment penalties.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
----------------------
<S> <C> <C>
(In thousands)
--------------------------------
Due within one year $ 207
Due in one to five years 2,647
Due in five to ten years 1,288
Due after ten years 21,866
----------------------
Total mortgage-backed and related securities $ 26,008
----------------------
</TABLE>
During the six months ended March 31, 1996, certain
mortgage-backed and related securities were reclassified from
held to maturity to available for sale. The amortized cost,
gross unrealized gains, gross unrealized losses and fair values
of mortgage-backed and related securities designated as
available for sale at March 31, 1996 (unaudited) were:
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(In thousands) COST GAINS LOSSES FAIR VALUE
----------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(unaudited)
Collateralized mortgage obligations:
Principally FNMA and FHLMC
REMICs:
Due in five to ten years $ 29 $ --- $ --- $ 29
Due after ten years 2,432 7 53 2,386
--------------- --------------- --------------- ---------------
2,461 7 53 2,415
GNMA Certificates:
Due after ten years 4,500 2 20 4,482
FHLMC Certificates:
Due within one year 716 --- 13 703
Due after ten years 3,168 24 23 3,169
--------------- --------------- --------------- ---------------
3,884 24 36 3,872
FNMA Certificates:
Due after ten years 1,092 2 2 1,092
Guardian Savings & Loan, due after
ten years 1,025 --- 26 999
Discovery Resort Limited, partnership
notes, due in five to ten years 350 --- --- 350
--------------- --------------- --------------- ---------------
$ 13,312 $ 35 $ 137 $ 13,210
--------------- ---------------- --------------- ---------------
</TABLE>
F-17
<PAGE> 120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE C - MORTGAGE-BACKED AND RELATED SECURITIES (CONTINUED)
-------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized
losses and fair value of mortgage-backed and related securities
classified as held to maturity by contractual term to maturity
at March 31, 1996 (unaudited), are shown below.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(In thousands) COST GAINS LOSSES FAIR VALUE
------------------------------ --------------- --------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C> <C>
GNMA Certificates:
Due after ten years $ 4,170 $ 41 $ --- $ 4,211
FHLMC Certificates:
Due within one year 330 2 --- 332
Due in one to five years 1,466 2 9 1,459
Due in five to ten years 451 13 --- 464
Due after ten years 1,704 36 --- 1,740
------------ ---------- ----------- -----------
3,951 53 9 3,995
FNMA Certificates:
Due after ten years 1,962 78 --- 2,040
------------ ---------- ----------- -----------
$ 10,083 $ 172 $ 9 $ 10,246
------------ ----------- ----------- -----------
</TABLE>
The amortized cost of mortgage-backed and related securities by
contractual terms to maturity at March 31, 1996, are shown
below. Expected maturities will differ from contractual
maturities because borrowers may generally prepay obligations
with or without prepayment penalties.
<TABLE>
<CAPTION>
MARCH 31, 1996
(In thousands) (unaudited)
------------------------------ ----------------------
<S> <C> <C>
Due within one year $ 1,046
Due in one to five years 1,466
Due in five to ten years 830
Due after ten years 20,053
----------------------
Total mortgage-backed and related securities $ 23,395
----------------------
</TABLE>
F-18
<PAGE> 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE D - LOANS RECEIVABLE
----------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
MARCH 31, 1996 1995 1994
---------------- ------------- --------------
(In thousands) (unaudited)
-------------------------------------
<S> <C> <C> <C>
Residential real estate:
One-to-four family $ 32,156 $ 31,923 $ 32,582
Multi-family 179 303 63
Construction 3,095 2,392 1,729
Nonresidential real estate and land 3,901 3,725 3,370
Home equity 767 330 198
Consumer 471 418 229
---------------- ------------- --------------
40,569 39,091 38,171
Undisbursed portion of loans in process (2,144) (1,064) (1,061)
Deferred fees, net 76 74 28
Allowance for loan losses (193) (80) (68)
---------------- ------------- --------------
$ 38,308 $ 38,021 $ 37,070
---------------- ------------- --------------
</TABLE>
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, YEARS ENDED SEPTEMBER 30,
-------------------------- ----------------------------------------
(In thousands) 1996 1995 1995 1994 1993
--------------------------- ------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 80 $ 68 $ 68 $ 68 $ 68
Charge-offs --- --- --- 5 21
Recoveries 8 --- --- --- ---
Provision for loan losses 105 --- 12 5 21
------------ ------------ ------------ ------------ ------------
Balance at end of period $ 193 $ 68 $ 80 $ 68 $ 68
------------ ------------ ------------ ------------ ------------
</TABLE>
NOTE E - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
(In thousands) MARCH 31, 1996 1995 1994
-------------------------------------- ----------------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Mortgage-backed and related securities $ 178 $ 186 $ 108
Investment securities 154 178 209
Loans receivable 4 6 4
Cash and cash equivalents 18 5 10
------------------------ -------------- --------------
$ 354 $ 375 $ 331
------------------------ -------------- --------------
</TABLE>
F-19
<PAGE> 122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE F - PREMISES AND EQUIPMENT
----------------------
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
(In thousands) MARCH 31, 1996 1995 1994
----------------------------- ---------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Land and land improvements $ 356 $ 356 $ 356
Buildings 1,180 1,180 1,176
Furniture and equipment 809 805 698
---------------- -------------- --------------
2,345 2,341 2,230
Less accumulated depreciation 843 800 718
---------------- -------------- --------------
$ 1,502 $ 1,541 $ 1,512
---------------- -------------- --------------
</TABLE>
NOTE G - DEPOSITS
--------
The following is an analysis of deposits:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
