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, 1999
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, 1999, 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 9, 1999, was $7.16 million.
1,265,108 of the issuer's common shares were issued and outstanding on
December 9, 1999.
<PAGE>
Documents Incorporated by Reference
The following sections of Peoples Financial Corporation's 1999 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 2000
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.
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<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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<PAGE>
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,
1999 1998
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) $62,062 77.73% $52,762 76.86%
Home equity (secured by mortgages) 1,543 1.93 1,475 2.15
Multifamily 392 .49 320 .47
Nonresidential real estate loans 3,406 4.27 3,897 5.68
Construction loans 12,215 15.30 9,831 14.32
------ ------ ------ ------
Total real estate loans 79,618 99.72 68,285 99.48
Consumer loans:
Loans on deposits 124 .16 192 .28
Other consumer loans 99 .12 168 .24
------ ------ ------ ------
Total consumer loans 223 .28 360 .52
------ ------ ------ ------
Total loans 79,841 100.00% 68,645 100.00%
====== ======
Other items:
Deferred loan origination (fees) costs (16) 26
Loans in process (6,528) (4,134)
Allowance for loan losses (213) (196)
------ ------
Net loans $73,084 $64,341
====== ======
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information as of September 30, 1999, 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
2000 2001 2002 9/30/99 9/30/99 9/30/99 9/30/99 Total
------- ------ ------ ------ ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family (first
mortgage) $14,279 $2,509 $2,527 $4,887 $12,440 $19,137 $18,498 $74,277
Home equity (first and
second mortgage) 107 121 131 271 690 223 - 1,543
Multifamily - - - - - 75 317 392
Nonresidential 46 - 38 80 261 2,942 39 3,406
Consumer loans 101 70 31 21 - - - 223
------ ----- ----- ----- ------ ------ ------ ------
Total loans $14,533 $2,700 $2,727 $5,259 $13,391 $22,377 $18,854 $79,841
====== ===== ===== ===== ====== ====== ====== ======
</TABLE>
Of the loans due more than one year after September 30, 1999, loans
with aggregate balances of $56.8 million have fixed rates of interest, and loans
with aggregate balances of $8.5 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
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<PAGE>
Federal also originates loans for the construction of one- to four-family
residences and home equity loans secured by first or second mortgages on
single-family, owner-occupied, residential real estate. Each of such loans is
secured by a mortgage on the underlying real estate and improvements thereon, if
any.
OTS regulations limit the amount that Peoples Federal may lend in
relationship to the appraised value of the real estate and improvements at the
time of loan origination. In accordance with such regulations, Peoples Federal
makes fixed-rate first mortgage loans on single-family or duplex, owner-occupied
residences up to 95% of the value of the real estate and improvements (the
"Loan-to-Value Ratio" or "LTV"). Low- to moderate-income loans are granted 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 $63.6 million at September 30, 1999, and represented 79.7% of
loans at such date. The largest individual loan balance on a one- to four-family
loan at such date was $352,000. At such date, four loans secured by one- to
four-family residential real estate in the amount of $107,000 were 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. 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, 1999, one- to four-family
mortgage loans included $722,000, or .9% 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%.
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
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<PAGE>
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, 1999, loans secured by multifamily properties totaled
approximately $392,000, 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, 1999, a total of $12.2 million, or approximately 15.3%
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, 1999, 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 75% LTV
and a maximum term of five years, and on improved lots (streets with all city
utilities) in amounts up to 80% 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.
At September 30, 1999, Peoples Federal had a total of $3.4 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 4.3% of Peoples Federal's total loans at such date. At
such date, Peoples Federal had no delinquent nonresidential real estate loans.
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<PAGE>
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its tangible capital. At September 30,
1999, Peoples Federal's nonresidential mortgage loans totaled 41.7% 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, 1999, Peoples Federal had approximately $223,000, or
less than one percent of its total loans, invested in consumer loans. At such
date, four loans in the amount of $7,000 were more than 90 days delinquent.
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 $500,000. If the loan amount exceeds $500,000, or if the
application does not conform in all respects with Peoples Federal's underwriting
guidelines, the application is accepted or rejected by the Board of Directors.
If a mortgage loan application is approved, title insurance is now
obtained on the title to the real estate which will secure the mortgage loan.
