FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to___________________
Commission File Number: 0-28838
PEOPLES FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Ohio 34-1822228
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
211 Lincoln Way East, Massillon, Ohio 44646
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (330) 832-7441
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, without par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended September 30, 1998, were
$6.8 million.
Based upon the average bid and asked prices quoted by The Nasdaq Stock
Market, the aggregate market value of the voting stock held by non-affiliates of
the issuer on December 4, 1998, was $11.45 million.
1,335,785 of the issuer's common shares were issued and outstanding on
December 4, 1998.
<PAGE>
Documents Incorporated by Reference
The following sections of Peoples Financial Corporation's 1998 Annual
Report to Shareholders are incorporated by reference into Part II of this Form
10-KSB:
1. Management's Discussion and Analysis of Financial Condition and
Results of Operations; and
2. Financial Statements.
The following sections of the definitive Proxy Statement for the 1999
Annual Meeting of Shareholders of Peoples Financial Corporation are incorporated
by reference into Part III of this Form 10-KSB:
1. PROPOSAL ONE - ELECTION OF DIRECTORS;
2. COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS; and
3. VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
2
<PAGE>
PART I
Item 1. Description of Business
Peoples Financial Corporation ("PFC"), an Ohio corporation formed in 1995,
is a unitary savings and loan holding company which owns all of the issued and
outstanding common stock of Peoples Federal Savings and Loan Association of
Massillon ("Peoples Federal"), a savings and loan association chartered under
the laws of the United States. On September 12, 1996, PFC acquired all of the
common stock issued by Peoples Federal upon its conversion from mutual to stock
form (the "Conversion").
Because PFC's activities have been limited primarily to holding the common
stock of Peoples Federal since acquiring such common stock in connection with
the Conversion, the following discussion focuses primarily on 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 market area and investing in U.S.
Government and agency obligations, interest-bearing deposits in other financial
institutions, mortgage-backed securities and municipal securities. 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 Federal Deposit
Insurance Corporation ("FDIC"), and loan and mortgage-backed and related
securities repayments.
Peoples Federal conducts business from its main office and a full-service
branch office, both located in Massillon, Ohio, and a lending office in the
Belden Village area of North Canton, Ohio. 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.
In addition to the historic financial information included herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances and PFC's operations and actual results
could differ significantly from those discussed in those forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein, but also include changes in the economy and
interest rates in the nation and in PFC's general market area. See Exhibit 99
hereto, "Safe Harbor Under the Private Securities Litigation Reform Act of
1995," which is incorporated herein by reference.
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 market area and home equity loans secured by first or
second mortgages on single-family, owner-occupied homes. In July 1998, Peoples
Federal began offering home equity lines of credit on single-family,
owner-occupied properties. 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 has recently begun originating its mortgage loans in
accordance with traditional secondary market guidelines but has not sold any
loans.
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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,
1998 1997
Percent Percent
of total of total
Amount loans Amount loans
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential real estate loans:
One- to four-family (first and second mortgage) $52,762 76.86% $48,026 77.32%
Home equity (secured by mortgages) 1,475 2.15 1,548 2.49
Multifamily 320 .47 345 .55
Nonresidential real estate loans 3,897 5.68 2,653 4.27
Construction loans 9,831 14.32 9,140 14.72
------ ------ ------ ------
Total real estate loans 68,285 99.48 61,712 99.35
Consumer loans:
Loans on deposits 192 .28 225 .36
Other consumer loans 168 .24 176 .29
------ ------ ------ ------
Total consumer loans 360 .52 401 .65
------ ------ ------ ------
Total loans 68,645 100.00% 62,113 100.00%
====== ======
Other items:
Deferred loan origination costs 26 48
Loans in process (4,134) (5,374)
Allowance for loan losses (196) (145)
------ ------
Net loans $64,341 $56,642
====== ======
</TABLE>
Loan Maturity Schedule. The following table sets forth certain information
as of September 30, 1998, 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 Due 4-5 Due 6-10 Due 11-20 Due more than
September 30, years after years after years after 20 years after
1999 2000 2001 9/30/98 9/30/98 9/30/98 9/30/98 Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $11,741 $2,436 $2,531 $4,899 $11,507 $15,973 $13,506 $62,593
(first mortgage)
Home equity (first
and second 104 114 120 261 621 255 - 1,475
mortgage)
Multifamily 13 14 15 35 117 126 - 320
Nonresidential 155 279 191 402 873 1,557 440 3,897
Consumer loans 141 113 71 33 2 - - 360
------ ----- ----- ----- ------ ------ ------ ------
Total loans $12,154 $2,956 $2,928 $5,630 $13,120 $17,911 $13,946 $68,645
====== ===== ===== ===== ====== ====== ====== ======
</TABLE>
Of the loans due more than one year after September 30, 1998, loans with
aggregate balances of $46.5 million have fixed rates of interest, and loans with
aggregate balances of $10.0 million 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
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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 with
LTVs 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 mortgages of 80%. Peoples Federal makes
adjustable-rate first mortgage loans for investment purposes on one- to
four-family, nonowner-occupied residences in amounts up to 75% LTV. Peoples
Federal requires private mortgage insurance ("PMI") for the amount of loans in
excess of 85% 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.
Adjustable-rate mortgage loans are offered by Peoples Federal for terms of
up to 30 years and with various alternative features. The interest rate
adjustment periods on 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.
The aggregate amount of Peoples Federal's one- to four-family residential
real estate loans, excluding construction loans, equaled approximately $54.2
million at September 30, 1998, and represented 79.0% of loans at such date. The
largest individual loan balance on a one- to four-family loan at such date was
$452,000. At such date, one loan secured by one- to four-family residential real
estate in the amount of $115,000 was more than 90 days delinquent or
nonaccruing.
In April 1997, Peoples Federal began offering loans to borrowers to build
or buy a new residence using the equity in their current residence as the down
payment. Bridge loans are structured as temporary mortgage loans, with interest
payments only required, at a fixed rate with a term of two years. The maximum
loan amount offered is $125,000. In addition, the maximum total amount of bridge
loans Peoples Federal's policy authorizes to have outstanding at any one time is
$1,000,000. If the current residence is not sold within the two-year period, the
bridge loan must be converted to a non-owner-occupied mortgage loan.
Bridge loans are considered to involve a greater degree of risk due to the
fact that the borrower may also have a construction loan from Peoples Federal at
the same time. The risk is reduced by requiring any other liens on the current
residence to be paid off with the proceeds of the loan or before a loan is
granted, requiring a maximum LTV of 80% of the current residence and evaluating
the credit history of the borrower. The risk is also reduced by Peoples
Federal's overall limitation. At September 30, 1998, one- to four-family
mortgage loans included $179,000, or .3% of total loans, invested in bridge
loans secured by property located within the primary lending area. At such date,
no bridge loans were delinquent.
In July 1998, Peoples Federal began offering home equity line of credit
loans secured by the equity in single-family owner-occupied residences. The home
equity line of credit loan is an adjustable-rate mortgage loan with an interest
rate one percent over the prime rate as published in the Wall Street Journal,
monthly payments of 1.5% of the previous month's balance and a term of up to ten
years. The maximum loan available is $50,000. The maximum combined LTV of a home
equity line of credit loan and any other mortgage loan secured by the same
property is 80%.
5
<PAGE>
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 creditworthiness 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 September 30, 1998, loans secured by multifamily properties totaled
approximately $320,000, or less than one percent of its 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 twelve-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, throughout the last three fiscal years, Peoples
Federal has also made loans 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 September 30, 1998, a total of $9.8 million, or approximately 14.3% 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 September 30, 1998, 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, manufacturing facilities, an industrial facility and a
warehouse. 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, and on improved lots (streets with all city
utilities) in amounts up to 75% LTV for 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 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.
6
<PAGE>
At September 30, 1998, Peoples Federal had a total of $3.9 million invested
in nonresidential real estate loans, all of which were secured by property
located within Peoples Federal's primary market area. Such loans comprised
approximately 5.7% of Peoples Federal's total loans at such date. At such date,
Peoples Federal had no delinquent nonresidential real estate loans.
Federal regulations limit the amount of nonresidential mortgage loans which
an association may make to 400% of its tangible capital. At September 30, 1998,
Peoples Federal's nonresidential mortgage loans totaled 35.6% 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 five 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.
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 September 30, 1998, Peoples Federal had approximately $360,000, or less
than one percent of its total loans, invested in consumer loans. None of such
loans was more than 90 days delinquent or nonaccruing.
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 38%. 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. Since 1993, Peoples Federal has
required a survey of the property securing 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 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.
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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 but has
recently begun originating its mortgage loans in accordance with FHLMC secondary
market guidelines.
The following table presents Peoples Federal's mortgage loan origination
and participation activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997
(In thousands)
<S> <C> <C>
Loans originated:
One- to four-family residential (1) $28,879 $27,771
Multifamily residential 188 -
Nonresidential 1,209 599
Consumer 276 332
------ ------
Total loans originated 30,552 28,702
------ ------
Reductions:
Principal repayments (22,834) (16,323)
Increase (decrease) in other items, net (2) 1,167 989
------ ------
Net increase $ 7,699 $12,436
====== ======
</TABLE>
- -----------------------------
(1) Includes construction loans.
(2) Consists of unearned and deferred fees, costs and undisbursed loans in
process and the allowance for loan losses.
Office of Thrift Supervision ("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 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 $1.7
million to one borrower at September 30, 1998. The largest amount Peoples
Federal had outstanding to one borrower at September 30, 1998, was $1.5 million,
consisting of eight loans. Such loans were secured by three single-family
residences and five nonresidential properties. All of such loans were current at
September 30, 1998.
Delinquent Loans, Nonperforming 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
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<PAGE>
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 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, 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 September 30, 1998.
Peoples Federal evaluates a loan for nonaccrual status when the payments
are 90 days or more past due.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
<TABLE>
<CAPTION>
September 30,
1998 1997
------ -----
Percent Percent
of total of total
Number Amount loans Number Amount loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for (1):
30 - 59 days 4 $ 97 .14% 6 $150 .24%
60 - 89 days 2 19 .03 5 51 .08
90 days and over 1 115 .17 1 2 .01
- ---- --- -- ---- ---
Total delinquent loans 7 $231 .34% 12 $203 .33%
= ==== === == ==== ===
</TABLE>
- -------------------------------------
(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.
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 nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
1998 1997
---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
<S> <C> <C>
Real estate:
Residential $115 $ -
Nonresidential - -
Consumer - 2
---- ----
Total nonaccruing loans 115 2
Accruing loans contractually past due
90 days or more:
Real estate:
Residential - -
Nonresidential - -
Consumer - -
---- ----
Total accruing loans contractually
past due 90 days or more - -
Automobile loan pass-through certificates - 33
---- ----
Total nonperforming assets $115 $ 35
==== ====
Total loan loss allowance $196 $145
==== ====
Total nonperforming assets as
a percentage of total assets .13% .04%
=== ===
Loan loss allowance as a percent
of nonperforming loans 170% 7,250%
=== =====
</TABLE>
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For the year ended September 30, 1998, gross interest income which would
have been recorded had non-accruing loans been current in accordance with their
original terms was $7,000. During the year ended September 30, 1998, less than
$1,000 was recorded as interest income as former nonaccruing loans were returned
to accrual status. During the periods shown, Peoples Federal had no restructured
loans within the meaning of Statement of Financial Accounting Standards ("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 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.
No loans in Peoples Federal's portfolio were classified as problem assets
at September 30, 1998.
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 nonperforming 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 appraised value of the real estate. In
addition, all of these loans are secured by property in Peoples Federal's
primary lending area. Peoples Federal's practice of making loans only in its
local market area and requiring a 20% down payment have contributed to a low
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.
Management believes that maintenance of the allowance at current levels is
prudent. 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 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.
10
<PAGE>
The following table sets forth an analysis of Peoples Federal's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
For the year ended September 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $145 $193
Charge-offs - (60)
Recoveries 9 -
Provision for loan losses (charged to
operations) 42 12
---- ----
Balance at end of period $196 $145
==== ====
Ratio of net charge-offs (recoveries) to
average net loans outstanding during
the period (.01)% .12%
Ratio of allowance for loan losses to
total loans .29% .23%
</TABLE>
At September 30, 1998, $30,000 of the allowance for loan losses was
allocated to nonresidential loans and $166,000 was allocated to residential
loans. At September 30, 1997, $20,000 of the allowance for loan losses was
allocated to nonresidential loans and $125,000 was allocated to residential
loans.
Mortgage-Backed and Related Securities
Peoples Federal maintains a significant portfolio of mortgage-backed
securities in the form of Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government National Mortgage
Association ("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 Federal Housing
Authority-insured and Veterans Administration-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 $700,000 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 September 30, 1998, was $91,000.
Neither of the privately issued mortgage-backed securities is guaranteed.
Peoples Federal is receiving timely payments on both securities.
11
<PAGE>
Peoples Federal has also invested in collateralized mortgage obligations
("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 September 30, 1998, $8.2 million of Peoples
Federal's mortgage-backed and related securities had adjustable rates.
The following table sets forth the carrying value of Peoples Federal's
mortgage-backed and related securities at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1998 1997
(In thousands)
<S> <C> <C>
FNMA certificates $ 895 $ 1,379
GNMA certificates 4,925 6,470
FHLMC certificates 2,743 4,260
Guardian Savings and Loan certificate 700 897
Discovery Resort Limited Partnership Notes 91 179
FNMA and FHLMC real estate mortgage
investment conduits ("REMICs") 3,905 2,313
------- -------
Total mortgage-backed and related
securities $13,259 $15,498
======= =======
</TABLE>
12
<PAGE>
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 September 30, 1998. 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 September 30, 1998
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 $ - - % $ - - % $275 7.69% $ 620 7.02%
GNMA certificates - - - - - - 4,925 6.83
FHLMC certificates - - - - 593 8.23 2,150 7.10
Guardian Savings and
Loan certificate - - - - - - 700 6.55
Discovery Resort
Limited Partnership - - 91 7.86 - - - -
Notes
FHLMC REMICs - - - - - - 3,905 6.22
---- ---- --- ---- --- ---- ------ ----
Total $ - - % $ 91 7.86% $868 8.06% $12,300 6.68%
==== ==== === ==== === ==== ====== ====
At September 30, 1998
Total mortgage-backed and related securities
portfolio
Carrying Market Average
value value yield
(Dollars in thousands)
<S> <C> <C> <C>
FNMA certificates $ 895 $ 941 7.22%
GNMA certificates 4,925 4,964 6.83
FHLMC certificates 2,743 2,779 7.34
Guardian Savings and
Loan certificate 700 700 6.55
Discovery Resort
Limited Partnership 91 91 7.86
Notes
FHLMC REMICs 3,905 3,905 6.22
------ ------ ----
Total $13,259 $13,380 6.77%
====== ====== ====
</TABLE>
For additional information, see Note B of the Notes to Consolidated
Financial Statements.
13
<PAGE>
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.
Peoples Federal's investments include three automobile loan pass-through
certificates. Such certificates represent interests in pools of automobile
loans. In November 1996, Duff & Philips withdrew its ratings on some
certificates, without stating a reason. At September 30, 1997, these investments
were written down to estimated realizable value. During fiscal 1998, all
collections were applied to principal until the recorded values of the
investments were eliminated. Further collections were recorded as a recovery to
the allowance for loan losses.
The following table sets forth the composition of Peoples Federal's
certificates of deposit in the Federal Home Loan Bank (the "FHLB") of Cincinnati
and investment securities at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
1998 1997
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 $ - - %$ - - % $1,000 16.48% $1,000 16.35%
Investment securities:
U.S. government and federal
agency securities 1,003 22.70 1,003 22.30 1,496 24.66 1,496 24.45
FHLB and FHLMC stock 2,449 55.42 2,449 54.46 2,451 40.41 2,451 40.06
Automobile loan pass-through
certificates - - - - 146 2.41 146 2.39
Municipal securities 967 21.88 1,045 23.24 973 16.04 1,025 16.75
------- ----- ----- ----- ------ ------ ------ ------
Total interest-bearing deposits
and investment securities $4,419 100.00% $4,497 100.00% $6,066 100.00% $6,118 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
14
<PAGE>
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 of Cincinnati and investment securities at September 30, 1998.