(In thousands) MARCH 31, 1996 1995 1994
------------------------------------ ----------------- -------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
BALANCES BY INTEREST RATE
-------------------------
Passbook savings - 2.50% $ 12,906 $ 12,457 $ 13,551
Christmas club accounts - 2.00% 34 67 ---
Negotiable order of withdrawal (NOW) -
personal accounts 1.75%; business
accounts without interest 1,569 1,035 880
Money market demand accounts - 2.65% 3,544 3,723 4,433
Certificates of deposit:
Individual Retirement Accounts
(weighted average 2.00% (3/96),
2.00% (1995) and 2.25% (1994)) 220 267 347
All other certificates of deposit
(weighted average 5.97% (3/96),
6.13% (1995) and 5.32% (1994)) 49,101 49,015 46,589
----------------- -------------- --------------
49,321 49,282 46,936
----------------- -------------- ---------------
$ 67,374 $ 66,564 $ 65,800
----------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
(In thousands) MARCH 31, 1996 1995 1994
------------------------------------ ---------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
CERTIFICATE MATURITIES
Within 12 months $ 26,969 $ 23,371 $ 24,610
13 months through 24 months 12,752 13,794 12,676
25 months through 36 months 6,355 6,918 3,404
37 months through 48 months 2,575 4,999 3,963
49 months through 60 months 255 163 2,283
Over 60 months 415 37 ---
---------------- -------------- --------------
$ 49,321 $ 49,282 $ 46,936
---------------- --------------- --------------
</TABLE>
F-20
<PAGE> 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE G - DEPOSITS (CONTINUED)
-------------------
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, YEARS ENDED SEPTEMBER 30,
------------------------------ ----------------------------------------------
(In thousands) 1996 1995 1995 1994 1993
---------------------- -------------- -------------- --------------- -------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Passbook savings $ 157 $ 163 $ 323 $ 364 $ 411
Christmas club --- --- --- --- ---
NOW 9 7 15 13 14
Money market demand 47 57 109 123 139
Certificates of deposit 1,508 1,257 2,695 2,620 2,976
-------------- -------------- -------------- -------------- --------------
$ 1,721 $ 1,484 $ 3,142 $ 3,120 $ 3,540
-------------- -------------- -------------- -------------- -------------
</TABLE>
Deposits issued in amounts of $100,000 and over are not
Federally insured and totaled $3.8 million and $3.9 million at
March 31, 1996 (unaudited) and September 30, 1995,
respectively.
NOTE H - RETIREMENT PLAN
---------------
The Association has a 401(k) defined contribution retirement
plan covering substantially all employees. The Association
makes contributions to the plan based on the amount contributed
by plan participants (40% in 1995, 60% in 1994 and 50% in
1993). Total expense for this plan was $28,000 and $15,000 for
the six months ended March 31, 1996 and 1995, and $37,000,
$54,000 and $24,000 for the years ended September 30, 1995,
1994 and 1993.
NOTE I - INCOME TAXES
------------
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(In thousands) MARCH 31, YEARS ENDED SEPTEMBER 30,
------------------------ ------------------------------ ---------------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Federal:
Current $ 69 $ 79 $ 150 $ 105 $ 302
Deferred (21) 13 27 70 13
-------------- -------------- -------------- -------------- --------------
$ 48 $ 92 $ 177 $ 175 $ 315
-------------- -------------- -------------- -------------- --------------
</TABLE>
The provision for Federal income taxes on earnings differ from
that computed at the statutory corporate tax rate of 34% is as
follows:
F-21
<PAGE> 124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE I - INCOME TAXES (CONTINUED)
-----------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(In thousands) MARCH 31, YEARS ENDED SEPTEMBER 30,
-------------------------- ------------------------------ ---------------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Federal income taxes
computed at statutory
rate $ 54 $ 102 $ 194 $ 188 $ 331
Increase (decrease)
resulting from:
Other, principally
municipal interest (6) (10) (17) (13) (16)
-------------- -------------- -------------- -------------- --------------
Federal income tax
provision per
consolidated
financial statements $ 48 $ 92 $ 177 $ 175 $ 315
-------------- -------------- -------------- --------------- --------------
Effective Federal income
tax rate 30.0% 30.8% 31.0% 31.6% 32.4%
-------------- -------------- ------------- -------------- --------------
</TABLE>
Deferred Federal income taxes (benefits) are provided for
temporary differences in the recognition of income and expense
for tax reporting and financial reporting purposes. A
reconciliation of the Association's temporary differences at
the statutory tax rate to the amount of deferred taxes is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(In thousands) MARCH 31, YEARS ENDED SEPTEMBER 30,
---------------------- ------------------------------ ---------------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Effect of temporary
difference at
statutory rate:
Book/tax depreciation
differences $ 5 $ 6 $ 12 $ 18 $ 17
Federal Home Loan Bank
stock dividends 8 7 15 11 9
Net loan origination
costs deferred for
financial reporting,
recognized currently
for tax purposes --- --- 5 (20) (18)
Deferred directors' fees --- --- --- 57 8
Book/tax loan loss
allowance --- --- --- --- ---
Other (34) --- (5) 4 (3)
-------------- -------------- -------------- -------------- --------------
Deferred Federal income
tax expense per
consolidated financial
statement $ (21) $ 13 $ 27 $ 70 $ 13
--------------- -------------- -------------- -------------- --------------
</TABLE>
F-22
<PAGE> 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE I - INCOME TAXES (CONTINUED)
-----------------------
The composition of the Association's net deferred tax liability
is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, ------------------------------
(In thousands) 1996 1995 1994
--------------------------------------------------- ----------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Taxes (payable) refundable on temporary differences