Prior to April 1, 1994, Peoples Federal did not require title insurance but did
obtain an attorney's opinion of title. Borrowers are required to carry
satisfactory fire and casualty insurance and flood insurance, if applicable, and
to name Peoples Federal as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. Peoples Federal
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Peoples Federal's loans carry no pre-payment penalties but do provide
that the entire balance of the loan is due upon sale of the property securing
the loan. Peoples Federal generally enforces such due-on-sale provisions.
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<PAGE>
Loan Originations, Purchases and Sales. Peoples Federal originated only
fixed-rate loans until July 1995. Peoples Federal has never sold loans but
originates its mortgage loans in accordance with Federal Home Loan Mortgage
Corporation ("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,
1999 1998
(In thousands)
<S> <C> <C>
Loans originated:
One- to four-family residential (1) $29,980 $28,879
Multifamily residential - 188
Nonresidential 34 1,209
Consumer 109 276
------ ------
Total loans originated
30,123 30,552
------ ------
Reductions:
Principal repayments (21,389) (22,834)
Increase (decrease) in other items, net (2) 9 19
------ ------
Net increase $ 8,743 $ 7,699
====== ======
</TABLE>
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(1) Includes construction loans, net of undisbursed loans in process.
(2) Consists of deferred fees and costs 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
$1.3 million to one borrower at September 30, 1999. The largest amount Peoples
Federal had outstanding to one borrower at September 30, 1999, was $1.5 million,
consisting of eight loans. Although the loans were, at September 30, 1999, in
excess of the amount that Peoples Federal could lend to one borrower at that
date, they were below the limit at the time they were made and were not,
therefore, in violation of the lending limit regulation. The excess over the
September 30, 1999, limit resulted from the payment of an intercompany dividend
from Peoples Federal to PFC to fund the special dividend paid by PFC to its
shareholders on November 19, 1999. Such loans were secured by three
single-family residences and five nonresidential properties. All of such loans
were current at September 30, 1999.
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
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, 1999.
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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,
1999 1998
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 $403 .51% 4 $ 97 .14%
60 - 89 days 2 18 .02 2 19 .03
90 days and over 8 114 .14 1 115 .17
-- --- --- - --- ---
Total delinquent loans 14 $535 .67% 7 $231 .34%
== === === = === ===
</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,
1999 1998
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $ 92 $115
Nonresidential - -
Consumer
7 -
--- ---
Total nonaccruing loans
99 115
Accruing loans contractually past due 90 days or more:
Real estate:
Residential 15 -
Nonresidential - -
Consumer - -
--- ---
Total accruing loans contractually past
due 90 days or more 15 -
--- ---
Total nonperforming loans $114 $115
=== ===
Total loan loss allowance $213 $196
=== ===
Total nonperforming assets as
a percentage of total assets .12% .13%
=== ===
Loan loss allowance as a percent
of nonperforming loans 187% 170%
=== ===
</TABLE>
For the year ended September 30, 1999, gross interest income which
would have been recorded had non-accruing loans been current in accordance with
their original terms was $3,000. During the year ended September 30, 1999,
$7,000 was recorded as interest income as former nonaccruing loans were returned
to accrual status. During the periods shown, Peoples Federal had no restructured
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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.
One mortgage and four consumer loans in Peoples Federal's portfolio
were classified as substandard at September 30, 1999.
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 15% 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 15% 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,
1999 1998
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $196 $145
Charge-offs - -
Recoveries 5 9
Provision for loan losses (charged to operations) 12 42
--- ---
Balance at end of period $213 $196
=== ===
Ratio of net charge-offs (recoveries) to
average net loans outstanding during the
period (.01)% (.01)%
Ratio of allowance for loan losses to total
loans .27% .29%
</TABLE>
At September 30, 1999, $30,000 of the allowance for loan losses was
allocated to nonresidential loans and $183,000 was allocated to residential
loans. 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.
Mortgage-Backed and Related Securities
Peoples Federal maintains a significant portfolio of mortgage-backed
securities in the form of 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 $684,000 interest, at
market value, 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, 1999, was $34,000.