<TABLE>
<CAPTION>
At September 30, 1998
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>
Investment securities:
U.S. government and federal
agency securities $ - - % $1,003 6.13% $ - - %
FHLB and FHLMC stock 2,449 3.18 - - - -
Municipal securities 12 6.50 123 6.31 832 6.08
------ ---- ------ ---- ---- ----
Total $2,461 3.20% $1,126 6.15% $832 6.08%
====== ==== ====== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1998
Average Weighted
life Carrying Market average
in years value value yield
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. government and federal
agency securities 4.32 $1,003 $1,003 6.13%
FHLB and FHLMC stock - 2,449 2,449 3.18
Municipal securities 6.20 967 1,045 6.11
------ ------ ----
Total 5.26 $4,419 $4,497 4.49%
====== ====== ====
</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. 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 first received FHLB advances in April 1998 and PFC
borrowed funds for a brief period in September and October 1997.
Deposits. Deposits are attracted principally from within Peoples Federal's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("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.
At September 30, 1998, Peoples Federal's certificates of deposit totaled
$50.9 million, or 77% of total deposits. Of such amount, approximately $29.3
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.
15
<PAGE>
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,
1998 1997
Percent Percent
of total of total
Amount deposits Amount deposits
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
NOW accounts (1) $ 1,824 2.77% $ 2,497 3.80%
Money market accounts (2) 2,616 3.97 2,588 3.94
Passbook savings accounts (3) 10,433 15.86 11,395 17.36
------- ------ ------- ------
Total transaction accounts 14,873 22.60 16,480 25.10
Certificates of deposit:
2.01 - 4.00% 126 .19 160 .24
4.01 - 6.00% 36,181 54.99 29,971 45.65
6.01 - 8.00% 14,617 22.22 19,049 29.01
------- ------ ------- ------
Total certificates of deposit 50,924 77.40 49,180 74.90
------- ------ ------- ------
Total deposits (4) $65,797 100.00% $65,660 100.00%
======= ====== ======= ======
</TABLE>
- -----------------------------
(1) Peoples Federal's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. The weighted
average rate on NOW accounts was 1.75% and 1.50% at September 30, 1998 and
1997, respectively.
(2) Peoples Federal's weighted average interest rate paid on money market
accounts fluctuates with the general movement of interest rates. The
weighted average rate on money market accounts was 2.19% and 2.10% at
September 30, 1998 and 1997, respectively.
(3) Peoples Federal's weighted average rate on passbook savings accounts
fluctuates with the general movement of interest rates. The weighted
average rate on passbook accounts was 2.00% at September 30, 1998 and 1997.
(4) IRAs are included in the various certificates of deposit balances. IRAs
totaled $126,000 and $160,000 as of September 30, 1998 and 1997,
respectively.
16
<PAGE>
The following table shows rate and maturity information for Peoples
Federal's certificates of deposit as of September 30, 1998:
<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% $ 60 $ 66 $ - $ - $ 126
4.01 - 6.00 20,922 11,318 1,635 2,306 36,181
Over 6.01 8,286 2,999 1,675 1,657 14,617
------- ------- ------ ------ -------
Total certificates
of deposit $29,268 $14,383 $3,310 $3,963 $50,924
======= ======= ====== ====== =======
</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
September 30, 1998:
<TABLE>
<CAPTION>
Maturity Amount
(In thousands)
<S> <C>
Three months or less $ 744
Over 3 months to 6 months 439
Over 6 months to 12 months 2,315
Over 12 months 2,400
-------
Total $ 5,898
=======
</TABLE>
The following table sets forth Peoples Federal's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Beginning balance $65,660 $64,355
Deposits 53,991 46,296
Withdrawals 56,220 (47,260)
------- -------
Net decreases before interest credited (2,229) (964)
Interest credited 2,366 2,269
------- -------
Ending balance $65,797 $65,660
======= =======
Net increase $ 137 $ 1,305
Percent increase .21% 2.03%
</TABLE>
Borrowings. The FHLB System functions as a central reserve bank providing
credit for its member institutions and certain other financial institutions. 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
17
<PAGE>
upon whether it meets the Qualified Thrift Lender Test (the "QTL 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 September 30, 1998, Peoples Federal was in
compliance with the QTL Test.
The following table sets forth certain information as to PFC's borrowings
at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
FHLB advances $4,000 $ -
Weighted average interest rate of FHLB
advances 5.68% -
Other borrowings - 3,000
Weighted average interest rate of other
borrowings - 8.50%
</TABLE>
The following table sets forth the maximum balance, the average balance and
the weighted average interest rate of PFC's borrowings:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Maximum balance $4,000 $3,000
Average balance 1,583 231
Weighted average interest rate 4.85% .69%
</TABLE>
PFC obtained an unsecured 90-day loan from a bank in the amount of $3.0
million, with an interest rate of 8.5%, in September 1997 in conjunction with
its special distribution to shareholders. This loan was repaid in October 1997.
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 2.53% for
the year ended September 30, 1998, from 2.52% for the year ended September 30,
1997. The spread for the year ended September 30, 1997, increased from 2.25% for
the year ended September 30, 1996.
The yield on interest-earning assets increased to 7.48% for the year ended
September 30, 1998, from 7.32% for the year ended September 30, 1997, as a
result of an increase in loans receivable, partly offset by a decrease in
investments and mortgage-backed securities. The cost of funds to Peoples Federal
increased to 4.95% for the year ended September 30, 1998, from 4.80% for the
year ended September 30, 1997, due to an increased average balance and higher
rates on certificates of deposit and increased borrowings.
The yield on interest-earning assets increased to 7.32% for the year ended
September 30, 1997, from 7.23% for the year ended September 30, 1996, as a
result of an increase in loans receivable, partly offset by a decrease in
investments and mortgage-backed securities. The cost of funds to Peoples Federal
decreased to 4.80% for the year ended September 30, 1997, from 4.98% for the
year ended September 30, 1996, due to maturity of longer-term, high-rate
certificates of deposit.
18
<PAGE>
The following table presents certain information relating to PFC's average
balance sheet information and reflects the average yield on interest-earning
assets and the average cost of interest-bearing liabilities 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
interest-bearing liabilities, 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>
Year ended September 30,
1998 1997
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 3,443 $ 199 5.78% $ 5,806 $ 322 5.55%
Investment securities 4,850 221 4.56 8,255 448 5.42
Mortgage-backed and related securities
12,413 870 7.01 21,674 1,483 6.84
Loans receivable (1) 60,876 4,815 7.91 49,717 4,000 8.05
------- ------ ------- ------
Total interest-earning assets 81,582 6,105 7.48 85,452 6,253 7.32
Non-interest-earning assets:
Cash and amounts due from depository
institutions 273 269
Premises and equipment, net 1,403 1,463
Other nonearning assets 401 640
------- -------
Total assets $83,659 $87,824
======= =======
Interest-bearing liabilities:
NOW accounts $ 1,698 22 1.30 $ 1,536 18 1.17
Money market accounts 2,590 62 2.39 2,708 57 2.10
Passbook savings accounts 10,799 217 2.01 12,026 241 2.00
Certificates of deposit 50,013 2,918 5.83 46,941 2,727 5.81
------- ------ ------- ------
Total deposits 65,100 3,219 4.95 63,211 3,043 4.81
Borrowings 1,814 96 5.29 250 4 1.60
------- ------ ------- ------
Total interest-bearing liabilities 66,914 3,315 4.95 63,461 3,047 4.80
------- ------ ------ ------- ------ ------
Non-interest-bearing liabilities 1,432 1,435
------- -------
Total liabilities 68,346 64,896
Shareholder's equity 15,313 22,928
------- -------
Total liabilities and shareholders' equity $83,659 $87,824
======= =======
Net interest income; interest rate
spread $2,790 2.53% $3,206 2.52%
====== ====== ====== ======
Net interest margin (net interest income as
a percent of average interest-earning
assets) 3.42% 3.75%
====== ======
Average interest-earning assets to
interest-bearing liabilities 121.92% 134.65%
====== ======
</TABLE>
- ---------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
19
<PAGE>
The following table sets forth, at the dates indicated, the weighted
average yields earned on PFC's interest-earning assets, the weighted average
interest yield paid on interest-bearing liabilities and the interest rate
spread.
<TABLE>
<CAPTION>
At September 30,
1998 1997
<S> <C> <C>
Weighted average yield on loan portfolio 7.73% 7.97%
Weighted average yield on mortgage-backed and related securities 6.79 6.99
Weighted average yield on investment securities 4.46 4.77
Weighted average yield on interest-bearing deposits 4.44 5.07
Weighted average yield on all interest-earning assets 7.34 7.55
Weighted average yield on deposits 5.07 4.97
Weighted average yield on borrowings 5.69 8.50
Weighted average yield paid on all interest-bearing liabilities 5.11 5.13
---- ----
Interest rate spread (spread between weighted average interest
rate on all interest-bearing assets and all interest-bearing
liabilities) 2.23% 2.42%
==== ====
</TABLE>
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>
Year ended September 30,
1998 vs. 1997 1997 vs 1996
Increase (decrease) Increase (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $(136) $ 13 $(123) $ (73) $ 76 $ 3
Investment securities (156) (70) (226) 52 (39) 13
Mortgage-backed and related securities (648) 35 (613) (136) 50 (86)
Loans receivable 882 (68) 814 794 (103) 691
----- ----- ----- ---- ---- ----
Total interest income (58) (90) (148) 637 (16) 621
----- ----- ----- ---- ---- ----
Interest expense attributable to:
NOW accounts 2 3 5 1 (2) (1)
Money market accounts (3) 7 4 (14) (15) (29)
Passbook savings accounts (25) 1 (24) (39) (46) (85)
Certificates of deposit 179 12 191 (134) (99) (233)
Borrowings 83 9 92 4 - 4
----- ----- ----- ---- ---- ----
Total interest expense 236 32 268 (182) (162) (344)
----- ----- ----- ---- ---- ----
Increase (decrease) in net interest
income $(294) $(122) $(416) $819 $146 $965
===== ===== ===== ==== ==== ====
</TABLE>
20
<PAGE>
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 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 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.
At September 30, 1998, 2% of the present value of Peoples Federal's assets
was approximately $1.8 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 $3.5 million at September 30, 1998,
Peoples Federal would have been required to deduct approximately $865,000 (50%
of the approximate $1.7 million 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 September 30,
1998, would still have exceeded the regulatory requirement by $6.8 million.
Presented below, as of September 30, 1998, 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>
September 30, 1998
Change in Interest Rate Board Limit $ Change % Change
(Basis Points) % Change in NPV in NPV
<S> <C> <C> <C>
+300 (75)% $(5,668) (40)%
+200 (45) (3,494) (25)
+100 (25) (1,578) (11)
- - - -
-100 (25) 1,177 8
-200 (45) 2,500 18
-300 (75) 4,138 29
</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
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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. At September 30, 1998, the portfolio included $2.2 million of
three-year ARMs, $722,000 of one-year ARMs and $7.7 million of loans that adjust
for the first time after 10 years and then each year thereafter. In addition, at
September 30, 1998, $8.2 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.
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.
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, the only asset of which was stock of Intrieve,
Incorporated, a data processing company. Such shares were redeemed on October
20, 1995.
Personnel
As of September 30, 1998, Peoples Federal had 21 full-time employees and 2
part-time employees.
REGULATION
General
PFC is a savings and loan holding company within the meaning of the Home
Owners Loan Act, as amended (the "HOLA"). Consequently, PFC is subject to
regulation, examination and oversight by the OTS and must submit periodic
reports to the OTS concerning its activities and financial condition. In
addition, as a corporation organized under Ohio law, PFC is subject to
provisions of the Ohio Revised Code applicable to corporations generally.
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
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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.
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS and
Peoples Federal may be regulated under federal law as a bank or be required to
change its charter. Such change in regulation or charter would likely change the
range of activities in which Peoples Federal may engage and would probably
subject Peoples Federal to more regulation by the FDIC. In addition, PFC might
become subject to a different set of holding company regulations limiting the
activities in which PFC may engage and subjecting PFC to additional regulatory
requirements, including separate capital requirements. At this time, PFC cannot
predict when or whether Congress may actually pass legislation regarding PFC's
and Peoples Federal's regulatory requirements or charter. Although such
legislation, if enacted, may change the activities in which PFC or Peoples
Federal are authorized to engage, it is not anticipated that the current
activities of either PFC or Peoples Federal will be materially affected by those
activity limits.
Ohio Corporation Law
Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code regulates
certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between 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 which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination may
not occur unless (1) one of the specified exceptions applies, (2) the holders of
at least two-thirds of the voting shares, and of at least a majority of the
voting shares not beneficially owned by the Interested Shareholder, approve the
business combination at a meeting called for such purpose, 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. PFC has
not opted out of the protection afforded by Chapter 1704.
Control Share Acquisition. Section 1701.831 of the Ohio Revised Code (the
"Control Share Acquisition Statute") requires that, with certain exceptions,
acquisitions of voting securities which would result in the acquiring
shareholder owning 20%, 33-1/3% or 50% of the outstanding voting securities of
an Ohio corporation (a "Control Share Acquisition") must be approved in advance
by the holders of at least a majority of the outstanding voting shares of such
corporation 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, by certain other
persons who acquire or transfer voting shares after public announcement of the
acquisition or by certain officers of the corporation or directors of the
corporation who are employees of the corporation. The Control Share Acquisition
Statute was intended, in part, to protect shareholders of Ohio corporations from
coercive tender offers.
Takeover Bid Statute. Ohio law provides that an offeror may not make a
tender offer or request or invitation for tenders that would result in the
offeror beneficially owning more than ten percent of any class of the target
company's equity securities unless such offeror files certain information with
the Ohio Division of Securities (the "Securities Division") and provides such
information to the target company and the offerees within Ohio. The Securities
Division may suspend the continuation of the control bid if the Securities
Division determines that the offeror's filed information does not provide full
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disclosure to the offerees of all material information concerning the control
bid. The statute also provides that an offeror may not acquire any equity
security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
Office of Thrift Supervision
General. The OTS is an office of the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings associations and all other savings associations the deposits of which
are insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The
OTS issues regulations governing the operation of savings associations,
regularly examines such associations and imposes assessments on savings
associations based on their asset size to cover the costs of general supervision
and examination. 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.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, 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. 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 communities and borrowers in that area.
Regulatory Capital Requirements. Peoples Federal is required by OTS
regulations to meet certain minimum capital requirements. The tangible capital
requirement requires savings associations to maintain "tangible capital" of not
less than 1.5% of their 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 their total assets. 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.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of their 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
$196,000 at September 30, 1998.
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 the interest rate risk component, a savings association
will 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. 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 defined capital category, an
association is subject to more restrictive and more 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
generally can downgrade an association's capital category, notwithstanding its
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<PAGE>
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. All undercapitalized associations must submit a
capital restoration plan to the OTS within 45 days after becoming
undercapitalized. Such associations 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. Furthermore,
critically undercapitalized institutions must be placed in conservatorship or
receivership within 90 days of reaching that capitalization level, except under
limited circumstances. Peoples Federal's capital at September 30, 1998, met the
standards for the highest category, a "well-capitalized" institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding 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 association's total assets at the
time the institution became undercapitalized and (b) the amount that is
necessary to bring the association into compliance with all capital standards
applicable to such association at the time the association fails to comply with
its capital restoration plan.