at the expected statutory rate:
Deferred tax liabilities:
Difference between book and tax depreciation $ (96) $ (91) $ (79)
Federal Home Loan Bank stock dividends (146) (138) (122)
Allowance for loan losses (124) (158) (158)
Unrealized gains on securities available for sale (289) (259) ---
Other --- --- (5)
----------------- -------------- --------------
Total deferred tax liabilities (655) (646) (364)
Deferred tax assets:
Net deferred loan fees 51 51 56
Franchise tax --- 85 58
----------------- -------------- --------------
Total deferred tax assets 51 136 114
----------------- -------------- --------------
Net deferred tax liability per consolidated
financial statements $ (604) $ (510) $ (250)
----------------- ------------- --------------
</TABLE>
Under the Internal Revenue Code, the Association is allowed a
special bad debt deduction. Such bad debt deduction is based on
a percentage of earnings, generally limited to 8% of taxable
income, or the amount of qualifying and nonqualifying loans
outstanding and subject to certain limitations based on total
loans and deposits at the end of the year. Retained earnings at
March 31, 1996 and September 30, 1995 includes pre-1987
percentage of earnings bad debt deductions of approximately
$2.4 million for which no provision for Federal income taxes
has been made. If these restricted retained earnings are later
used for purposes other than for bad debt losses, then such
amount will be subject to Federal income taxes at the then
current corporate income tax rate. The related amount of
unrecognized deferred tax liability totaled approximately
$819,000 at March 31, 1996 and September 30, 1995.
NOTE J - REGULATORY CAPITAL REQUIREMENTS
-------------------------------
The Association must maintain certain minimum capital
requirements promulgated by the Office of Thrift Supervision
(OTS). OTS requires the Association to meet the following
regulatory capital tests: the tangible capital requirement, the
core capital requirement and the risk-based capital
requirement. The tangible capital requirement provides for
minimum tangible capital equal to 1.5% of adjusted total
assets. The core capital requirement provides for minimum core
capital equal to 3.0% of adjusted total assets. OTS has
proposed to amend the core capital requirement to a range of
4.0% to 5.0% of adjusted total
F-23
<PAGE> 126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE J - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
-------------------------------------------
assets, depending on the examination rating and overall risk.
The Association's management does not anticipate any adverse
effect if the core capital requirement regulation is amended as
proposed. The risk-based capital requirement provides for core
capital plus the general loss allowance equal to 8.0% of
risk-weighted assets. OTS has adopted an amendment to the
risk-based capital requirement that includes an interest-rate
risk component for any institution carrying "above normal"
interest rate risk. Management believes this amendment will not
affect the Association's compliance with its risk-based capital
requirements.
The Association's regulatory capital exceeded all minimum
capital requirements as of March 31, 1996 and September 30,
1995, as shown in the following tables:
<TABLE>
<CAPTION>
MARCH 31, 1996 (unaudited)
---------------------------------------------------------------------------------
TANGIBLE CORE RISK-BASED
(In thousands) CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
------------------------ ------------ ------- ------------ ------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles $ 10,050 $ 10,050 $ 10,050
Additional capital item:
General valuation
allowances --- --- 193
Less unrealized gains on
securities designated as
available for sale, net (560) (560) (560)
------------ ------------ --------------
Regulatory capital 9,490 12.2 9,490 12.2 9,683 31.3
Minimum capital
requirement 1,165 1.5 2,329 3.0 2,479 8.0
------------ ------- ------------ ------- -------------- -------
Regulatory capital - excess $ 8,325 10.7 $ 7,161 9.2 $ 7,204 23.3
------------ ------ ------------ ------- -------------- ------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
---------------------------------------------------------------------------------
TANGIBLE CORE RISK-BASED
(In thousands) CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
------------------------ ------------ ------- ------------ ------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles $ 9,882 $ 9,882 $ 9,882
Additional capital item:
General valuation
allowances --- --- 80
Less unrealized gains on
securities designated as
available for sale, net (504) (504) (504)
------------ ------------ --------------
Regulatory capital 9,378 12.2 9,378 12.2 9,458 30.7
Minimum capital
requirement 1,152 1.5 2,304 3.0 2,469 8.0
------------ ------- ------------ ------- -------------- -------
Regulatory capital - excess $ 8,226 10.7 $ 7,074 9.2 $ 6,989 22.7
------------ ------ ------------ ------- -------------- ------
</TABLE>
F-24
<PAGE> 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE K - COMMITMENTS
-----------
The Association is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
financing needs of its customers. These financial instruments
include commitments to make loans. In the event of
nonperformance by the other party to the financial instruments
to make loans, the Association's exposure to credit loss is
represented by the contractual amount of those instruments. The
Association follows the same credit policy in making such
commitments as is followed for those loans recorded in the
financial statements.
As of March 31, 1996, the Association had outstanding
commitments of approximately $5,088,000 to originate
residential one-to-four family real estate fixed-rate loans at
interest rates ranging from 7.50% to 8.25% with loan-to-value
ratios of not more than 85%. The Association's commitment for
undisbursed loans in process as of March 31, 1996, of
$2,144,000 is shown in the consolidated financial statements as
a deduction in arriving at net loans receivable.