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, 1999, $6.8 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,
1999 1998
(In thousands)
<S> <C> <C>
FNMA certificates $ 1,659 $ 895
GNMA certificates 3,568 4,925
FHLMC certificates 4,544 6,435
Guardian Savings and Loan certificate 684 700
Discovery Resort Limited Partnership Notes 34 91
Collateralized mortgage obligation -
FHLMC REMIC 123 213
------ ------
Total mortgage-backed and related securities $10,612 $13,259
====== ======
</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, 1999. 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, 1999
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 $ - -% $ - - % $335 8.20% $ 345 8.44%
GNMA certificates - - - - - - 3,568 6.72
FHLMC certificates - - - - 619 7.90 914 7.08
Guardian Savings and Loan
certificate - - - - - - 684 6.40
Discovery Resort Limited
Partnership Notes - - 34 7.38 - - - -
FHLMC REMICs - - - - - - 4,113 5.85
---- ---- ---- ---- --- ---- ----- ----
Total $ - -% $ 34 7.38% $954 8.00% $9,624 6.42%
==== ==== ==== ==== === ==== ===== ====
At September 30, 1999
Total mortgage-backed and related securities
portfolio
Carrying Market Average
value value yield
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
FNMA certificates $ 680 $ 709 8.32%
GNMA certificates 3,568 3,591 6.72
FHLMC certificates 1,533 1,551 7.41
Guardian Savings and Loan
certificate 684 684 6.40
Discovery Resort Limited
Partnership Notes 34 34 7.38
FHLMC REMICs 4,113 4,113 5.85
------ ------ ----
Total $10,612 $10,682 6.56%
====== ====== ====
</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 and 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 during fiscal 1998 and 1999 were recorded as a recovery to the
allowance for loan losses. Management expects final collections on these
certificates during fiscal 2000.
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,
1999 1998
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 24.81% $1,000 24.55% $ - - % $ - - %
Investment securities:
U.S. government and federal
agency securities - - - - 1,003 22.70 1,003 22.30
FHLB and FHLMC stock 2,074 51.47 2,074 50.90 2,449 55.42 2,449 54.46
Municipal securities 956 23.72 1,000 24.55 967 21.88 1,045 23.24
----- ------ ----- ------ ----- ------ ----- ------
Total interest-bearing deposits
and investment securities $4,030 100.00% $4,074 100.00% $4,419 100.00% $4,497 100.00%
===== ====== ===== ====== ===== ====== ===== ======
</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,
1999.
<TABLE>
<CAPTION>
At September 30, 1999
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:
Certificates of deposit in
the FHLB $1,000 5.10% $ - -% $ - -%
FHLB and FHLMC stock 2,074 3.89 - - - -
Municipal securities 12 6.50 143 6.25 801 6.06
----- ---- --- ---- --- ----
Total $3,086 4.30% $143 6.25% $801 6.06%
===== ==== === ==== === ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999
Average Weighted
life Carrying Market average
in years value value yield
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities:
Certificates of deposit in the
FHLB .15 $1,000 $1,000 5.10%
FHLB and FHLMC stock - 2,074 2,074 3.89
Municipal securities 5.58 956 1,000 6.10
---- ----- ----- ----
Total 2.86 $4,030 $4,074 4.72%
==== ===== ===== ====
</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.
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, 1999, Peoples Federal's certificates of deposit
totaled $50.7 million, or 77% of total deposits. Of such amount, approximately
$28.7 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,
1999 1998
Percent Percent
of total of total
Amount deposits Amount deposits
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
NOW accounts (1) $ 2,064 3.11% $ 1,824 2.77%
Money market accounts (2) 2,603 3.93 2,616 3.97
Passbook savings accounts (3) 10,869 16.40 10,433 15.86
------ ------ ------ ------
Total transaction accounts
15,536 23.44 14,873 22.60
Certificates of deposit:
2.01 - 4.00% 1,268 1.91 126 .19
4.01 - 6.00% 40,699 61.41 36,181 54.99
6.01 - 8.00% 8,773 13.24 14,617 22.22
------ ------ ------ ------
Total certificates of deposit
50,740 76.56 50,924 77.40
------ ------ ------ ------
Total deposits $66,276 100.00% $65,797 100.00%
====== ====== ====== ======
</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 1.50% and 1.75% at September 30, 1999 and
1998, 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% at September 30,
1999 and 1998.