Liquidity. OTS regulations require that a savings association maintain a
minimum daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations). During fiscal 1998, certain maturity requirements were removed,
which, in Peoples Federal's case, resulted in a greater eligible liquidity
amount and percentage at September 30, 1998, than at prior year ends. At
September 30, 1998, such minimum requirement was an amount equal to a monthly
average of not less than 4% of its net withdrawable savings deposits plus
borrowings payable in one year or less. Monetary penalties may be imposed upon
associations failing to meet the liquidity requirement. The eligible liquidity
of Peoples Federal at September 30, 1998, was approximately $15.6 million, or
23.8%.
Qualified Thrift Lender Test. Savings associations are required to maintain
a specified level of investments in assets that are designated as qualifying
thrift investments ("QTIs"), which are generally related to domestic residential
real estate and manufactured housing and include credit card, student and small
business loans and stock issued by any FHLB, the FHLMC or the FNMA. Under such
test, 65% of an institution's "portfolio assets" (total assets less goodwill and
other intangibles, property used to conduct business and 20% of liquid assets)
must consist of QTI on a monthly average basis in nine out of every 12 months.
Effective September 30, 1996, a savings association may also qualify as a QTL by
meeting the definition of "domestic building and loan association" under the
Internal Revenue Code of 1986, as amended (the "Code"). In order for an
institution to meet the definition of a "domestic building and loan association"
under the Code, at least 60% of such institution's assets must consist of
specified types of property, including cash loans secured by residential real
estate or deposits, educational loans and certain governmental obligations. 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 become subject to certain operating and regulatory restrictions. A
savings association that fails to meet the QTL test will not be eligible for new
FHLB advances. At September 30, 1998, Peoples Federal met the QTL test.
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 Lending Limit Capital. A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional 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 the lending
limit. A general exception to the 15% limit provides that an association may
lend to one borrower up to $500,000, for any purpose. In applying the limit on
loans to one borrower, the regulations require that loans to certain related
borrowers be aggregated. At September 30, 1998, Peoples Federal was in
compliance with this lending limit.
Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
deposits). 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 with the general public or as offered to all
employees in a company-wide benefit program, and loans to executive officers are
subject to additional limitations. Peoples Federal was in compliance with such
restrictions at September 30, 1998.
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All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). 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. PFC is an
affiliate of Peoples Federal. Generally, Sections 23A and 23B of the FRA (i)
limit the extent to which a savings association 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 association, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchasing 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 September 30, 1998.
Limitations on Capital Distributions. The OTS imposes various restrictions
or requirements on the ability of associations to make capital distributions,
including dividend payments. An association which has converted from mutual to
stock form is prohibited from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the net worth of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion. OTS
regulations also establish a three-tier system limiting capital distributions
according to ratings of associations based on their capital level and
supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year up to the
greater of (i) 100% of 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, and (ii) the amount authorized
for a Tier 2 association. A Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or 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.
Tier 2 consists of associations that, before and after the proposed
distribution, meet their current minimum, but not fully phased-in, capital
requirements. Associations in this category may make capital distributions of up
to 75% of net income over the most recent four quarters. Tier 3 associations do
not meet current minimum capital requirements and must obtain OTS approval of
any capital distribution. Tier 2 associations that propose to make a capital
distribution in excess of the noted safe harbor level must also obtain OTS
approval. Tier 2 associations proposing to make a capital distribution within
the safe harbor provisions and Tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior to such
distribution.
As a subsidiary of PFC, Peoples Federal is required to give the OTS 30
days' notice prior to declaring any dividend on its stock. The OTS may object to
the distribution during such 30-day period based on safety and soundness
concerns. Peoples Federal paid dividends to PFC totaling $4.0 million during
fiscal 1998.
Holding Company Regulation. PFC is a savings and loan holding company
within the meaning of the HOLA. As such, PFC has registered with the OTS and is
subject to OTS regulations, examination, supervision and reporting requirements.
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 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 PFC.
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 holding company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other savings
and loan holding company.
As a unitary savings and loan holding company, PFC generally has no
restrictions on its activities. Such companies are the only financial
institution holding companies which may engage in any commercial, securities and
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insurance activities without restriction. Congress is considering legislation
which may limit PFC's ability to engage in these activities. It cannot be
predicted whether and in what form these proposals might become law. However,
such limits would not impact PFC's current activities, which consist solely of
holding stock of Peoples Federal. The broad latitude to engage in activities
under current law can be restricted. If the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings 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 PFC
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 September 30, 1998, Peoples Federal met both those tests.
If PFC acquired control of another savings institution, other than through
a merger or other business combination with Peoples Federal, PFC would become a
multiple savings and loan holding company. Unless the acquisition was an
emergency thrift acquisition and each subsidiary savings association met 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
activity restrictions.
The OTS may approve acquisitions resulting in the formation of a multiple
savings and loan holding company that controls savings associations in more than
one state only if the multiple savings and loan holding company involved
controls a savings association that 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. Bank holding
companies have had more expansive authority to make interstate acquisitions than
savings and loan holding companies since August 1995.
Federal Regulation of Acquisitions of Control of PFC and Peoples Federal.
In addition to the Ohio law limitations on the merger with, and acquisition of,
PFC, federal limitations generally require regulatory approval of acquisitions
at specified levels. Under pertinent federal law and regulations, no person,
directly or indirectly, or acting in concert with others, may acquire control of
Peoples Federal or PFC without 60 days' prior notice to the OTS. "Control" is
generally defined as having more than 25% ownership or voting power; however,
ownership or voting power of more than 10% may be deemed "control" if certain
factors are in place. If the acquisition of control is by a company, the
acquiror must obtain approval, rather than give notice, of the acquisition as a
savings and loan holding company.
In addition, any merger of Peoples Federal must be approved by the OTS as
well as the Superintendent. Further, any merger of PFC in which PFC is not the
resulting company must also be approved by both the OTS and the Superintendent.
Federal Deposit Insurance Corporation
Deposit Insurance and Assessments. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and savings and loan associations and safeguards the
safety and soundness of the banking and savings and loan industries. The FDIC
administers two separate insurance funds, the Bank Insurance Fund ("BIF") for
commercial banks and state savings banks and the SAIF for savings associations.
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.
The FDIC is required to maintain designated levels of reserves in the SAIF
and in the BIF. 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 FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments vary based on the risk
the institution poses to its deposit insurance fund. The risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
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Prior to September 1996, the SAIF's ratio of reserves to insured deposits
was significantly below the level required by law, while the BIF's ratio was
above the required level. As a result, institutions with SAIF-insured deposits
were paying higher deposit insurance assessments than institutions with
BIF-insured deposits. Federal legislation providing for the recapitalization of
the SAIF became effective in September 1996 and included a special assessment of
$.657 per $100 of SAIF-insured deposits held at March 31, 1995. Peoples Federal
had approximately $65.5 million in deposits at March 31, 1995, and paid a
special assessment of $427,000.
Federal Reserve Requirements
Effective December 1, 1998, FRB regulations require savings associations to
maintain reserves of 3% of net transaction accounts (primarily NOW accounts) up
to $46.5 million (subject to an exemption of up to $4.9 million), and of 10% of
net transaction accounts in excess of $46.5 million. At September 30, 1998,
Peoples Federal was in compliance with the reserve requirements then in effect
and also with the new requirements.
Federal Home Loan Banks
The Federal Home Loan Banks 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 of Cincinnati. Peoples Federal was in compliance with this
requirement with an investment in stock of the FHLB of Cincinnati of $861,000 at
September 30, 1998.
FHLB advances to member institutions who meet the QTL Test are generally
limited to the lower of (i) 25% of the member's assets or (ii) 20 times the
member's investment in FHLB stock. At September 30, 1998, Peoples Federal's
maximum limit on advances was approximately $17.2 million. The granting of
advances is also subject to the FHLB's collateral and credit underwriting
guidelines.
Upon the origination or renewal of a loan or advance, the FHLB 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 FHLB, if such collateral has a readily ascertainable value and the FHLB can
perfect its security interest in the collateral.
The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. 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 the FHLB must be made only to provide funds for
residential housing finance.
TAXATION
Federal Taxation
PFC and Peoples Federal are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, PFC and Peoples Federal may be subject to an alternative 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 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 minimum taxable income computed without regard to this preference
item and prior to reduction by net operating losses, is included in alternative
28
<PAGE>
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. However, the Taxpayer Relief Act of 1997 repealed the
alternative minimum tax for certain "small corporations" for tax years beginning
after December 31, 1997. A corporation initially qualifies as a small
corporation if it had average gross receipts of $5,000,000 or less for the three
tax years ending with its first tax year beginning after December 31, 1996. Once
a corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period does not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration. PFC's average
gross receipts for the three tax years ending on September 30, 1998 is $174,000,
and, as a result, PFC does qualify as a small corporation exempt from the
alternative minimum tax. Peoples Federal's average gross receipts for the three
tax years ending on September 30, 1998, is $6.1 million, and, as a result,
Peoples Federal does not qualify as a small corporation exempt from the
alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as Peoples Federal, were allowed deductions for bad debts
under methods more favorable than those granted to other taxpayers. Qualified
thrift institutions could compute deductions for bad debts using either the
specific charge-off method of Section 166 of the Code or one of two reserve
methods of Section 593 of the Code. The reserve methods under Section 593 of the
Code permitted a thrift institution annually to elect to deduct bad debts under
either (i) the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the "experience" method, a thrift
institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995, 1994, and
1993, Peoples Federal used the percentage of taxable income method.
The Act eliminated the percentage of taxable income method of accounting
for bad debts by thrift institutions, effective for taxable years beginning
after 1995. Thrift institutions that are treated as small banks are allowed to
utilize the experience method applicable to such institutions, while thrift
institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer and having been made with the consent of the Secretary
of the Treasury. Section 481(a) of the Code requires certain amounts to be
recaptured with respect to such change. Generally, the amounts to be recaptured
will be determined solely with respect to the "applicable excess reserves" of
the taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that is treated as a large bank, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that
is treated as a small bank, like Peoples Federal, the amount of the
institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that begin after December 31, 1995, and before January 1,
1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
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<PAGE>
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
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 pre-1988 reserves; 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
pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and
the gross income of Peoples Federal 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 pre-1988 reserves. As of September 30, 1998, the pre-1988 reserves of
Peoples Federal for tax purposes totaled approximately $1.8 million. Peoples
Federal believes it had approximately $6.6 million of accumulated earnings and
profits for tax purposes as of September 30, 1998, which would be available for
dividend distributions, provided regulatory restrictions applicable to the
payment of dividends are met. No representation can be made as to whether
Peoples Federal will have current or accumulated earnings and profits in
subsequent years.
The tax returns of Peoples Federal have been audited or closed without
audit through fiscal year 1993. 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. For tax years beginning after December 31, 1998, the rate of
tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable
income and 8.5% of computed Ohio taxable income in excess of $50,000 or (ii)
.400% times taxable net worth.
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 the
taxable book net worth of Peoples Federal determined in accordance with
generally accepted accounting principles. For tax year 1999, however, the
franchise tax on financial institutions will be 1.4% of the taxable book net
worth and for tax year 2000 and years thereafter the tax will be 1.3% of the
taxable book net worth. 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.
30
<PAGE>
Item 2. Description of Property
The following table sets forth certain information at September 30, 1998,
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 $660,000 $51.6 million
Branch Office:
2312 Lincoln Way N.W.
Massillon, Ohio 44647 Owned 1978 1,400 430,000 $14.2 million
Lending Office:
4344 Metro Circle, N.W.
North Canton, Ohio 44720 Leased(2) N/A - 8,000 (3) N/A
</TABLE>
- -----------------------------
(1) At September 30, 1998, Peoples Federal's office premises and equipment had
a total net book value of $1.5 million. For additional information
regarding Peoples Federal's office premises and equipment, see Notes A and
E of Notes to Consolidated Financial Statements.
(2) The lease is for a term of three years, expiring in 1999, with a three-year
renewal option.
(3) Consists of leasehold improvements.
Item 3. Legal Proceedings
Neither PFC nor Peoples Federal is 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
31
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
There were 1,335,785 common shares of PFC outstanding on December 4, 1998,
held of record by approximately 340 shareholders. Price information with respect
to PFC's common shares is quoted on The Nasdaq SmallCap Market ("Nasdaq") under
the symbol "PFFC." The high and low bids for the common shares of PFC, as quoted
by Nasdaq, and dividends declared per common share for fiscal years ending
September 30, 1997 and September 30, 1998, are set forth below. Such amounts do
not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
09/98 06/98 03/98 12/97 09/97 06/97 03/97 12/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividends Declared $ 0.150 $ 0.150 $ 0.125 $ 0.125 $ 5.125(1) $ 0.125 $ 0.075 $ -
High Bid During Quarter 13.063 16.375 20.000 15.250 18.500 15.250 15.500 13.00
Low Bid During Quarter 10.313 12.625 14.000 12.500 15.250 14.625 13.000 11.50
</TABLE>
- ---------------------------
(1) Of such distribution, $5.00 constituted a return of capital.
The income of PFC consists of dividends which may periodically be declared
and paid by the Board of Directors of Peoples Federal on the common shares of
Peoples Federal held by PFC and earnings on the $7.1 million in net proceeds
retained by PFC from the sale of PFC's common shares in connection with the
Conversion. In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings associations.
Under OTS regulations applicable to converted savings associations, Peoples
Federal is not permitted to pay a cash dividend on its common shares if the
regulatory capital of Peoples Federal would, as a result of the payment of such
dividend, be reduced below the amount required for the liquidation account
(which was established for the purpose of granting a limited priority claim on
the assets of Peoples Federal, in the event of a complete liquidation, to those
members of Peoples Federal before the Conversion who maintain a savings account
at Peoples Federal after the Conversion) or applicable regulatory capital
requirements prescribed by the OTS.
OTS regulations applicable to all savings associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital to
assets ratio exceeded its required capital to assets ratio at the beginning of
the calendar year, or (2) 75% of its net earnings for the most recent
four-quarter period. Savings associations with total capital in excess of the
capital requirements that have been notified by the OTS that they are in need of
more than normal supervision will be subject to restrictions on dividends. A
savings association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without prior approval of the
OTS. Peoples Federal currently meets all of its regulatory capital requirements
and, unless the OTS determines that Peoples Federal is an institution requiring
more than normal supervision, Peoples Federal may pay dividends in accordance
with the foregoing provisions of the OTS regulations.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information required herein is incorporated by reference from PFC's
1998 Annual Report to Shareholders ("Annual Report"), the Managements Discussion
and Analysis of which is included in Exhibit 13 as attached hereto.
Item 7. Financial Statements
The financial statements required herein are incorporated by reference from
the Annual Report, the financial statements of which are included in Exhibit 13
attached hereto.
32
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information contained in the definitive Proxy Statement for the 1999
Annual Meeting of Shareholders of PFC (the "Proxy Statement"), which is included
as Exhibit 99.1 hereto, under the caption "PROPOSAL ONE - ELECTION OF DIRECTORS"
is incorporated herein by reference.
Item 10. Executive Compensation
The information contained in the Proxy Statement under the caption
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information contained in the Proxy Statement under the caption "VOTING
SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information contained in the Proxy Statement under the caption
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS - Certain Transactions" is
incorporated herein by reference.