As of September 30, 1995, the Association had outstanding
commitments of approximately $94,000 to originate residential
one-to-four family real estate fixed-rate loans at interest
rates ranging from 7.625% to 9.50% with loan-to-value ratios of
not more than 85% or private mortgage insurance. The
Association's commitment for undisbursed loans in process as of
September 30, 1995 of $1.1 million is shown in the consolidated
financial statements as a deduction in arriving at net loans
receivable.
In the opinion of management, all loan commitments equaled or
exceeded prevalent market rates and such commitments have been
underwritten on the same basis as that of the existing loan
portfolio. Management believes that all loan commitments are
able to be funded through cash flows from operations and
existing excess liquidity.
NOTE L - DEPOSIT INSURANCE
-----------------
As stated in Note A, the Association's savings deposits are
insured up to the applicable limits by the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance
Corporation (FDIC). The annual FDIC premium assessment has been
.23% of insured deposits of the Association. Congress is
considering legislation to require the FDIC to issue a special
assessment to enable the SAIF to meet certain reserve
requirements and to reduce the annual premiums charged by the
SAIF. The assumed after-tax amount of this special assessment
based on the rate as currently provided in the proposed
legislation, of $.85 per $100 of SAIF deposits held at March
31, 1995, is approximately $369,000.
Congress is also considering legislation that would merge the
SAIF and Bank Insurance Fund (BIF) on January 1, 1998. The
proposed legislation currently provides for the elimination of
the thrift charter or separate thrift regulation under Federal
law prior to the merger of the deposit insurance funds. The
Association would then be regulated as a bank under Federal law
and subject to the more restrictive activity limits imposed on
national banks. If the Association is required to convert to a
bank charter it would be required to recapture approximately
$500,000 of its bad debt reserve for which deferred taxes have
previously been provided.
F-25
<PAGE> 128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON AND SUBSIDIARY
As of and for the six months ended March 31, 1996 and 1995
(unaudited) and the years ended September 30, 1995,
1994 and 1993
================================================================================
NOTE M - CORPORATE REORGANIZATION (UNAUDITED)
-----------------------------------
On October 16, 1995, the Board of Directors of the Association
unanimously adopted a Plan of Conversion (Plan) to convert from
a federally chartered mutual savings and loan association to a
federally chartered capital stock savings association. The
Plan, which includes the formation of a holding company, is
subject to regulatory approval and approval by the members of
the Association. The conversion is expected to be accomplished
through amendment of the Association's Charter and the sale of
the holding company's common shares. A subscription offering of
the holding company's shares will be offered initially to
eligible account holders, the holding company's employee stock
ownership plan, supplemental eligible account holders and
certain other members. Any common shares not sold in the
subscription offering will be offered to the general public
with preference given to residents of Stark County, Ohio.
At the time of conversion, the Association will establish a
liquidation account in an amount equal to its regulatory
capital as reflected in the latest statement of financial
condition used in the final conversion prospectus. The
liquidation account will be maintained for the benefit of
eligible depositors who continue to maintain their accounts at
the Association after conversion. The liquidation account will
be reduced annually to the extent that eligible depositors have
reduced their qualifying deposits. In the event of a complete
liquidation, each eligible depositor will be entitled to
receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying
balances for accounts then held. The Association may not
declare or pay a cash dividend on its common shares or
repurchase any of its common shares if after the payment of
such dividend or the repurchase of such shares the
Association's shareholders' equity would be reduced below the
amount required for the liquidation account or the
Association's regulatory capital would fail to satisfy
applicable regulatory capital requirements.
Conversion costs will be deferred and will reduce the proceeds
from the shares sold in the conversion. If the conversion is
not completed, all costs will be charged to expense. As of
March 31, 1996, the Association had incurred approximately
$135,000 of conversion costs.
F-26
<PAGE> 129
================================================================================
No person has been authorized to give any information or to make any
representations other than as contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized by PFC. This Prospectus does not constitute an offer to sell,
or the solicitation of an offer to buy, any security, other than the Common
Shares offered hereby, to any person in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom delivery of
this Prospectus would be unlawful. Neither the delivery of this Prospectus nor
any sale hereunder shall, under any circumstances, create any implication that
the information contained herein is correct as to any time subsequent to the
date hereof.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY.................................iv
SELECTED FINANCIAL INFORMATION AND OTHER DATA.......x
REGULATORY CAPITAL COMPLIANCE.......................1
RISK FACTORS........................................2
PEOPLES FINANCIAL CORPORATION.......................7
PEOPLES FEDERAL SAVINGS AND LOAN
ASSOCIATION OF MASSILLON..........................7
USE OF PROCEEDS.....................................8
MARKET FOR COMMON SHARES............................8
DIVIDEND POLICY.....................................9
CAPITALIZATION.....................................10
PRO FORMA DATA.....................................11
SUMMARY CONSOLIDATED STATEMENTS OF INCOME..........16
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL.... 16
THE BUSINESS OF PEOPLES FEDERAL....................31
MANAGEMENT OF PFC..................................50
MANAGEMENT OF PEOPLES FEDERAL......................51
REGULATION.........................................56
TAXATION...........................................63
THE CONVERSION.....................................65
RESTRICTIONS ON ACQUISITION
OF PEOPLES FEDERAL
AND PFC AND RELATED
ANTI-TAKEOVER PROVISIONS.......................77
DESCRIPTION OF AUTHORIZED SHARES...................81
REGISTRATION REQUIREMENTS..........................83
LEGAL MATTERS......................................83
EXPERTS............................................83
ADDITIONAL INFORMATION.............................83
FINANCIAL STATEMENTS..............................F-1
===============================================================================
Up to 1,495,000 Common Shares
PEOPLES FINANCIAL
CORPORATION
(Holding Company for Peoples Federal Savings
and Loan Association of Massillon)
------------
PROSPECTUS
-------------
MCDONALD & COMPANY
SECURITIES, INC.