33
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (incorporated by reference)
3.2 Code of Regulations (incorporated by reference)
10.1 Employment Agreement with Mr. Paul von Gunten
(incorporated by reference)
10.2 Employment Agreement with Ms. Linda Fowler
(incorporated by reference)
10.3 Employment Agreement with Mr. James Rinehart
(incorporated by reference)
10.4 Employment Agreement with Ms. Cynthia Wagner
(incorporated by reference)
10.5 Peoples Financial Corporation 1997 Stock Option
and Incentive Plan(incorporated by reference)
10.6 Peoples Financial Corporation Recognition and
Retention Plan and Trust Agreement (incorporated by
reference)
13 Portions of 1998 Annual Report to Shareholders
21 Subsidiaries of Peoples Financial Corporation
(incorporated by reference)
23 Consent of Grant Thornton LLP
27 Financial Data Schedule
99.1 Proxy Statement for 1999 Annual Meeting of
Shareholders (incorporated by reference)
99.2 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
(b) No reports on Form 8-K were filed during the last quarter of the
fiscal year ended September 30, 1998.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PEOPLES FINANCIAL CORPORATION
By/s/Paul von Gunten
Paul von Gunten
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By /s/ Paul von Gunten By /s/ James R. Rinehart
Paul von Gunten James R. Rinehart
President and Director Treasurer
(Principal Financial Officer)
Date December 16, 1998 Date December 16, 1998
By /s/ Victor C. Baker By /s/ James P. Bordner
Victor C. Baker James P. Bordner
Director Director
Date December 16, 1998 Date December 16, 1998
By /s/ Vincent G. Matecheck By /s/ Thomas E. Shelt
Vincent G. Matecheck Thomas E. Shelt
Secretary and Director Director
Date December 16, 1998 Date December 16, 1998
By /s/ Vincent E. Stephan
Vincent E. Stephan
Chairman of the Board and Director
Date December 16, 1998
35
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
3.1 Articles of Incorporation of Peoples Financial Incorporated by reference to Pre-Effective Amendment
Corporation No. 1 to the Registration Statement on Form S-1 of
the Registrant (No. 333-2690) filed with the
Securities and Exchange Commission (the "SEC") on
June 28, 1996 (the "S-1"), Exhibit 3.1.
3.2 Code of Regulations of Peoples Financial Corporation Incorporated by reference to Exhibit 3.2 to the S-1.
10.1 Employment Agreement with Mr. von Gunten Incorporated by reference to Exhibit 10.1 to the
Form 10-KSB filed by the Registrant with the SEC on
December 26, 1996 (the "1996 10-KSB").
10.2 Employment Agreement with Ms. Fowler Incorporated by reference to Exhibit 10.2 to the
1996 10-KSB.
10.3 Employment Agreement with Mr. Rinehart Incorporated by reference to Exhibit 10.3 to the
1996 10-KSB.
10.4 Employment Agreement with Ms. Wagner Incorporated by reference to Exhibit 10.4 to the
1996 10-KSB.
10.5 Peoples Financial Corporation 1997 Stock Option and Incorporated by reference to Exhibit A to the
Incentive Plan definitive Proxy Statement filed with the SEC on
February 6, 1997.
10.6 Peoples Financial Corporation Recognition and Incorporated by reference to Exhibit B to the
Retention Plan and Trust Agreement definitive Proxy Statement filed with the SEC on
February 6, 1997.
13 Portions of 1998 Annual Report to Shareholders
21 Subsidiaries of Peoples Financial Corporation Incorporated by reference to Exhibit 21 to the 1996
10-KSB.
23 Consent of Grant Thornton LLP
27 Financial Data Schedule
99.1 Proxy Statement for the 1999 Annual Meeting of Incorporated by reference to definitive Proxy
Shareholders. Statement to be filed separately.
99.2 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
</TABLE>
36
EXHIBIT 13
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
PFC was incorporated for the purpose of owning all of the outstanding shares of
Peoples Federal after the Conversion. As a result, the discussion that follows
focuses on Peoples Federal's financial condition and results of operations. The
following discussion and analysis of the financial condition and results of
operations of PFC and Peoples Federal should be read in conjunction with and
with reference to the consolidated financial statements and the notes thereto,
included in the Annual Report.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of Peoples Federal, and
PFC's actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein, but also include changes in the
economy and changes in interest rates in the nation and PFC's primary market
area.
Without limiting the generality of the foregoing, some of the statements in the
referenced sections of this discussion and analysis are forward looking and are,
therefore, subject to such risks and uncertainties:
1. Management's determination of the amount and adequacy of the allowance
for loan losses set forth under "Financial Condition," "Comparison of
Results of Operations for the Years Ended September 30, 1998 and 1997"
and "Comparison of Results of Operations for the Years Ended September
30, 1997 and 1996;"
2. Management's analysis of interest rate risk set forth under "Asset and
Liability Management;"
3. Management's discussion of the liquidity of Peoples Federal's assets
and the regulatory capital of Peoples Federal set forth under
"Liquidity and Capital Resources;" and
4. The discussion of the anticipated effect of legislation which may be
enacted set forth under "Charter Unification Legislation."
5. Management's determination of the effect of recent accounting
pronouncements.
6. Management's determination of the effects of the year 2000 on PFC's
information technology systems.
Discussion of Changes in Financial Condition from September 30, 1997 to
September 30, 1998
PFC's consolidated assets totaled $86.3 million at September 30, 1998, an
increase of $1.1 million, or 1.3%, over the $85.2 million total at September 30,
1997. The principal changes in the composition of assets during the year ended
September 30, 1998, consisted of an increase in loans receivable, offset by
decreases in interest-bearing deposits in other financial institutions and
investment and mortgage-backed securities. This increase in assets was funded
primarily through net increases of $1.0 million in borrowings and $137,000 in
deposits, which were partially offset by a $293,000 decrease in shareholders'
equity.
1
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussions of Changes in Financial Condition from September 30, 1997 to
September 30, 1998 (continued)
Interest-earning deposits in other financial institutions totaled $2.2 million
at September 30, 1998, a decrease of $2.3 million from September 30, 1997.
Investment securities and mortgage-backed securities totaled $16.8 million at
September 30, 1998, as compared to $20.8 million at September 30, 1997, a
decrease of $4.0 million, or 19.2%. Investment securities decreased due to sale
of U.S. Government agency obligations and FHLMC common stock, maturities of FHLB
certificates of deposit and municipal bonds, and principal repayments totaling
$3.4 million, which were partially offset by purchases of $1.0 million.
Mortgage-backed securities decreased due to sales and principal repayments
totaling $6.3 million, partially offset by purchases of $4.1 million. Such
proceeds, coupled with excess liquidity, were principally used to fund the
growth in the loan portfolio.
Loans receivable totaled $64.3 million at September 30, 1998, an increase of
$7.7 million, or 13.6%, over the $56.6 million total at September 30, 1997. The
increase was comprised of a $6.6 million increase in one- to four-family, home
equity and construction loans, including a net decrease in undisbursed loans in
process of $1.2 million. Multi-family and nonresidential real estate loans
increased by $1.2 million while consumer and other loans decreased by $41,000.
Loan disbursements of $30.6 million were partially offset by principal
repayments of $22.8 million during the year ended September 30, 1998. Fiscal
1997 loan disbursements totaled $28.7 million and principal repayments amounted
to $16.3 million.
Peoples Federal's allowance for loan losses totaled $196,000 at September 30,
1998, compared to the fiscal 1997 allowance of $145,000. Nonperforming loans
were $115,000 at September 30, 1998, compared to nonperforming loans of $2,000
and automobile loan pass-through certificates of $33,000 at September 30, 1997.
The allowance for loan losses represented .29% and .23% of total loans at
September 30, 1998 and 1997, respectively and 170.4% and 7250.0% of
nonperforming loans on the same dates.
Management believes that the allowance for loan loss level at September 30, 1998
is appropriate based on the available facts and circumstances. There can be no
assurance, however, that the allowance will be adequate to absorb actual loan
losses during future periods. The amount of loan loss experienced may increase
due to growth in the loan portfolio generally; increases in the amount of the
portfolio consisting of higher risk loan types, such as nonresidential real
estate loans, construction loans and consumer and other loans; economic changes
locally or nationally, including changes in interest rates, employment rates and
property values; and unexpected problems with specific loans. If additions to
the allowance are necessary in future periods, such additions would reduce PFC's
net earnings.
Deposits totaled $65.8 million at September 30, 1998, as compared to $65.7
million at September 30, 1997, an increase of $137,000, or .2%. Certificates of
deposit increased by $1.7 million as a result of management's continuing efforts
to increase deposits while maintaining the cost of funds at acceptable levels.
Passbook and money market deposits decreased by $934,000 and NOW accounts
decreased by $673,000 for the year.
2
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussions of Changes in Financial Condition from September 30, 1997 to
September 30, 1998 (continued)
At September 30, 1998, borrowings consisted of advances from the Federal Home
Loan Bank of $4.0 million. No advances were outstanding at September 30, 1997.
These funds were used primarily to fund the increase in loans. At September 30,
1997, borrowings consisted of a note payable to another financial institution of
$3.0 million. The funds obtained from the borrowing in 1997 were used to
partially fund the return of capital distribution and were repaid to the lender
in October 1997.
Shareholders' equity totaled $15.0 million at September 30, 1998, a decrease of
$293,000, or 1.9%, from September 30, 1997 levels. The decrease resulted
primarily from purchases of treasury stock totaling $995,000 and dividends paid
of $770,000, which were partially offset by net earnings of $918,000 and
proceeds from the exercise of stock options of $76,000.
Comparison of Results of Operations for the Years Ended September 30, 1998 and
1997
General
The operating results of PFC 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 earnings of
PFC and Peoples Federal are primarily dependent on net interest income, which is
the difference between interest earned on loans and other interest-earning
assets and interest expense incurred on deposits and borrowed funds.
Net earnings totaled $918,000 for the year ended September 30, 1998, an increase
of $112,000 over net earnings of $806,000 recorded for fiscal 1997. The increase
resulted from net gains on the sale of investment and mortgage-backed securities
of $683,000 in 1998 compared to $15,000 in 1997, offset by a decrease in net
interest income of $416,000, an increase of $30,000 in the provision for losses
on loans, a decrease in other income of $8,000, an increase in general,
administrative and other expense of $85,000 and an increase of $17,000 in the
provision for federal income taxes.
Net Interest Income
Total interest income for the year ended September 30, 1998, amounted to $6.1
million, a decrease of $148,000, or 2.4%, from the $6.3 million recorded in
fiscal 1997. Interest income from loans increased $814,000, or 20.4%. The
increase resulted primarily from an $11.2 million increase in the
weighted-average outstanding balance of loans receivable, partially offset by a
14 basis point (100 basis points equals one percent) decrease in
weighted-average yield to 7.91% in 1998, from 8.05% in 1997. Interest income on
mortgage-backed securities, investment securities and interest-earning deposits
decreased by $962,000, or 42.7%. The decrease resulted primarily from a $15.0
million decrease in the average balance of such assets and an 84 basis point
decrease in weighted-average yield on investment securities, partially offset by
a 23 basis point increase in weighted-average yield on interest-earning deposits
and a 17 basis point increase in weighted-average yield on mortgage-backed
securities.
3
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended September 30, 1998 and
1997 (continued)
Net Interest Income (continued)
Interest expense on deposits for the year ended September 30, 1998, totaled $3.2
million, an increase of $176,000, or 5.8%, over the $3.0 million recorded in
fiscal 1997. This increase was due primarily to a $1.9 million increase in the
weighted-average outstanding balance of deposits, coupled with an increase in
the weighted-average interest rate paid of 13 basis points, to 4.94% in 1998,
from 4.81% in 1997. Interest expense on borrowings increased to $96,000 in
fiscal 1998 from $4,000 in fiscal 1997. Advances from the Federal Home Loan Bank
were outstanding for approximately 5 months in fiscal 1998, with no advances in
fiscal 1997, while the note payable was outstanding for less than a month during
both years.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $416,000, or 13.0%, to $2.8 million for the
year ended September 30, 1998. The interest rate spread increased to 2.53% in
fiscal 1998, from 2.52% in fiscal 1997, while the net interest margin decreased
to 3.42% in fiscal 1998, from 3.75% in fiscal 1997.
Provision for Losses on Loans
The provision for losses on loans totaled $42,000 for the year ended September
30, 1998, an increase of $30,000, or 250%, over the $12,000 provision recorded
in fiscal 1997. The increase was recorded primarily because of growth in the
loan portfolio in fiscal 1998. Management believes that the continuation of
periodic increases in the allowance for loan losses based upon the inherent risk
of loss related to loans, the increase in the outstanding portfolio balance,
current and anticipated economic conditions as measured by leading economic
indicators and local employment data, the level of nonperforming loans and past
loss experience is prudent. There can be no assurance that the loan loss
allowance will be adequate to cover losses on nonperforming assets in the
future.
Other Income
Other income totaled $712,000 for the year ended September 30, 1998, compared to
$52,000 for fiscal 1997. The increase resulted from net gains on sale of
securities during 1998 of $683,000, compared to net gains of $15,000 during
1997. Mortgage-backed and investment securities with a book value of $4.2
million and $10.0 million were sold during fiscal 1998 and 1997, respectively.
Gains of $696,000 and losses of $13,000 were realized in 1998, while gains of
$41,000 and losses of $26,000 were realized in 1997. Other operating income was
greater in fiscal 1997 by $8,000, primarily due to mortgage loan late charges
from a December 1996 collection. The remainder of other operating income is made
up of service fees, safe deposit box rentals and service charges on negotiable
order of withdrawal ("NOW") accounts.
General, Administrative and Other Expense
General, administrative and other expense totaled $2.1 million for the year
ended September 30, 1998, compared to $2.0 million for fiscal 1997, an increase
of $85,000, or 4.2%.
4
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended September 30, 1998 and
1997 (continued)
General, Administrative and Other Expense (continued)
Employee compensation and benefits increased by $104,000, or 9.8% in fiscal
1998, compared to fiscal 1997. Recording the first full year's cost of the
Peoples Financial Corporation Recognition and Retention Plan ("RRP") and the
change in average market value of PFC stock increased the expense of stock
benefit plans by $79,000. Salaries and wages and directors' fees increased by
$41,000 due to normal merit increases, hiring of additional personnel and
deferral of a lesser amount of loan costs. The cost of the 401(k) benefit plan
decreased by $32,000 as the Corporation's contributions were frozen during
fiscal 1998 and the first half of fiscal 1997 and an excess provision was
reversed during 1998. Other employment benefits increased $16,000 primarily due
to increases in health insurance premium rates and payroll taxes on the first
RRP distribution made in fiscal 1998.
The other significant change in general, administrative and other expense during
fiscal 1998 was a decrease of $21,000, or 34.4% in federal deposit insurance
premiums mostly due to decreased rates effective January 1, 1997.
Federal Income Taxes
The provision for federal income taxes totaled $453,000 for the year ended
September 30, 1998, an increase of $17,000, or 3.9%, over the $436,000 provision
recorded in fiscal 1997. The increase was primarily due to the increase in net
earnings before taxes of $129,000, or 10.4%. PFC's effective tax rates were
33.0% for fiscal 1998 and 35.1% for fiscal 1997.
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996
General
Net earnings totaled $806,000 for the year ended September 30, 1997, an increase
of $729,000, over net earnings of $77,000 recorded for fiscal 1996. The increase
resulted primarily from an increase in net interest income of $965,000, a
decrease of $93,000 in the provision for losses on loans, an increase in other
income of $28,000 and a decrease in general, administrative and other expense of
$58,000, including the effects of the $428,000 charge recorded in fiscal 1996
related to the Savings Association Insurance Fund ("SAIF") recapitalization
assessment, which were partially offset by an increase of $415,000 in the
provision for federal income taxes.
5
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996 (continued)
Net Interest Income
Total interest income for the year ended September 30, 1997, totaled $6.3
million, an increase of $621,000, or 11.0%, over the $5.6 million recorded in
fiscal 1996. Interest income on loans increased by $691,000, or 20.9%. The
increase resulted primarily from a $9.9 million increase in the weighted-average
outstanding balance of loans receivable, partially offset by a 26 basis point
(100 basis points equals one percent) decrease in weighted-average yield to
8.05% in 1997, from 8.31% in 1996. Interest income on mortgage-backed
securities, investment securities and interest-earning deposits decreased by
$70,000, or 3.0%. The decrease resulted primarily from a $2.4 million decrease
in the average balance of such assets and a 54 basis point decrease in
weighted-average yield on investment securities, partially offset by a 108 basis
point increase in weighted-average yield on interest-earning deposits and a 21
basis point increase in weighted average yield on mortgage-backed securities.
Interest expense on deposits for the year ended September 30, 1997, totaled $3.0
million, a decrease of $348,000 from the $3.4 million recorded in fiscal 1996.
This decrease was due primarily to a decrease in the weighted-average
outstanding balance of deposits totaling $4.8 million, and a decrease in the
weighted-average interest rate paid of 17 basis points, to 4.81% in 1997, from
4.98% in 1996.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $965,000, or 43.1%, to $3.2 million for the
year ended September 30, 1997. The interest rate spread increased to 2.52% in
fiscal 1997, from 2.25% in fiscal 1996, while the net interest margin increased
to 3.75% in fiscal 1997, from 2.88% in fiscal 1996.
Provision for Losses on Loans
The provision for losses on loans totaled $12,000 for the year ended September
30, 1997, a decrease of $93,000, or 88.6%, from the $105,000 provision recorded
in fiscal 1996. The decrease was primarily due to an additional provision of
$100,000 recorded in the year ended September 30, 1996, because of an increase
in delinquent loans during that year. These loans were partially repaid in
fiscal 1996 and paid in full in December 1996. Management believes that the
continuation of periodic increases in the allowance for loan losses based upon
the inherent risk of loss related to loans, the increase in the outstanding
portfolio balance, current and anticipated economic conditions as measured by
leading economic indicators and local employment data, the level of
nonperforming loans and past loss experience is prudent.
6
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996 (continued)
Other Income
Other income totaled $52,000 for the year ended September 30, 1997, compared to
$24,000 for fiscal 1996. The increase resulted primarily from a net gain on sale
of securities during 1997. Mortgage-backed and investment securities with a book
value of $10.0 million were sold during fiscal 1997. Gains of $41,000 and losses
of $26,000 were realized. No securities were sold in fiscal 1996. Other
operating income increased by $13,000, consisting primarily of increases in
service fees, safe deposit box rentals, service charges on negotiable order of
withdrawal ("NOW") accounts and mortgage loan late charges.
General, Administrative and Other Expense
General, administrative and other expense totaled $2.0 million for the year
ended September 30, 1997, compared to $2.1 million for fiscal 1996, a decrease
of $58,000, or 2.8%. Federal deposit insurance premiums decreased by $520,000. A
one-time assessment to recapitalize the SAIF totaling $428,000 was recorded in
September 1996, while the $92,000 remainder of the decrease was due to lower
quarterly premium rates in fiscal 1997.
Employee compensation and benefits increased by $267,000, or 33.8% in fiscal
1997, compared to fiscal 1996. Recording the first full year's cost of stock
benefit plans increased expense by $248,000. Salaries and wages increased by
$48,000 due to normal merit increases and additional hours worked. Cost of the
401(k) benefit plan decreased by $37,000 as the Corporation's contributions were
frozen during the first half of fiscal 1997.
Other expense increases during fiscal 1997 were $105,000 in franchise taxes,
based on increased capital from the Conversion and $84,000 in other operating
expenses, primarily from costs of compliance reporting requirements of a
publicly traded corporation, modification of an employee benefit plan and
operation of PFC.
Federal Income Taxes
The provision for federal income taxes totaled $436,000 for the year ended
September 30, 1997, an increase of $415,000 over the $21,000 provision recorded
in fiscal 1996. The increase was primarily due to the increase in net earnings
before taxes of $1.1 million. PFC's effective tax rates were 35.1% for fiscal
1997 and 21.4% for fiscal 1996.
7
<PAGE>
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
The following table presents certain information relating to PFC and Peoples
Federal's average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities 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
interest-bearing liabilities, respectively, for the years presented. Average
balances are derived from month-end balances, which include nonaccruing loans in
the loan portfolio, net of the allowance for loan losses.
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 3,443 $ 199 5.78% $ 5,806 $ 322 5.55%
Investment securities 4,850 222 4.58 8,255 448 5.42
Mortgage-backed and related securities 12,413 870 7.01 21,674 1,483 6.84
Loans receivable (1) 60,876 4,814 7.91 49,717 4,000 8.05
------ ----- ------ ------ ----- ------
Total interest-earning assets 81,582 6,105 7.48 85,452 6,253 7.32
Non-interest-earning assets
Cash and amounts due from depository institutions 273 269
Premises and equipment, net 1,403 1,463
Other non-earning assets 401 640
------ ------
Total assets $83,659 $87,824
====== ======
Interest-bearing liabilities:
NOW accounts $ 1,698 22 1.30 $ 1,536 18 1.17
Money market accounts 2,590 62 2.39 2,708 57 2.10
Passbook savings accounts 10,799 217 2.01 12,026 241 2.00
Certificates of deposit 50,013 2,918 5.83 46,941 2,727 5.81
Borrowings 1,814 96 5.29 250 4 1.60
------ ----- ------ ------ ----- ------
Total interest-bearing liabilities 66,914 3,315 4.95 63,461 3,047 4.80
----- ------ ----- ------
Non-interest-bearing liabilities 1,432 1,435
------ ------
Total liabilities 68,346 64,896
Shareholders' equity 15,313 22,928
------ ------
Total liabilities and shareholders' equity $83,659 $87,824
====== ======
Net interest income; interest rate spread $2,790 2.53% $3,206 2.52%
===== ====== ===== ======
Net interest margin (net interest income as a percent
of average interest-earning assets) 3.42% 3.75%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 121.92% 134.65%
====== ======
Year ended September 30,
1996
Average Interest
outstanding earned/ Yield/
balance paid rate
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 7,130 $ 319 4.47%
Investment securities 7,292 435 5.96
Mortgage-backed and related securities 23,671 1,569 6.63
Loans receivable (1) 39,844 3,309 8.31
------ ----- -----
Total interest-earning assets 77,937 5,632 7.23
Non-interest-earning assets
Cash and amounts due from depository institutions 250
Premises and equipment, net 1,517
Other non-earning assets 565
------
Total assets $80,269
======
Interest-bearing liabilities:
NOW accounts $ 1,431 18 1.26
Money market accounts 3,402 87 2.56
Passbook savings accounts 13,958 326 2.34
Certificates of deposit 49,249 2,960 6.01
Borrowings - - -
------ ----- -----
Total interest-bearing liabilities 68,040 3,391 4.98
----- -----
Non-interest-bearing liabilities 1,032
------
Total liabilities 69,072
Shareholders' equity 11,197
------
Total liabilities and shareholders' equity $80,269
======
Net interest income; interest rate spread $2,241 2.25%
===== ======
Net interest margin (net interest income as a percen
of average interest-earning assets) 2.88%
======
Average interest-earning assets to average
interest-bearing liabilities 114.55%
======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
the allowance for loan losses.
8
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rate/Volume Table
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected PFC and 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>
Year ended September 30,
1998 vs. 1997 1997 vs. 1996
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-earnings deposits $(136) $ 13 $(123) $ (73) $ 76 $ 3
Investment securities (156) (70) (226) 52 (39) 13
Mortgage-backed and related securities (648) 35 (613) (136) 50 (86)
Loans receivable 882 (68) 814 794 (103) 691
----- ----- ----- --- --- ---
Total interest income (58) (90) (148) 637 (16) 621
----- ----- ----- --- --- ---
Interest expense attributable to:
NOW accounts 2 3 5 1 (2) (1)
Money market accounts (3) 7 4 (14) (15) (29)
Passbook savings accounts (25) 1 (24) (39) (46) (85)
Certificates of deposit 179 12 191 (134) (99) (233)
Borrowings 83 9 92 4 - 4
----- ----- ----- --- --- ---
Total interest expense 236 32 268 (182) (162) (344)
----- ----- ----- --- --- ---
Increase (decrease) in net interest income $(294) $(122) $(416) $819 $146 $965
===== ===== ===== === === ===
</TABLE>
9
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 Net Portfolio Value ("NPV")
methodology 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
can illustrate Peoples Federal's degree of 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 September 30, 1998, 2% of the present value of Peoples Federal's assets was
approximately $1.8 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 $3.4 million at September 30, 1998, Peoples
Federal would have been required to deduct approximately $865,000 (50% of the
approximate $1.7 million 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 September 30, 1998,
would still have exceeded the regulatory requirement by $6.8 million.
Presented below, as of September 30, 1998, 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. At September 30, 1998, fixed-rate
loans constituted 84.5% of Peoples Federal's loan portfolio. In addition,
because Peoples Federal has only recently begun to originate loans in
10
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
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 of repricing. Assumptions in calculating the amounts in this table are
OTS assumptions.
<TABLE>
<CAPTION>
September 30, 1998
Change in interest rate Board limit $ Change % Change
(Basis Points) % change in NPV in NPV
(In thousands)
<S> <C> <C> <C>
+300 (75)% $(5,668) (40)%
+200 (45) (3,494) (25)
+100 (25) (1,578) (11)
- - - -
-100 25 1,177 8
-200 45 2,500 18
-300 75 4,138 29
</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 rise, 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.
Liquidity and Capital Resources
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 loan and mortgage-backed securities
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 (1) the need for funds, (2) expected deposit
flows, (3) the yield available on short-term liquid assets and (4) the
objectives of the asset/liability management program.
11
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
OTS regulations at September 30, 1998, required Peoples Federal to maintain an
average daily balance of cash, investments in United States Treasury and agency
securities and other investments having maturities of five years or less in an
amount equal to 4% of the sum of Peoples Federal's average daily balance of net
withdrawable deposit accounts. 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 September 30, 1998, Peoples Federal's regulatory liquidity
ratio was 23.8%. At such date, Peoples Federal had commitments to originate
loans totaling $3.2 million and, in addition, had undisbursed loans in process
of $4.1 million. At September 30, 1998, Peoples Federal had no commitments to
purchase or sell loans. Peoples Federal considers its liquidity and capital
sufficient to meet its outstanding short- and long-term needs. At September 30,
1998, Peoples Federal had no material commitments for capital expenditures.
PFC's liquidity, primarily represented by cash and cash equivalents, is a result
of the funds used in or provided by PFC's operating, investing and financing
activities. These activities are summarized below for the years ended September
30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Net earnings $ 918 $ 806 $ 77
Adjustments to reconcile net earnings to
net cash from operating activities 511 (289) 466
----- ------ ------
Net cash from operating activities 1,429 517 543
Net cash from investing activities (3,239) (2,803) (1,272)
Net cash from financing activities (552) (5,464) 11,398
----- ------ ------
Net change in cash and cash equivalents (2,362) (7,750) 10,669
Cash and cash equivalents at
beginning of year 4,783 12,533 1,864
----- ------ ------
Cash and cash equivalents at end
of year $2,421 $ 4,783 $12,533
===== ====== ======
</TABLE>
12
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
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.
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
intangible assets.
"Core capital" is comprised of common shareholders' 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% or 5%, except for those
associations with the highest examination rating and acceptable levels of risk.
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 $196,000 at
September 30, 1998.
Peoples Federal exceeded all of its regulatory capital requirements at September
30, 1998. The following table summarizes Peoples Federal's regulatory capital
requirements and regulatory capital at September 30, 1998:
<TABLE>
<CAPTION>
Excess of
regulatory capital
over current Applicable
Regulatory capital Current requirement requirement asset
Amount Percent Amount Percent Amount Percent total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $10,947 13.0% $1,267 1.5% $9,680 11.5% $84,469
Core capital 10,947 13.0 2,534 3.0 8,413 10.0 84,469
Risk-based capital 11,143 26.0 3,433 8.0 7,710 18.0 42,915
</TABLE>
13
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
that provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing assets
and liabilities are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are subject to subsequent
assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet only if
the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1997, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management adopted SFAS No. 125 during fiscal 1998 without material effect on
PFC's consolidated financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
14
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements (continued)
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on PFC's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on
PFC's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No. 133 is
not expected to have a material impact on PFC's financial statements.
15
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Charter Unification Legislation
The deposit accounts of Peoples Federal and other savings associations are
insured up to applicable limits by the FDIC in the SAIF. Legislation to
recapitalize the SAIF was enacted on September 30, 1996. Such legislation
provided that the SAIF will be merged into the Bank Insurance Fund if there are
no remaining federal savings associations. Such legislation also requires the
Department of Treasury to submit a report to Congress on the development of a
common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS, and Peoples
Federal may be regulated under federal law as a bank or may be required to
change its charter. Such change in regulation or charter would likely change the
range of activities in which Peoples Federal may engage and would probably
subject Peoples Federal to more regulation by the FDIC. In addition, Peoples
Federal might become subject to a different form of holding company regulation,
which may limit the activities in which PFC may engage, and subject PFC to other
additional regulatory requirements, including separate capital requirements. At
this time, PFC cannot predict when or whether Congress may actually pass
legislation regarding PFC's and Peoples Federal's regulatory requirements or
charter. Although such legislation may change the activities in which either PFC
and Peoples Federal may engage, it is not anticipated that the current
activities of both PFC and Peoples Federal will be materially affected by those
activity limits.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto included herein have
been prepared in accordance with generally accepted accounting principles, which
require PFC to measure financial position and results of operations in terms of
historical dollars with the exception of investment and mortgage-backed
securities available-for-sale, which are carried at fair value. 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
rate of inflation. While interest rates are greatly influenced by changes in the
rate of inflation, they do not change at the same rate or in the same magnitude
as the rate of inflation. Rather, interest rate volatility is based on changes
in the expected rate of inflation, as well as changes in monetary and fiscal
policies.
16
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters
As with most providers of financial services, Peoples Federal's operations are
heavily dependent on information technology systems. Peoples Federal is
addressing the potential problems associated with the possibility that the
computers that control or operate Peoples Federal's information technology
system and infrastructure may not be programmed to read four-digit date codes
and, upon arrival of the year 2000, may recognize the two-digit code "00" as the
year 1900, causing systems to fail to function or to generate erroneous data.
Peoples Federal is working with the companies that supply or service its
information technology systems to identify and remedy any year 2000 related
problems.
PFC's primary data processing applications are handled by a third-party service
bureau which has advised PFC that is has transferred to a fully year
2000-compliant processing system that will be fully tested by January 1, 1999.
Management has also reviewed PFC's ancillary equipment and is in the process of
providing the appropriate remedial measures without material cost.
As a result of the foregoing, PFC has not identified any material specific
expenses that are reasonably likely to be incurred by Peoples Federal in
connection with this issue and does not expect to incur significant expense to
implement the necessary corrective measures. No assurance can be given, however,
that significant expense will not be incurred in future periods. In the event
that Peoples Federal is ultimately required to purchase replacement computer
systems, programs and equipment, or incur substantial expense to make Peoples
Federal's current systems, programs and equipment year 2000 compliant, PFC's net
earnings and financial condition could be adversely affected.
While Peoples Federal is endeavoring to ensure that its computer-dependent
operations are year 2000 compliant, no assurance can be given that some year
2000 problems will not occur. Peoples Federal has developed a Year 2000
contingency/business resumption plan which calls for manual posting of
customers' accounts and passbooks. Under the plan, general ledger accounts and
other company records will also be posted manually. Management believes manual
posting is possible due to the size of Peoples Federal, the relative simplicity
of products and records, the number of personnel available to participate in the
additional record keeping and the fact that all loan and deposit accounts,
except NOW accounts and Home Equity Line of Credit loans are passbook accounts.
In addition to possible expense related to its own systems, PFC could incur
losses if year 2000 issues adversely affect Peoples Federal's depositors or
borrowers. Such problems could include delayed loan payments due to year 2000
problems affecting any significant borrowers or impairing the payroll systems of
large employers in Peoples Federal's primary market area. Because Peoples
Federal's loan portfolio is highly diversified with regard to individual
borrowers and types of businesses and Peoples Federal's primary market area is
not significantly dependent upon one employer or industry, Peoples Federal does
not expect any significant or prolonged difficulties that will affect net
earnings or cash flow.