TRIDENT SECURITIES, INC.
____________________, 1996
================================================================================
27
<PAGE> 130
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
* Legal Fees and Expenses $150,000
* Printing, Postage and Mailing 41,000
Appraisal Fees and Expenses 18,000
* Accounting Fees and Expenses 38,000
* Blue Sky Filing Fees and Expenses 15,610
Federal Filing Fees 14,329
NASD Filing Fees 2,220
Conversion Agent Fees 8,500
* Other Expenses 16,441
** Underwriting Fees and Expenses 275,900
--------
Total estimated expenses $580,000
========
<FN>
- -----------------------------
* Estimated.
** Peoples Federal and PFC have retained McDonald & Company Securities,
Inc. ("McDonald & Company"), and Trident Securities, Inc. ("Trident"),
to assist in the marketing of the Common Shares. McDonald & Company
and Trident will consult with and advise Peoples Federal and PFC and
assist with the sale of the Common Shares in connection with the
Conversion on a best efforts basis. The services to be rendered by
McDonald & Company and Trident include assisting PFC in conducting the
Subscription Offering and the Community Offering and educating Peoples
Federal personnel about the Conversion process.
For its services, McDonald & Company and Trident will receive a
commission equal to 2% of the aggregate purchase price paid for shares
sold in the Subscription Offering, excluding any amounts paid by
Peoples Federal's directors, executive officers and employee benefit
plans and any associates of Peoples Federal's directors and officers.
McDonald & Company and Trident will also receive a commission equal to
2.5% of the aggregate dollar amount of Common Shares sold in the
Community Offering. Peoples Federal will reimburse McDonald & Company
and Trident for reasonable out of pocket expenses, including legal
fees, not to exceed $45,000.
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS OF PEOPLES FEDERAL.
(a) FEDERAL REGULATIONS
As a federal savings and loan association, Peoples Federal is
subject to federal regulations which provide that any person against whom any
action, suit or other judicial or administrative proceeding, or threatened
proceeding, whether civil, criminal, or otherwise, including any appeal or
other proceeding for review (an "Action"), is brought by reason of the fact
that such person is or was a director, officer or employee of Peoples Federal
shall be indemnified by Peoples Federal for the following:
(i) Reasonable costs and expenses, including
reasonable attorney's fees actually paid or incurred by such person in
connection with proceedings related to the defense or settlement of an Action:
(ii) Any amount for which such person becomes
liable by reason of any judgment in an Action; and
(iii) Reasonable costs and expenses, including
reasonable attorney's fees, actually paid or incurred in any Action to enforce
his rights under this section if the person attains a final judgment in favor
of such person in such Action.
II-1
<PAGE> 131
Such indemnification shall be made to such officer, director
or employee only if the following requirements are met:
(i) Peoples Federal shall make the
indemnification in connection with any Action which results in a final
judgment on the merits in favor of such director, officer or employee; and
(ii) Peoples Federal shall make the
indemnification in case of (A) settlement of any Action, (B) final judgment
against such director, officer or employee, or (C) final judgment in favor of
such director, officer or employee other than on the merits, only if a majority
of the directors of Peoples Federal determines that such director, officer or
employee was acting in good faith within what he or she reasonably believed
under the circumstances was the scope of his or her employment or authority and
for a purpose which he or she reasonably believed under the circumstances was
in the best interest of Peoples Federal or its stockholders.
Peoples Federal may authorize payment of reasonable costs and
expenses, including reasonable attorney's fees arising from the defense or
settlement of any Action, to any director, officer or employee if a majority of
the directors of Peoples Federal conclude that such person may become entitled
to indemnification. The directors of Peoples Federal may impose conditions on
such payment, and, before making an advance payment, Peoples Federal shall
obtain an agreement from such person that Peoples Federal will be repaid if the
person on whose behalf payment is made is later determined not to be entitled
to such indemnification.
Peoples Federal currently maintains a directors' and officers'
liability policy with The Ohio Casualty Insurance Company providing for
insurance of directors and officers for liability incurred in connection with
performance of their duties as directors and officers. Such policy does not,
however, provide insurance for losses resulting from willful or criminal
misconduct.
(b) PFC'S CODE OF REGULATIONS
Article Five of PFC's Code of Regulations provides for the
indemnification of officers and directors as follows:
SECTION 5.01. MANDATORY INDEMNIFICATION. The corporation
shall indemnify any officer or director of the corporation who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (including, without limitation, any action threatened or
instituted by or in the right of the corporation), by reason of the fact that
he is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, trustee,
officer, employee or agent of another corporation (domestic or foreign,
nonprofit or for profit), partnership, joint venture, trust or other
enterprise, against expenses (including, without limitation, attorneys' fees,
filing fees, court reporters' fees and transcript costs), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, he had no reasonable cause to believe his conduct was unlawful. A
person claiming indemnification under this Section 5.01 shall be presumed, in
respect of any act or omission giving rise to such claim for indemnification,
to have acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and with respect to any
criminal matter, to have had no reasonable cause to believe his conduct was
unlawful, and the termination of any action, suit or proceeding by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, rebut such presumption.