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Peoples Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Peoples Financial Corporation as of September 30, 1998 and 1997, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the years ended September 30, 1998, 1997 and 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Peoples Financial
Corporation as of September 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the years ended September 30,
1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Cincinnati, Ohio
November 19, 1998
18
<PAGE>
Peoples Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 269 $ 343
Interest-earning deposits in other financial institutions 2,152 4,440
------ ------
Cash and cash equivalents 2,421 4,783
Investment securities designated as available
for sale - at market 2,591 3,291
Investment securities - at cost, approximate market value
of $1,045 and $2,025 as of September 30, 1998 and 1997 967 1,973
Mortgage-backed securities designated as available for
sale - at market 8,859 8,657
Mortgage-backed securities - at amortized cost,
approximate market value of $4,521 and $7,044
as of September 30, 1998 and 1997 4,400 6,841
Loans receivable - net 64,341 56,642
Office premises and equipment - at depreciated cost 1,471 1,422
Stock in Federal Home Loan Bank - at cost 861 802
Accrued interest receivable 298 316
Prepaid expenses and other assets 87 479
------ ------
Total assets $86,296 $85,206
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $65,797 $65,660
Advances from the Federal Home Loan Bank 4,000 -
Note payable - 3,000
Other liabilities 251 326
Accrued federal income taxes 329 10
Deferred federal income taxes 886 884
------ ------
Total liabilities 71,263 69,880
Commitments - -
Shareholders' equity
Preferred stock - authorized 1,000,000 shares without par
value; no shares issued - -
Common stock - authorized 6,000,000 shares without par or
stated value; 1,491,012 shares issued - -
Additional paid-in capital 7,287 7,165
Retained earnings - restricted 9,927 9,779
Unrealized gains on securities designated as available
for sale, net of related tax effects 1,095 1,083
Shares acquired by stock benefit plans (1,097) (1,416)
Less 139,327 and 74,400 treasury shares, at cost (2,179) (1,285)
------ ------
Total shareholders' equity 15,033 15,326
------ ------
Total liabilities and shareholders' equity $86,296 $85,206
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
Peoples Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except share data)
1998 1997 1996
<S> <C> <C> <C>
Interest income
Loans $4,814 $4,000 $3,309
Mortgage-backed securities 870 1,483 1,569
Investment securities 222 448 435
Interest-bearing deposits and other 199 322 319
----- ----- -----
Total interest income 6,105 6,253 5,632
Interest expense
Deposits 3,219 3,043 3,391
Borrowings 96 4 -
----- ----- -----
Total interest expense 3,315 3,047 3,391
----- ----- -----
Net interest income 2,790 3,206 2,241
Provision for losses on loans 42 12 105
----- ----- -----
Net interest income after
provision for losses on loans 2,748 3,194 2,136
Other income
Gain on sale of investment and mortgage-backed
securities designated as available for sale 683 15 -
Other operating 29 37 24
----- ----- -----
Total other income 712 52 24
General, administrative and other expense
Employee compensation and benefits 1,161 1,057 790
Occupancy and equipment 222 228 228
Franchise taxes 230 227 122
Federal deposit insurance premiums 40 61 581
Data processing 81 75 75
Advertising 33 37 31
Other operating 322 319 235
----- ----- -----
Total general, administrative
and other expense 2,089 2,004 2,062
----- ----- -----
Earnings before income taxes 1,371 1,242 98
Federal income taxes
Current 455 275 108
Deferred (2) 161 (87)
----- ----- -----
Total federal income taxes 453 436 21
----- ----- -----
NET EARNINGS $ 918 $ 806 $ 77
===== ===== =====
EARNINGS PER SHARE
Basic $.68 $.57 N/A
=== === ===
Diluted $.67 $.57 N/A
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
Peoples Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1998, 1997 and 1996
(In thousands, except share data)
Unrealized
Shares gains on
acquired securities
Additional by stock Treasury designated
Common paid-in benefit shares, as available Retained
stock capital plans at cost for sale earnings Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995 $- $ - $ - $ - $ 504 $9,378 $ 9,882
Reorganization to common stock form and issuance
of shares in connection therewith - net - 14,203 (597) - - - 13,606
Net earnings for the year ended September 30, 1996 - - - - - 77 77
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - - 141 - 141
-- ------ ------ ------ ----- ----- ------
Balance at September 30, 1996 - 14,203 (597) - 645 9,455 23,706
Return of capital distribution to shareholders - (7,083) - - - - (7,083)
Purchase of shares for stock benefit plan - - (919) - - - (919)
Purchase of treasury shares - - - (1,285) - - (1,285)
Amortization expense of stock benefit plan - 45 100 - - - 145
Dividends of $.325 per share - - - - - (482) (482)
Net earnings for the year ended September 30, 1997 - - - - - 806 806
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - - 438 - 438
-- ------ ------ ------ ------ ----- ------
Balance at September 30, 1997 - 7,165 (1,416) (1,285) 1,083 9,779 15,326
Issuance of shares under stock option plan - (25) - 101 - - 76
Purchase of treasury shares - - - (995) - - (995)
Amortization expense of stock benefit plans - 147 319 - - - 466
Dividends of $.55 per share - - - - - (770) (770)
Net earnings for the year ended September 30, 1998 - - - - - 918 918
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - - 12 - 12
-- ----- ------ ------ ----- ----- ------
Balance at September 30, 1998 $- $ 7,287 $(1,097) $(2,179) $1,095 $9,927 $15,033
== ===== ====== ====== ===== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
Peoples Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 918 $ 806 $ 77
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts on
investments and mortgage-backed securities - net 20 36 64
Gain on sale of investment and mortgage-backed
securities designated as available for sale (683) (15) -
Amortization of deferred loan origination (fees) costs (32) (9) 29
Depreciation and amortization 98 102 95
Provision for losses on loans 42 12 105
Amortization expense of stock benefit plans 466 145 -
Recovery of loss on investments 9 - -
Federal Home Loan Bank stock dividends (60) (54) (62)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 18 81 (22)
Prepaid expenses and other assets 392 (384) (3)
Other liabilities (91) (347) 345
Accrued interest payable 15 5 3
Federal income taxes
Current 319 (22) (1)
Deferred (2) 161 (87)
------ ------ ------
Net cash provided by operating activities 1,429 517 543
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities designated
as available for sale (4,085) (3,498) (2,243)
Proceeds from sale of mortgage-backed securities
designated as available for sale 1,998 6,501 -
Principal repayments on mortgage-backed securities 4,348 4,616 5,090
Purchase of investment securities designated as available
for sale (999) (1,500) (3,502)
Proceeds from sale of investment securities designated
as available for sale 2,211 3,499 -
Purchase of investment securities designated as
held to maturity - (2,000) (1,000)
Principal repayments and maturities of investment securities 1,153 1,967 6,770
Loan principal repayments 22,834 16,323 8,805
Loan disbursements (30,552) (28,702) (15,125)
Purchase of office premises and equipment (147) (9) (67)
------ ------ ------
Net cash used in investing activities (3,239) (2,803) (1,272)
------ ------ ------
Net cash used in operating and investing
activities (balance carried forward) (1,810) (2,286) (729)
------ ------ ------
</TABLE>
22
<PAGE>
Peoples Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $(1,810) $(2,286) $ (729)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 137 1,305 (2,208)
Proceeds from note payable - 3,000 -
Repayment of note payable (3,000) - -
Proceeds from Federal Home Loan Bank advances 4,000 - -
Return of capital distribution on common stock - (7,083) -
Purchase of treasury shares (995) (1,285) -
Purchase of shares for stock benefit plans - (919) -
Dividends paid on common stock (770) (482) -
Proceeds from exercise of stock options 76 - -
Net proceeds from the issuance of common stock - - 13,606
------ ------ ------
Net cash provided by (used in) financing activities (552) (5,464) 11,398
------ ------ ------
Net increase (decrease) in cash and cash equivalents (2,362) (7,750) 10,669
Cash and cash equivalents at beginning of year 4,783 12,533 1,864
------ ------ ------
Cash and cash equivalents at end of year $ 2,421 $ 4,783 $12,533
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 135 $ 298 $ 108
======= ======= ======
Interest on deposits and borrowings $ 3,304 $ 3,039 $ 3,387
====== ======= ======
Supplemental disclosure of noncash investing activities:
Securities transferred to an available for sale classification
in accordance with SFAS No. 115 $ - $ - $14,855
====== ======= ======
Unrealized gains on securities designated as
available for sale, net of related tax effects $ 12 $ 438 $ 141
====== ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On October 16, 1995, the Board of Directors of Peoples Federal Savings and
Loan Association of Massillon (the "Association") adopted a Plan of
Conversion (the "Plan") whereby the Association would convert to the stock
form of ownership, followed by the issuance of all of the Association's
outstanding stock to a newly formed holding company, Peoples Financial
Corporation (the "Corporation"). Pursuant to the Plan, the Corporation
offered common shares for sale to certain depositors of the Association and
members of the community. The conversion was completed on September 12,
1996, and resulted in the issuance of 1,491,012 common shares of the
Corporation which, after consideration of offering expenses totaling
approximately $707,000, and share purchases by the Employee Stock Ownership
Plan ("ESOP") totaling $597,000, resulted in net equity proceeds of $13.6
million. Condensed financial statements of the Corporation are presented in
Note M. Future references are made either to the Corporation or the
Association as applicable.
The Corporation is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Association. The Association
conducts a general banking business in northeast Ohio which consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and nonresidential purposes.
The Association's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated
from interest-earning assets (i.e. loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e. customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Association can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are
outside of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
A summary of significant accounting policies which have been consistently
applied in the preparation of the accompanying consolidated financial
statements follows:
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and the Association, and its wholly-owned subsidiary, Massillon
Community Service Corporation ("Massillon") . At September 30, 1998 and
1997, Massillon had no assets and was inactive. All intercompany balances
and transactions have been eliminated in the accompanying consolidated
financial statements.
24
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities
The Corporation accounts for investments and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No.
115 requires that investments be categorized as held-to-maturity, trading,
or available for sale. Securities classified as held-to-maturity are carried
at cost only if the Corporation has the positive intent and ability to hold
these securities to maturity. Trading securities and securities designated
as available for sale are carried at fair value with resulting unrealized
gains or losses recorded to operations or shareholders' equity,
respectively.
In November 1995, the Financial Accounting Standards Board (the "FASB")
issued a Special Report on Implementation of SFAS No. 115 (the "Special
Report"), which provided for the reclassification of securities between the
held-to-maturity, available for sale and trading portfolios, without calling
into question management's prior intent with respect to such securities.
Management elected to restructure the Association's securities portfolio
pursuant to the Special Report, and transferred investment and
mortgage-backed securities totaling $14.9 million from the held-to-maturity
portfolio to an available for sale classification. The Corporation's
shareholders' equity reflected a net unrealized gain on securities
designated as available for sale totaling approximately $1.1 million at both
September 30, 1998 and 1997.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. Loans Receivable
Loans receivable are stated at the principal balance outstanding, adjusted
for deferred loan origination fees and costs and the allowance for loan
losses. Interest is accrued as earned unless the collectibility of the loan
is in doubt. Interest on loans that are contractually past due is charged
off, or an allowance is established based on management's periodic
evaluation. 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 the loan is in
doubt, in whole or in part, all payments received on nonaccrual loans are
applied to reduce principal until such doubt is eliminated.
25
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Loan Origination Fees
The Association accounts for loan origination fees and costs in accordance
with SFAS No. 91 "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases".
Pursuant to the provisions of SFAS No. 91, origination fees received from
loans, net of certain direct origination costs, are deferred and amortized
to interest income using the level-yield method, giving effect to actual
loan prepayments. Additionally, SFAS No. 91 generally limits the definition
of loan origination costs to the direct costs attributable to originating a
loan, i.e., principally actual personnel costs. Fees received for loan
commitments that are expected to be drawn upon, based on the Association's
experience with similar commitments, are deferred and amortized over the
life of the loan using the level-yield method. Fees for other loan
commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
5. Allowance for Loan Losses
It is the Association's policy to provide valuation allowances for estimated
losses on loans based on past loan loss experience, changes in the
composition of the loan portfolio, trends in the level of delinquent and
problem loans, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current and
anticipated economic conditions in the primary lending area. When the
collection of a loan becomes doubtful, or otherwise troubled, the
Association records a charge-off equal to the difference between the fair
value of the property securing the loan and the loan's carrying value. Major
loans and major lending areas are reviewed periodically to determine
potential problems at an early date. The allowance for loan losses is
increased by charges to earnings and decreased by charge-offs (net of
recoveries).
The Association accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". SFAS No. 114 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 an
alternative, at the loan's observable market price or fair value of the
collateral if the loan is collateral dependent.
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 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 nonresidential and multi-family residential real
estate loans, and its evaluation of impairment thereof, such loans are
generally collateral dependent and, as a result, are carried as a practical
expedient at the lower of cost or fair value.
26
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
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.
At September 30, 1998 and 1997, the Association had no loans that would be
defined as impaired under SFAS No. 114.
6. Real Estate Acquired through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the value
determined at the recording date. In determining the lower of cost or fair
value at acquisition, costs relating to development and improvement of
property are capitalized. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
7. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line method over
the useful lives of the assets, estimated to be fifty years for the
building, ten to thirty years for building improvements and five to ten
years for furniture and equipment. An accelerated method is used for tax
reporting purposes.
8. Income Taxes
The Corporation accounts for federal income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". In accordance with SFAS No. 109, a deferred
tax liability or deferred tax asset 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 consolidated financial statements that will result in net taxable or
deductible amounts in future periods. Deferred tax assets 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 assets 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.
27
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Income Taxes (continued)
Deferral of income taxes results primarily from the different methods of
accounting for deferred loan origination fees and costs, Federal Home Loan
Bank stock dividends, stock benefit plan expense, general loan loss
allowances and percentage of earnings bad debt deductions. Additional
temporary differences result from depreciation computed using accelerated
methods for tax purposes.
9. Benefit Plans
In conjunction with its reorganization to stock form, the Corporation
implemented an Employee Stock Ownership Plan ("ESOP"). The ESOP provides
retirement benefits for substantially all employees who have completed one
year of service and have attained the age of 21. The Corporation accounts
for the ESOP in accordance with Statement of Position ("SOP") 93-6,
"Employers' Accounting for Employee Stock Ownership Plans". SOP 93-6
requires the measure of compensation expense recorded by employers to equal
the fair value of ESOP shares allocated to participants during a fiscal
year. Expense recognized related to the ESOP totaled approximately $215,000,
$203,000 and $35,000 for the fiscal years ended September 30, 1998, 1997 and
1996, respectively.
The Association also provides retirement benefits through contributions to a
discretionary 401(k) plan. Expense recorded under the plan totaled $21,000
and $58,000 for fiscal 1997 and 1996, respectively. Due to contributions
made to the ESOP, the Company did not make matching contributions to the
401(k) plan during fiscal 1998 and 1997.
The Corporation also has a Recognition and Retention Plan ("RRP").
Subsequent to the common stock offering the RRP purchased 59,640 shares of
the Corporation's common stock in the open market. During fiscal 1997, a
total of 47,712 shares available under the RRP were awarded to officers and
directors of the Corporation effective upon shareholder approval of the RRP,
leaving 11,928 shares available for allocation. Common stock granted under
the RRP is earned by plan participants and distributed ratably over a five
year period, commencing with the date of award. A provision of $147,000 and
$80,000 related to the RRP was charged to expense for the fiscal years ended
September 30, 1998 and 1997, respectively.
10. Earnings Per Share and Capital Distributions
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period less shares in the ESOP that are unallocated
and not committed to be released. Weighted-average common shares deemed
outstanding, which gives effect to a reduction for 45,676 and 59,132
weighted-average unallocated shares held by the ESOP, totaled 1,354,032 and
1,420,414 for the fiscal years ended September 30, 1998 and 1997,
respectively.
28
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Earnings Per Share and Capital Distributions (continued)
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
1,372,595 and 1,420,414 for the fiscal years ended September 30, 1998 and
1997, respectively. Options to purchase 3,000 and 104,371 shares of common
stock with a weighted average exercise price of $16.44 and $16.00 were
outstanding at September 30, 1998 and 1997, respectively, but were excluded
from the computation of diluted earnings per share because their exercise
prices were greater than the average market price of the common shares.
Effective during the fiscal year ended September 30, 1998, the Corporation
began presenting earnings per share pursuant to the provisions of SFAS No.
128, "Earnings per Share." Accordingly, the fiscal 1997 earnings per share
presentation has been revised to conform to SFAS No. 128. The provisions of
SFAS No. 128 are not applicable for fiscal 1996 as the Corporation completed
its conversion to stock form in September 1996.
During fiscal 1997, the Corporation declared capital distributions of $5.32
per common share. Of this amount $5.00 per share was paid in September 1997
from funds retained by the Corporation in the conversion to stock form and
was deemed by management to constitute a return of excess capital.
Accordingly, the Corporation charged the return of capital distribution to
additional paid-in-capital. Additionally, management estimated that
approximately $5.00 of the distribution constituted a tax-free return of
capital.
11. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-bearing deposits in other financial
institutions with original terms to maturity of less than ninety days.
12. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
29
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at September
30, 1998 and 1997:
Cash and cash equivalents: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to four-family
residential, multi-family residential and nonresidential real estate.
These loan categories were further delineated into fixed-rate and
adjustable-rate loans. The fair values for the resultant loan
categories were computed via discounted cash flow analysis, using
current interest rates offered for loans with similar terms to
borrowers of similar credit quality. For loans on deposit accounts and
consumer and other loans, fair values were deemed to equal the
historic carrying values. The historical carrying amount of accrued
interest on loans is deemed to approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in the
consolidated statements of financial condition is deemed to
approximate fair value.
Deposits: The fair value of NOW accounts, passbook accounts, and money
market demand deposits is deemed to approximate the amount payable on
demand. Fair values for fixed-rate certificates of deposit have been
estimated using a discounted cash flow calculation using the interest
rates currently offered for deposits of similar remaining maturities.
Advances from the Federal Home Loan Bank: The fair value of these
advances is estimated using the interest rates currently offered for
advances of similar remaining maturities or, when available, quoted
market prices.
Note Payable: The fair value of the 90 day unsecured note payable is
deemed to approximate the carrying value.
Commitments to extend credit: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. The difference
between the fair value and notional amount of outstanding loan
commitments at September 30, 1998 and 1997, was not material.
30
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at September 30 are as
follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,421 $ 2,421 $ 4,783 $ 4,783
Investment securities 3,558 3,636 5,264 5,316
Mortgage-backed securities 13,259 13,380 15,498 15,701
Loans receivable 64,341 67,752 56,642 58,315
Federal Home Loan Bank stock 861 861 802 802
------ ------ ------ ------
$84,440 $88,050 $82,989 $84,917
====== ====== ====== ======
Financial liabilities
Deposits $65,797 $66,094 $65,660 $65,905
Advances from the Federal Home Loan Bank 4,000 4,001 - -
Note payable - - 3,000 3,000
------ ------ ------ ------
$69,797 $70,095 $68,660 $68,905
====== ====== ====== ======
</TABLE>
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
consolidated financial statement presentation.
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair value of investment securities at September 30, 1998 and
1997, are as follows:
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
Municipal obligations $ 967 $ 82 $ 4 $1,045
Available for sale:
U.S. Government obligations 999 4 - 1,003
FHLMC stock 31 1,557 - 1,588
----- ----- ----- -----
Total investments available for sale 1,030 1,561 - 2,591
----- ----- ----- -----
Total investment securities $1,997 $1,643 $ 4 $3,636
===== ===== ===== =====
</TABLE>
31
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
Municipal obligations $ 973 $ 57 $ 5 $1,025
Federal Home Loan Bank obligations 1,000 - - 1,000
----- ----- ----- -----
Total investments held to maturity 1,973 57 5 2,025
Available for sale:
U.S. Government obligations 1,500 - 4 1,496
FHLMC stock 46 1,603 - 1,649
Automobile loan pass-through certificates 146 - - 146
----- ----- ----- -----
Total investments available for sale 1,692 1,603 4 3,291
----- ----- ----- -----
Total investment securities $3,665 $1,660 $ 9 $5,316
===== ===== ===== =====
</TABLE>
The amortized cost and estimated fair value of investment securities at
September 30, 1998, including those designated as available for sale, are
shown below by term to maturity.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
(In thousands)
<S> <C> <C>
Due in one year or less $ 12 $ 12
Due after one year through five years 1,122 1,125
Due in five to ten years 202 212
Due after ten years 630 699
------ ------
1,966 2,048
FHLMC stock 31 1,588
------- -----
$1,997 $3,636
===== =====
</TABLE>
32
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of mortgage-backed securities at September 30, 1998 and
1997, are shown below:
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
Government National Mortgage
Association participation certificates $ 2,308 $ 38 $ - $ 2,346
Federal Home Loan Mortgage
Corporation participation certificates 1,197 37 - 1,234
Federal National Mortgage Association
participation certificates 895 46 - 941
------ --- --- ------
Total mortgage-backed securities
held to maturity 4,400 121 - 4,521
Available for sale:
Government National Mortgage
Association participation certificates 2,549 68 - 2,617
Federal Home Loan Mortgage
Corporation participation certificates 5,200 53 15 5,238
Collateralized mortgage obligation -
FHLMC REMIC 207 6 - 213
Guardian Savings and Loan participation
certificates 714 - 14 700
Discovery Resort Limited, partnership
notes 91 - - 91
------ --- --- ------
Total mortgage-backed securities
available for sale 8,761 127 29 8,859
------ --- --- ------
Total mortgage-backed securities $13,161 $248 $ 29 $13,380
====== === === ======
</TABLE>
33
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
Government National Mortgage
Association participation certificates $ 3,168 $ 89 $ - $ 3,257
Federal Home Loan Mortgage
Corporation participation certificates 2,294 47 - 2,341
Federal National Mortgage Association
participation certificates 1,379 67 - 1,446
------ --- --- ------
Total mortgage-backed securities
held to maturity 6,841 203 - 7,044
Available for sale:
Government National Mortgage
Association participation certificates 3,253 49 - 3,302
Federal Home Loan Mortgage
Corporation participation certificates 1,951 18 3 1,966
Collateralized mortgage obligations -
FNMA and FHLMC REMICs 2,314 8 9 2,313
Guardian Savings and Loan participation
certificates 916 - 19 897
Discovery Resort Limited, partnership
notes 179 - - 179
------ --- --- ------
Total mortgage-backed securities
available for sale 8,613 75 31 8,657
------ --- --- ------
Total mortgage-backed securities $15,454 $278 $ 31 $15,701
====== === === ======
</TABLE>
The amortized cost and estimated fair values of mortgage-backed securities
at September 30, 1998, including those designated as available for sale, are
shown below by contractual term to maturity. Expected maturities will differ
from contractual maturities because borrowers may generally prepay
obligations without prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
(In thousands)
<S> <C> <C>
Due after one through five years $ 91 $ 91
Due in five to ten years 868 906
Due after ten years 12,202 12,383
------ ------
$13,161 $13,380
====== ======
</TABLE>
34
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family $54,237 $49,574
Multi-family 320 345
Nonresidential real estate 3,897 2,653
Construction 9,831 9,140
Consumer and other loans 360 401
Deferred loan origination costs, net 26 48
------ ------
68,671 62,161
Less:
Undisbursed portion of loans in process 4,134 5,374
Allowance for losses on loans 196 145
------ ------
$64,341 $56,642
====== ======
</TABLE>
The Association's lending efforts have historically focused on one- to
four-family residential real estate loans, which comprise approximately
$59.9 million, or 93% of the total loan portfolio at September 30, 1998, and
approximately $53.3 million, or 94% of the total loan portfolio at September
30, 1997. Generally, such loans have been underwritten on the basis of no
more than an 80% loan-to-value ratio, which has historically provided the
Association with adequate collateral coverage in the event of default.
Nevertheless, the Association, as with any lending institution, is subject
to the risk that real estate values could deteriorate in its primary lending
area of northeast Ohio, thereby impairing collateral values. However,
management is of the belief that real estate values in the Association's
primary lending area are presently stable.
In the ordinary course of business, the Association has made loans to some
of its directors, officers and their related business interests. In the
opinion of management, such loans are consistent with sound lending
practices and are within applicable regulatory lending limitations. The
balance of such loans totaled approximately $263,000 and $277,000 at
September 30, 1998 and 1997, respectively.
From time to time, the Corporation has retained a director to perform legal
services. Fees paid for such services totaled approximately $16,000, $17,000
and $16,000 for the years ended September 30, 1998, 1997 and 1996,
respectively.
35
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $145 $193 $ 80
Provision for losses on loans 42 12 105
Charge-offs - (60) -
Recoveries 9 - 8
--- --- ---
Balance at end of year $196 $145 $193
=== === ===
</TABLE>
As of September 30, 1998, the Association's allowance for loan losses was
comprised solely of a general loan loss allowance, which is includible as a
component of regulatory risk-based capital.
Nonperforming and nonaccrual loans at September 30, 1998, 1997 and 1996,
totaled $115,000, $2,000 and $25,000, respectively. There was no material
loss of interest income on nonperforming loans for the years ended September
30, 1998, 1997 and 1996.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Land $ 355 $ 355
Building and improvements 1,216 1,216
Furniture and equipment 989 846
------ ------
2,560 2,417
Less accumulated depreciation and
amortization 1,089 995
----- ------
$1,471 $1,422
===== =====
</TABLE>
36
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
Deposit type and weighted-
average interest rate 1998 1997
Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts
1998 - 1.75% $ 1,824 2.8
1997 - 1.50% $ 2,497 3.8
Passbook
1998 - 2.00% 10,433 15.8
1997 - 2.00% 11,395 17.4
Money market demand accounts
1998 - 2.19% 2,616 4.0
1997 - 2.10% 2,588 3.9
------ ----- ------ -----
Total demand, transaction and
passbook deposits 14,873 22.6 16,480 25.1
Certificates of deposit
Original maturities of:
Up to 12 months
1998 - 5.25% 12,507 19.0
1997 - 5.29% 11,019 16.8
Over 12 months to 94 months
1998 - 5.98% 38,291 58.2
1997 - 5.99% 38,001 57.9
Individual retirement accounts
1998 - 1.50% 126 .2
1997 - 1.50% 160 .2
------ ----- ------ -----
Total certificates of deposit 50,924 77.4 49,180 74.9
------ ----- ------ -----
Total deposit accounts $65,797 100.0 $65,660 100.0
====== ===== ====== =====
</TABLE>
At September 30, 1998 and 1997, the Association had certificate of deposit
accounts with balances of $100,000 or more totaling $5.9 million and $4.3
million, respectively.
Interest expense on deposits is summarized as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
NOW accounts $ 22 $ 18 $ 18
Passbook 217 241 326
Money market demand accounts 62 57 87
Certificates of deposit 2,918 2,727 2,960
----- ----- -----
$3,219 $3,043 $3,391
===== ===== =====
</TABLE>
37
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Up to one year $29,268 $27,334
Over one year to two years 14,383 16,174
Over two years to three years 3,310 3,216
Over three years to four years 1,413 1,858
Over four years to five years 2,218 221
Over five years 332 377
------ ------
$50,924 $49,180
====== ======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1998, by pledges of certain residential mortgage loans totaling $6.0
million, and the Association's investment in Federal Home Loan Bank stock,
are summarized as follows:
<TABLE>
<CAPTION>
Maturing fiscal
Interest rate year ending in 1998 1997
(In thousands)
<S> <C> <C> <C>
5.65% - 5.69% 1999 $4,000 $-
===== ==
Weighted-average interest rate 5.68% N/A
==== ===
</TABLE>
NOTE H - NOTE PAYABLE
In connection with the September 1997 return of capital distribution, the
Corporation borrowed funds from another financial institution. At September
30, 1997, the related note payable consisted of an unsecured 90-day loan
bearing interest at 8.50%.
The note was repaid in October 1997.
38
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE I - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate for the years ended September 30 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $466 $422 $ 33
Increase (decrease) in taxes resulting from:
Interest on municipal obligations (12) (12) (12)
Other (1) 26 -
--- --- ---
Federal income taxes per consolidated
financial statements $453 $436 $ 21
=== === ===
Effective tax rate 33.0% 35.1% 21.4%
==== ==== ====
</TABLE>
The composition of the Corporation's net deferred tax liability at September
30 is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1998 1997
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Net deferred loan origination costs $ 71 $ 71
General loan loss allowance 67 49
Stock benefit plan expense 27 27
Other 12 -
----- -----
Deferred tax assets 177 147
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (194) (174)
Difference between book and tax depreciation (115) (104)
Percentage of earnings bad debt deduction (190) (190)
Unrealized gains on securities designated
as available for sale (564) (560)
Other - (3)
----- -----
Deferred tax liabilities (1,063) (1,031)
----- -----
Net deferred tax liability $ (886) $ (884)
===== =====
</TABLE>
The Association was allowed a special bad debt deduction generally limited
to 8% of otherwise taxable income and subject to certain limitations based
on aggregate loans and deposit account balances at the end of the year. If
the amounts that previously qualified as deductions for federal income taxes
are later used for purposes other than bad debt losses, including
distributions in liquidation, such distributions will be subject to federal
income taxes at the then current corporate income tax rate. Retained
earnings at September 30, 1998, include approximately $2.4 million for which
federal income taxes have not been provided. The approximate amount of
unrecognized deferred tax liability relating to the cumulative bad debt
deduction was approximately $630,000 at September 30, 1998. See Note L for
additional information regarding future percentage of earnings bad debt
deductions.
39
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE J - LOAN COMMITMENTS
The Association is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Association's involvement in such financial instruments.
The Association's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Association uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet instruments.
At September 30, 1998, the Association had outstanding commitments of
approximately $3.2 million to originate loans. Additionally, the Association
had undisbursed loans in process of $4.1 million at September 30, 1998. In
the opinion of management, all loan commitments equaled or exceeded
prevalent market interest rates as of September 30, 1998, and will be funded
from normal cash flow from operations.
NOTE K - REGULATORY CAPITAL
The Association is subject to the regulatory capital requirements of the
Office of Thrift Supervision (the "OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Association's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Association's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk-weightings, and other factors.
Such minimum capital standards generally require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement
and the risk-based capital requirement. The tangible capital requirement
provides for minimum tangible capital (defined as shareholders' equity less
all intangible assets) equal to 1.5% of adjusted total assets. The core
capital requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible
assets) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted
in present form, would increase the core capital requirement to a range of
4% - 5% of adjusted total assets for substantially all savings institutions.
Management anticipates no material change to the Association's present
excess
40
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE K - REGULATORY CAPITAL (continued)
regulatory capital position as a result of this change in the regulatory
capital requirement. The risk-based capital requirement provides for the
maintenance of core capital plus general loss allowances equal to 8.0% of
risk-weighted assets. In computing risk-weighted assets, the Association
multiplies the value of each asset on its statement of financial condition
by a defined risk-weighting factor, e.g., one-to-four family residential
loans carry a risk-weighted factor of 50%.
During the calendar year, the Association was notified from its regulator
that it was categorized as "well-capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well-capitalized" the
Association must maintain minimum capital ratios as set forth in the
following table.