II-2
<PAGE> 132
SECTION 5.02. COURT-APPROVED INDEMNIFICATION. Anything contained
in the Regulations or elsewhere to the contrary notwithstanding:
(A) the corporation shall not indemnify any officer or director of the
corporation who was a party to any completed action or suit instituted by or in
the right of the corporation to procure a judgment in its favor by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, trustee, officer, employee or agent of another corporation (domestic
or foreign, nonprofit or for profit), partnership, joint venture, trust or
other enterprise, in respect of any claim, issue or matter asserted in such
action or suit as to which he shall have been adjudged to be liable for acting
with reckless disregard for the best interests of the corporation or misconduct
(other than negligence) in the performance of his duty to the corporation
unless and only to the extent that the Court of Common Pleas of Stark County,
Ohio, or the court in which such action or suit was brought shall determine
upon application that, despite such adjudication of liability, and in view of
all the circumstances of the case, he is fairly and reasonably entitled to such
indemnity as such Court of Common Pleas or such other court shall deem proper;
and
(B) the corporation shall promptly make any such unpaid
indemnification as is determined by a court to be proper as contemplated by
this Section 5.02.
SECTION 5.03. INDEMNIFICATION FOR EXPENSES. Anything contained in the
Regulations or elsewhere to the contrary notwithstanding, to the extent that an
officer or director of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section
5.01, or in defense of any claim, issue or matter therein, he shall be promptly
indemnified by the corporation against expenses (including, without limitation,
attorneys' fees, filing fees, court reporters' fees and transcript costs)
actually and reasonably incurred by him in connection therewith.
SECTION 5.04 DETERMINATION REQUIRED. Any indemnification required
under Section 5.01 and not precluded under Section 5.02 shall be made by the
corporation only upon a determination that such indemnification of the officer
or director is proper in the circumstances because he has met the applicable
standard of conduct set forth in Section 5.01. Such determination may be made
only (A) by a majority vote of a quorum consisting of directors of the
corporation who were not and are not parties to, or threatened with, any such
action, suit or proceeding, or (B) if such a quorum is not obtainable or if a
majority of a quorum of disinterested directors so directs, in a written
opinion by independent legal counsel other than an attorney, or a firm having
associated with it an attorney, who has been retained by or who has performed
services for the corporation, or any person to be indemnified, within the past
five years, or (C) by the shareholders, or (D) by the Court of Common Pleas of
Stark County, Ohio, or (if the corporation is a party thereto) the court in
which such action, suit or proceeding was brought, if any; any such
determination may be made by a court under division (D) of this Section 5.04 at
any time including, without limitation, any time before, during or after the
time when any such determination may be requested of, be under consideration by
or have been denied or disregarded by the disinterested directors under
division (A) or by independent legal counsel under division (B) or by the
shareholders under division (C) of this Section 5.04; and no failure for any
reason to make any such determination, and no decision for any reason to deny
any such determination, by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by shareholders under division
(C) of this Section 5.04 shall be evidence in rebuttal of the presumption
recited in Section 5.01. Any determination made by the disinterested directors
under division (A) or by independent legal counsel under division (B) of this
Section 5.04 to make indemnification in respect of any claim, issue or matter
asserted in an action or suit threatened or brought by or in the right of the
corporation shall be promptly communicated to the person who threatened or
brought such action or suit, and within ten (10) days after receipt of such
notification such person shall have the right to petition the Court of Common
Pleas of Stark County, Ohio, or the court in which such action or suit was
brought, if any, to review the reasonableness of such determination.
SECTION 5.05. ADVANCES FOR EXPENSES. Expenses (including, without
limitation, attorneys' fees, filing fees, court reporters' fees and transcript
costs) incurred in defending any action, suit or proceeding referred to in
Section 5.01 shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding to or on behalf of the officer
or director promptly as such expenses are incurred by him, but only if such
officer or director shall first agree, in writing, to repay all amounts so paid
in respect of any claim, issue or other matter asserted in such action, suit or
proceeding in defense of which he shall not have been successful on the merits
or otherwise:
II-3
<PAGE> 133
(A) if it shall ultimately be determined as provided in Section 5.04
that he is not entitled to be indemnified by the corporation as provided under
Section 5.01; or
(B) if, in respect of any claim, issue or other matter asserted by or
in the right of the corporation in such action or suit, he shall have been
adjudged to be liable for acting with reckless disregard for the best interests
of the corporation or misconduct (other than negligence) in the performance of
his duty to the corporation, unless and only to the extent that the Court of
Common Pleas of Stark County, Ohio, or the court in which such action or suit
was brought shall determine upon application that, despite such adjudication of
liability, and in view of all the circumstances, he is fairly and reasonably
entitled to all or part of such indemnification.
SECTION 5.06. ARTICLE FIVE NOT EXCLUSIVE. The indemnification provided
by this Article Five shall not be deemed exclusive of any other rights to which
any person seeking indemnification may be entitled under the Articles or the
Regulations or any agreement, vote of shareholders or disinterested directors,
or otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be an officer or director of the corporation and shall inure
to the benefit of the heirs, executors, and administrators of such a person.
SECTION 5.07. INSURANCE. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, trustee, officer, employee, or agent of another
corporation (domestic or foreign, nonprofit or for profit), partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the obligation or the power to
indemnify him against such liability under the provisions of this Article Five.
SECTION 5.08. CERTAIN DEFINITIONS. For purposes of this Article
Five, and as examples and not by way of limitation:
(A) A person claiming indemnification under this Article 5 shall be
deemed to have been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 5.01, or in defense of any
claim, issue or other matter therein, if such action, suit or proceeding shall
be terminated as to such person, with or without prejudice, without the entry
of a judgment or order against him, without a conviction of him, without the
imposition of a fine upon him and without his payment or agreement to pay any
amount in settlement thereof (whether or not any such termination is based upon
a judicial or other determination of the lack of merit of the claims made
against him or otherwise results in a vindication of him); and
(B) References to an "other enterprise" shall include employee benefit
plans; references to a "fine" shall include any excise taxes assessed on a
person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee or agent with respect to
an employee benefit plan, its participants or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" within the meaning of that term as used in this Article Five.
SECTION 5.09. VENUE. Any action, suit or proceeding to determine a
claim for indemnification under this Article Five may be maintained by the
person claiming such indemnification, or by the corporation, in the Court of
Common Pleas of Stark County, Ohio. The corporation and (by claiming such
indemnification) each such person consent to the exercise of jurisdiction over
its or his person by the Court of Common Pleas of Stark County, Ohio, in any
such action, suit or proceeding.
The Board of Directors is authorized, at their discretion, to obtain
policies of insurance insuring the Association against loss caused by the acts
of its directors, officers or employees and insuring its directors, officers or
employees for those expenses which an association may indemnify such director,
officer or employee under the authority of Revised Code Section 1151.151.
II-4
<PAGE> 134
(c) INDEMNIFICATION AGREEMENTS
(i) AGREEMENT WITH KELLER & COMPANY, INC.
Peoples Federal has agreed to indemnify Keller & Company,
Inc. ("Keller"), the firm retained by Peoples Federal to provide the appraisal
of the pro forma market value of Peoples Federal as converted, in connection
with certain matters related to the appraisal. Peoples Federal will indemnify
Keller, its employees and affiliates, for certain costs and expenses, including
reasonable legal fees, in connection with claims or litigation relating to the
appraisal and arising out of any misstatement or untrue statement of a material
fact in information supplied to Keller by Peoples Federal or by an intentional
omission by Peoples Federal to state a material fact in the information so
provided, except where Keller has been negligent or at fault.
(ii) AGREEMENT WITH MCDONALD & COMPANY AND TRIDENT
Peoples Federal has agreed to indemnify and hold harmless
McDonald & Company and Trident. In general, the agency agreement with McDonald
& Company and Trident (the "Agency Agreement") provides that Peoples Federal
will indemnify and hold harmless their directors, officers, employees, agents
and any controlling person against any and all loss, liability, claim, damage
or expense (including the fees and disbursements of counsel reasonably
incurred) arising out of any untrue statement, or alleged untrue statement, of
a material fact contained in the Summary Proxy Statement or the Prospectus, any
application to regulatory authorities, any "blue sky" application, or any other
related document prepared or executed by or on behalf of Peoples Federal with
its consent in connection with, or in contemplation of, the transactions
contemplated by the Agency Agreement, or any omission therefrom of a material
fact required to be stated therein, unless such untrue statement or omission,
or alleged untrue statement or omission, was made in reliance upon, and in
conformity with, written information regarding McDonald & Company and Trident
furnished to Peoples Federal by McDonald & Company and Trident expressly for
use in the Summary Proxy Statement or the Prospectus.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of PFC have been sold by PFC without
registration pursuant to the Act, except as follows:
On November 7, 1995, in connection with the incorporation of
PFC, 100 common shares, without par value, of PFC (the "Securities") were sold
for an aggregate purchase price of $100 pursuant to Section 4(2) of the Act in
a transaction not involving any public offering. The Securities were sold to
Vincent G. Matecheck, the Secretary of PFC, who had access to all material
information about PFC. The Securities were offered without the use of any form
of general solicitation or advertising. No underwriter was involved in the
transaction, and no commission, discount or other remuneration was paid or
given in connection with the sale of the Securities. Under the terms of the
Subscription Agreement between PFC and Mr. Matecheck, the Securities will be
repurchased by PFC on the effective date of the Conversion.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
The exhibits filed as a part of this Registration Statement
are as follows:
*1.1 Engagement letter with McDonald & Company
Securities, Inc. and Trident Securities, Inc.
*1.2 Agency Agreement with McDonald & Company
Securities, Inc. and Trident Securities, Inc.
(proposed)
*2 Plan of Conversion
*3.1 Articles of Incorporation of Peoples
Financial Corporation
*3.2 Code of Regulations of Peoples Financial
Corporation
*5 Opinion of Vorys, Sater, Seymour and Pease
regarding legality of securities being
offered
*8 Opinion of Vorys, Sater, Seymour and Pease
regarding tax matters
II-5
<PAGE> 135
<TABLE>
<S> <C>
*10.1 Peoples Financial Corporation 1996 Stock
Option Plan (proposed)
*10.2 Peoples Federal Savings and Loan Association
of Massillon Recognition and Retention Plan
(proposed)
*10.3 Peoples Financial Corporation Employee Stock
Ownership Plan (proposed)
*10.4 Employment Agreements with Paul von Gunten,
Linda L. Fowler, James R. Rinehart and Cindy
A. Wagner (proposed)
*10.5 Tax Allocation Agreement
*21 Subsidiaries
23.1 Consent of Hall, Kistler & Company
23.2 Consent of Keller & Company, Inc.
23.3 Consent of Vorys, Sater, Seymour and Pease
*27 Financial Data Schedule
*99.1 Summary Proxy Statement
*99.2 Order Form
*99.3 Form of Proxy
*99.4 Solicitation and Marketing Material
*99.5 Appraisal Agreement between Peoples Federal
Savings and Loan Association
of Massillon and Keller & Company, Inc.
*99.6 Appraisal Report prepared by Keller & Company,
Inc.
<FN>
- -------------------------
* Filed previously.