As of September 30, 1998 and 1997, management believes that the Association
met all capital adequacy requirements to which it is subject. The major
cause of changes in capital and ratios presented below is the declaration of
dividends of $6.5 million from the Association to the Corporation during
fiscal 1998.
<TABLE>
<CAPTION>
As of September 30, 1998
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $10,947 13.0% =>$1,267 =>1.5% =>$4,223 => 5.0%
Core capital $10,947 13.0% =>$2,534 =>3.0% =>$5,068 => 6.0%
Risk-based capital $11,143 26.0% =>$3,433 =>8.0% =>$4,292 =>10.0%
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1997
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $16,126 19.3% =>$1,251 =>1.5% =>$4,170 => 5.0%
Core capital $16,126 19.3% =>$2,502 =>3.0% =>$5,004 => 6.0%
Risk-based capital $16,271 43.9% =>$2,966 =>8.0% =>$3,708 =>10.0%
</TABLE>
41
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE K - REGULATORY CAPITAL (continued)
The Corporation's management believes that, under the current regulatory
capital regulations, the Association will continue to meets its minimum
capital requirements in the foreseeable future. However, events beyond the
control of management, such as increased interest rates or an economic
downturn in the Association's market areas, could adversely affect future
earnings and, consequently, the ability to meet future minimum regulatory
capital requirements.
NOTE L - LEGISLATIVE MATTERS
The deposit accounts of the Association and of other savings associations
are insured by the Federal Deposit Insurance Corporation ("FDIC") in the
Savings Association Insurance Fund ("SAIF"). The reserves of the SAIF were
below the level required by law, because a significant portion of the
assessments paid into the fund had been used to pay the cost of prior thrift
failures. The deposit accounts of commercial banks are insured by the FDIC
in the Bank Insurance Fund ("BIF"), except to the extent such banks have
acquired SAIF deposits. The reserves of the BIF met the level required by
law in 1995. As a result of the respective reserve levels of the funds,
deposit insurance assessments paid by healthy savings associations exceeded
those paid by healthy commercial banks by approximately $.19 per $100 in
deposits in 1995. In 1996, no BIF assessments were required for healthy
commercial banks except for a $2,000 minimum fee.
On September 30, 1996, legislation was enacted to recapitalize the SAIF
which provided for a special assessment of $.657 per $100 of deposits held
at March 31, 1995. The Association had $65.7 million in SAIF deposits at
March 31, 1995, resulting in an assessment of approximately $428,000, or
$282,000 after-tax, which was recorded as a charge in fiscal 1996, and was
paid in November 1996.
The legislation also provided for a reduction of future annual deposit
insurance premiums from $.235 per $100 of SAIF deposits to $.064 per $100 of
SAIF deposits. At September 30, 1998, the annual rate was $.0582 per $100 of
SAIF deposits.
A component of the recapitalization plan provides for the merger of the SAIF
and BIF on January 1, 1999, assuming all savings associations have become
banks. Pending legislation has proposed the elimination of the thrift
charter or of the separate federal regulation of thrifts. As a result, the
Association would be regulated as a bank under federal laws which would
subject it to the more restrictive activity limits imposed on national
banks. Under separate but related legislation, the Association is required
to recapture as taxable income approximately $560,000 of its bad debt
reserve, which represents the post-1987 additions to the reserve, and is
unable to utilize the percentage of earnings method to compute its reserve
in the future. The Association has provided deferred taxes for this amount
and will be permitted by such legislation to amortize the recapture of its
bad debt reserve over six years commencing in fiscal 1999.
42
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of Peoples Financial Corporation as of September 30, 1998 and 1997,
and the results of its operations and its cash flows for the periods ended
September 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Peoples Financial Corporation
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
ASSETS 1998 1997
<S> <C> <C>
Interest-bearing deposits in other financial institutions $ 205 $ 310
Loan receivable from ESOP 336 497
Investment in Peoples Federal Savings and Loan Association
of Massillon 12,042 17,209
Prepaid expenses and other assets 70 400
Accounts receivable from Peoples Federal Savings and Loan
Association of Massillon 2,405 -
------ ------
Total assets $15,058 $18,416
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable to Peoples Federal Savings and Loan
Association of Massillon $ - $ 79
Note payable - 3,000
Other liabilities 25 11
------ ------
Total liabilities 25 3,090
Shareholders' equity
Additional paid-in capital 7,287 7,165
Retained earnings 9,927 9,779
Unrealized gains on securities designated as available
for sale, net of related tax effects 1,095 1,083
Shares acquired by stock benefit plans (1,097) (1,416)
Treasury shares (2,179) (1,285)
------ ------
Total shareholders' equity 15,033 15,326
------ ------
Total liabilities and shareholders' equity $15,058 $18,416
====== ======
</TABLE>
43
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION
(continued)
<TABLE>
<CAPTION>
Peoples Financial Corporation
STATEMENTS OF OPERATIONS
Period ended September 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Revenue (expense)
Interest income $ 54 $ 437 $ 32
Other income - 4 -
Equity in earnings (loss) of subsidiary 997 664 (268)
----- ----- ----
Total revenue (expense) 1,051 1,105 (236)
Interest expense 19 20 -
General and administrative expenses 154 198 2
----- ----- ----
Earnings (loss) before income taxes (credits) 878 887 (238)
Federal income taxes (credits) (40) 81 11
----- ----- ----
NET EARNINGS (LOSS) $ 918 $ 806 $(249)
===== ===== ====
</TABLE>
44
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION
(continued)
<TABLE>
<CAPTION>
Peoples Financial Corporation
STATEMENTS OF CASH FLOWS
Period ended September 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings (loss) for the period $ 918 $ 806 $ (249)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Undistributed (earnings) loss of consolidated subsidiary (997) (664) 268
Amortization of expense related to stock benefit plans 147 145 -
Gain on sale of securities designated as available for sale - (4) -
Increases (decreases) in cash due to changes in:
Other assets 330 (362) (38)
Other liabilities (65) 1 10
Other - (675) 609
----- ----- ------
Net cash provided by (used in) operating activities 333 (753) 600
Cash flows provided by (used in) investing activities:
Purchase of securities available for sale - (3,020) (4,771)
Dividends received from subsidiary 4,090 - -
Maturities of investment securities - 3,502 -
Proceeds from sale of securities designated as available
for sale - 4,293 -
Investment in subsidiary - - (6,478)
----- ----- ------
Net cash provided by (used in) investing activities 4,090 4,775 (11,249)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock - - 13,606
Proceeds from (repayment of) note payable (3,000) 3,000 -
Return of capital distribution - (7,083) -
Repayments on ESOP loan 161 100 -
Dividends on common stock (770) (482) -
Purchase of shares for stock benefit plan - (919) -
Purchase of treasury stock (995) (1,285) -
Proceeds from exercise of stock options 76 - -
----- ----- ------
Net cash provided by (used in) financing activities (4,528) (6,669) 13,606
----- ----- ------
Net increase (decrease) in cash and cash equivalents (105) (2,647) 2,957
Cash and cash equivalents at beginning of period 310 2,957 -
----- ----- ------
Cash and cash equivalents at end of period $ 205 $ 310 $ 2,957
===== ===== ======
</TABLE>
45
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE N - STOCK OPTION PLAN
During fiscal 1997, the Board of Directors adopted a Stock Option Plan that
provided for the issuance of 104,371 shares of authorized, but unissued
shares of common stock at the fair market value at the date of grant.
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation
expense is then recognized over the service period, which is usually the
vesting period. Alternatively, SFAS No. 123 permits entities to continue to
account for stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings
and earnings per share, as if the fair value-based method of accounting
defined in SFAS No. 123 had been applied.
The Corporation applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for the plan. Had
compensation cost for the Corporation's stock option plan been determined
based on the fair value at the grant dates for awards under the plan
consistent with the accounting method utilized in SFAS No. 123, the
Corporation's net earnings and earnings per share would have been reduced to
the pro forma amounts indicated below for the years ended September 30:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C> <C>
Net earnings (In thousands) As reported $918 $806
=== ===
Pro-forma $917 $767
=== ===
Earnings per share
Basic As reported $.68 $.57
=== ===
Pro-forma $.68 $.54
=== ===
Diluted As reported $.67 $.57
=== ===
Pro-forma $.67 $.54
=== ===
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1998 and 1997;
dividend yield of 4.9% and 1.7%; expected volatility of 12.0%; risk-free
interest rate of 6.0% and 6.5% and expected lives of ten years.
46
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE N - STOCK OPTION PLAN (continued)
A summary of the status of the Corporation's stock option plan as of
September 30, 1998 and 1997, and changes during the years then ended, is
presented below:
<TABLE>
<CAPTION>
1998 1997
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 104,371 $16.00 - $ -
Adjustment for return of capital
distribution 30,056 (3.59) - -
Granted 3,000 16.44 104,371 16.00
Exercised (6,165) 12.41 - -
Forfeited - - - -
------- ----- ------- -----
Outstanding at end of year 131,262 $12.50 104,371 $16.00
======= ===== ======= =====
Options exercisable at year-end 20,716 $12.41 - $ -
======= ===== ======= =====
Weighted-average fair value of
options granted during the year $ 1.96 $ 4.76
===== =====
</TABLE>
The following information applies to options outstanding at September 30,
1998:
Number outstanding 131,262
Exercise price $12.41 - $16.44
Weighted-average exercise price $12.50
Weighted-average remaining contractual life 8.5 years
NOTE O - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
On October 16, 1995, the Association's Board of Directors adopted a Plan of
Conversion whereby the Association would convert to the stock form of
ownership, followed by the issuance of all of the Association's outstanding
common stock to a newly formed holding company, Peoples Financial
Corporation.
On September 12, 1996, the Association completed its conversion to the stock
form of ownership, and issued all of the Association's outstanding common
shares to the Corporation.
In connection with the conversion, the Corporation sold 1,491,012 shares at
a price of $10.00 per share which, after consideration of offering expenses
totaling approximately $707,000, and shares purchased by the ESOP totaling
$597,000, resulted in net equity proceeds of approximately $13.6 million.
47
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE O - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM (continued)
At the date of the conversion, the Association established a liquidation
account in an amount equal to retained earnings reflected in the statement
of financial condition used in the conversion offering circular. The
liquidation account will be maintained for the benefit of eligible savings
account holders who maintained deposit accounts in the Association after
conversion. In the event of a complete liquidation (and only in such event),
each eligible savings account holder will be entitled to receive a
liquidation distribution from the liquidation account in the amount of the
then current adjusted balance of deposit accounts held, before any
liquidation distribution may be made with respect to common stock. Except
for the repurchase of stock and payment of dividends by the Association, the
existence of the liquidation account will not restrict the use or
application of such retained earnings. The Association may not declare, pay
a cash dividend on, or repurchase any of its common stock, if the effect
thereof would cause retained earnings to be reduced below either the amount
required for the liquidation account or the regulatory capital requirements
for SAIF insured institutions.
48
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We have issued our report dated November 19, 1998, accompanying the consolidated
financial statements of Peoples Financial Corporation which are included in the
Corporation's Annual Report on Form 10-KSB for the year ended September 30,
1998. We hereby consent to the incorporation by reference of said report in the
Registration Statement of Peoples Financial Corporation on Form S-8.
GRANT THORNTON LLP
Cincinnati, Ohio
December 22, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 269
<INT-BEARING-DEPOSITS> 2,152
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,450
<INVESTMENTS-CARRYING> 5,367
<INVESTMENTS-MARKET> 5,566
<LOANS> 64,341
<ALLOWANCE> 196
<TOTAL-ASSETS> 86,296
<DEPOSITS> 65,797
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,466
<LONG-TERM> 4,000
0
0
<COMMON> 0
<OTHER-SE> 15,033
<TOTAL-LIABILITIES-AND-EQUITY> 86,296
<INTEREST-LOAN> 4,814
<INTEREST-INVEST> 1,092
<INTEREST-OTHER> 199
<INTEREST-TOTAL> 6,105
<INTEREST-DEPOSIT> 3,219
<INTEREST-EXPENSE> 3,315
<INTEREST-INCOME-NET> 2,790
<LOAN-LOSSES> 42
<SECURITIES-GAINS> 683
<EXPENSE-OTHER> 2,089
<INCOME-PRETAX> 1,371
<INCOME-PRE-EXTRAORDINARY> 918
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 918
<EPS-PRIMARY> .68
<EPS-DILUTED> .67
<YIELD-ACTUAL> 3.42
<LOANS-NON> 115
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 145
<CHARGE-OFFS> 0
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 196
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 196
</TABLE>
EXHIBIT 99.2
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. Peoples Financial
Corporation ("PFC") desires to take advantage of the "safe harbor" provisions of
the Act. Certain information, particularly information regarding future economic
performance and finances and plans and objectives of management, contained or
incorporated by reference in PFC's Annual Report on Form 10-KSB for fiscal year
1998 is forward-looking. In some cases, information regarding certain important
factors that could cause actual results of operations or outcomes of other
events to differ materially from any such forward-looking statement appear
together with such statement. In addition, forward-looking statements are
subject to other risks and uncertainties affecting the financial institutions
industry, including, but not limited to, the following:
Interest Rate Risk
PFC'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 and borrowings. The interest income
and interest expense of PFC 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 PFC's control. The
interest rates on specific assets and liabilities of PFC 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.
In a rising interest rate environment, loans tend to prepay slowly and new loans
at higher rates increase slowly, while interest paid on deposits increases
rapidly because the terms to maturity of deposits tend to be shorter than the
terms to maturity or prepayment of loans. Such differences in the adjustment of
interest rates on assets and liabilities may negatively affect PFC's income.
Moreover, rising interest rates tend to decrease loan demand in general,
negatively affecting PFC's income.
Possible Inadequacy of the Allowance for Loan Losses
Peoples Federal Savings and Loan Association of Massillon ("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 nonperforming
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.
While the Board of Directors of Peoples Federal believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions 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.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by one-
to four-family residential real estate due, in part, to the effects of general
economic conditions. The repayment of multifamily residential and nonresidential
real estate loans generally depends upon the cash flow from the operation of the
property, which may be negatively affected by national and local economic
conditions that cause leases not to be renewed or that negatively affect the
operations of a commercial borrower. Construction loans may also be negatively
affected by such economic conditions, particularly loans made to developers who
do not have a buyer for a property before the loan is made. The risk of default
on consumer loans increases during periods of recession, high unemployment and
other adverse economic conditions. When consumers have trouble paying their
bills, they are more likely to pay mortgage loans than consumer loans, and the
collateral securing such loans, if any, may decrease in value more rapidly than
the outstanding balance of the loan.
<PAGE>
Competition
Peoples Federal competes for deposits with other savings associations,
commercial banks and credit unions and 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. 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. 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 PFC.
Legislation and Regulation that may Adversely Affect PFC's Earnings
Peoples Federal is subject to extensive regulation by the Office of Thrift
Supervision (the "OTS") and the Federal Deposit Insurance Corporation (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 is also 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 the company 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 the PFC's net earnings.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to the target level within a reasonable time and
may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
such system, assessments may vary depending on the risk the institution poses to
its deposit insurance fund. Such risk level is determined by reference to the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Congress recently enacted a plan to recapitalize the SAIF. The
recapitalization plan also provides for the merger of the SAIF and BIF effective
January 1, 1999, assuming there are no savings associations under federal law.
Congress is considering legislation to eliminate the federal thrift charter and
the separate federal regulation of savings and loan associations. As a result,
Peoples Federal may have to convert to a different financial institution charter
or might be regulated under federal law as a bank. If Peoples Federal becomes a
bank or is regulated as a bank, it would become subject to the more restrictive
activity limitations imposed on national banks. Moreover, PFC might become
subject to more restrictive holding company requirements, including activity
limits and capital requirements similar to those imposed on Peoples Federal. PFC
cannot predict the impact of the conversion of Peoples Federal to, or regulation
of Peoples Federal as, a bank until any legislation requiring such change is
enacted.