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the
required information is not applicable or is included in the consolidated
financial statements or related notes.
ITEM 17. UNDERTAKINGS.
(a) The undersigned, PFC, hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to
this Registration Statement:
(i) To include any prospectus required
by Section 10(a)(3) of the Act.
(ii) To reflect in the prospectus any
facts or events arising after the
effective date of the Registration
Statement (or the most recent
post-effective amendment thereof)
which, individually or in the
aggregate, represent a fundamental
change in the information set forth
in the Registration Statement.
Notwithstanding the foregoing, any
increase or decrease in volume of
securities offered (if the total
dollar value of securities offered
would not exceed that which was
registered) and any deviation from
the low or high end of the
estimated maximum offering range
may be reflected in the form of
prospectus filed with the
II-6
<PAGE> 136
Commission pursuant to Rule 424(b)
(sections 230.434(b) of this chapter)
if, in the aggregate, the changes
in volume and price represent no
more than a 20% change in the
maximum aggregate offering price
set forth in the "Calculation of
Registration Fee" table in the
effective registration statement.
(iii) To include any material information
with respect to the plan of
distribution not previously
disclosed in the Registration
Statement or any material change to
such information in the
Registration Statement.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be
a new Registration Statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers and controlling persons of PFC,
pursuant to the foregoing provisions or otherwise, PFC has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by PFC of expenses incurred or paid by a director, officer or
controlling person of PFC in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, PFC will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-7
<PAGE> 137
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Pre-Effective Amendment No. 2 to Registration
Statement on Form S-1 to be signed on its behalf by the undersigned, duly
authorized to do so, in the City of Massillon, State of Ohio, on July 15, 1996.
By: /s/ Paul von Gunten
--------------------
Paul von Gunten
President, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 has been
signed below by the following persons in the capacities and as of the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Paul von Gunten President, Chief Executive Officer July 15, 1996
- ------------------------- (Principal Executive Officer)
Paul von Gunten and Director
/s/ James R. Rinehart Treasurer July 15, 1996
- ------------------------- (Principal Financial and Accounting Officer)
James R. Rinehart
/s/ Victor C. Baker Director July 15, 1996
- -------------------------
Victor C. Baker
Director
- -------------------------
James P. Bordner
/s/ Vincent G. Matecheck Director July 15, 1996
- -------------------------
Vincent G. Matecheck
/s/ Thomas E. Shelt Director July 15, 1996
- -------------------------
Thomas E. Shelt
/s/ Vince E. Stephan Director July 15, 1996
- -------------------------
Vince E. Stephan
</TABLE>
II-8
<PAGE> 138
PEOPLES FINANCIAL CORPORATION
PRE-EFFECTIVE AMENDMENT NO. 2 TO
REGISTRATION STATEMENT ON FORM S-1
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
23.1 Consent of Hall, Kistler & Company P.L.L.
23.2 Consent of Keller & Company, Inc.
23.3 Consent of Vorys, Sater, Seymour and Pease
</TABLE>
<PAGE> 1
Exhibit 23.1
July 23, 1996
ACCOUNTANT'S CONSENT
--------------------
Peoples Federal Savings and Loan Association
of Massillon
211 Lincoln Way East
Massillon, Ohio 44646
We have issued our report dated October 30, 1995, accompanying the
financial statements of Peoples Federal Savings and Loan Association of
Massillon as of September 30, 1995 and 1994, and for the years ended September
30, 1995, 1994 and 1993, included in Pre-effective Amendment No. 2 to Form S-1
to be filed with the Securities and Exchange Commission on or about July 23,
1996. We consent to the use of our report and our name as it appears in the
Prospectus under the caption "Experts."
/s/ Hall, Kistler & Company P.L.L.
----------------------------------
HALL, KISTLER & COMPANY P.L.L.
Canton, Ohio
<PAGE> 1
Exhibit 23.2
KELLER & COMPANY, INC.
555 Metro Place North
Suite 524
Dublin, Ohio 43017
(614) 766-1426
(614) 766-1459
July 23, 1996
Re: Valuation Appraisal of Peoples Financial Corporation/
Peoples Savings and Loan Association of Massillon
Massillon, Ohio
We hereby consent to the statements with respect to us and the
references to our Valuation Appraisal Report in the Prospectus and in
Pre-Effective Amendment No. 2 to the Form S-1 to be filed with the Securities
and Exchange Commission.
Sincerely,
KELLER & COMPANY, INC.
By /s/ Michael R. Keller
----------------------
Michael R. Keller
President
<PAGE> 1
Exhibit 23.3
(513) 723-4000
CONSENT
-------
Board of Directors
Peoples Financial Corporation
211 Lincoln Way East
Massillon, Ohio 44646
Gentlemen:
We hereby consent to the use of our firm's name in
Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1 (the
"Form S-1") filed by Peoples Financial Corporation ("PFC") to register 1,719,250
common shares, without par value, of PFC; to the statements with respect to our
firm appearing under the heading "Legal Matters" in the Prospectus which is
included in the Form S-1; to the reference to our firm name under the heading
"Principal Effects of the Conversion" in the Prospectus which is included in the
Form S-1; and to the filing of our opinion regarding the legality of the common
shares, included as Exhibit 5 to the Form S-1, and our opinion regarding federal
and state tax matters, included as Exhibit 8 to the Form S-1.
Very truly yours,
/s/ Vorys, Sater, Seymour and Pease
-----------------------------------
VORYS, SATER, SEYMOUR AND PEASE
Cincinnati, Ohio
July 23, 1996