(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, 1999 and 1998.
The following table shows rate and maturity information for Peoples
Federal's certificates of deposit as of September 30, 1999:
<TABLE>
<CAPTION>
Amount Due
Over Over
Up to 1 year to 2 years to Over
one year 2 years 3 years 3 years Total
-------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
2.01 - 4.00% $ 1,262 $ 6 $ - $ - $ 1,268
4.01 - 6.00 25,032 11,333 1,351 2,983 40,699
Over 6.01 2,380 1,223 3,793 1,377 8,773
------ ------ ----- ----- ------
Total certificates
of deposit $28,674 $12,562 $5,144 $4,360 $50,740
====== ====== ===== ===== ======
</TABLE>
-16-
<PAGE>
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, 1999:
<TABLE>
<CAPTION>
Maturity Amount
(In thousands)
<S> <C>
Three months or less $ 465
Over 3 months to 6 months 485
Over 6 months to 12 months 1,807
Over 12 months 2,672
-----
Total $5,429
=====
</TABLE>
The following table sets forth Peoples Federal's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998
(Dollars in thousands)
<S> <C> <C>
Beginning balance $65,797 $65,660
Deposits 56,363 53,991
Withdrawals (58,380) (56,220)
------ ------
Net decreases before interest credited (2,017) (2,229)
Interest credited 2,496 2,366
------- -------
Ending balance
$66,276 $65,797
====== ======
Net increase
$ 479 $ 137
====== ======
Percent increase .73% .21%
=== ===
</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 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, 1999, 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,
1999 1998
(Dollars in thousands)
<S> <C> <C>
FHLB advances $11,000 $4,000
Weighted average interest rate of FHLB
advances 5.45% 5.74%
</TABLE>
-17-
<PAGE>
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,
1999 1998
(Dollars in thousands)
<S> <C> <C>
Maximum balance $12,000 $4,000
Average balance 6,917 1,583
Weighted average interest rate 4.94% 5.29%
</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 decreased to 2.43%
for the year ended September 30, 1999, from 2.53% for the year ended September
30, 1998. The spread for the year ended September 30, 1998, increased from 2.52%
for the year ended September 30, 1997.
The yield on interest-earning assets decreased to 7.19% for the year
ended September 30, 1999, from 7.48% for the year ended September 30, 1998, as
the average rates on loans receivable, investments and mortgage-backed
securities declined. The cost of funds to Peoples Federal decreased to 4.76% for
the year ended September 30, 1999, from 4.95% for the year ended September 30,
1998, due to lower rates on certificates of deposit, partially offset by
increased average balances on certificates of deposit and FHLB advances.
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.
-18-
<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,
1999 1998
<S> <C> <C>
Weighted average yield on loan portfolio 7.47% 7.73%
Weighted average yield on mortgage-backed and related securities 6.44 6.79
Weighted average yield on investment securities 4.71 4.46
Weighted average yield on interest-bearing deposits 4.29 4.44
Weighted average yield on all interest-earning assets 7.14 7.34
Weighted average yield on deposits 4.78 5.07
Weighted average yield on borrowings 5.45 5.69
Weighted average yield paid on all interest-bearing liabilities 4.88 5.11
---- ----
Interest rate spread (spread between weighted average interest rate
on all interest-bearing assets and all interest-bearing liabilities) 2.26% 2.23%
==== ====
</TABLE>
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, 1999, Peoples Federal had 19 full-time employees
and 3 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
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.
-19-
<PAGE>
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including PFC, to continue to engage in all activities
that they were permitted to engage in prior to the enactment of the Act. Such
activities are essentially unlimited, provided that the thrift subsidiary
remains a qualified thrift lender. Any thrift holding company formed after May
4, 1999, will be subject to the same restrictions as a multiple thrift holding
company. In addition, a unitary thrift holding company in existence on May 4,
1999, may be sold only to a financial holding company engaged in activities
permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities
in which PFC and Peoples Federal currently engage, except to the extent that
competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
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 4% of their total assets
except for 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 their risk-weighted assets. Risk-based
capital is defined as adjusted core capital plus certain additional items of
capital, which in the case of Peoples Federal includes a general loan loss
allowance of $213,000 at September 30, 1999.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement. 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
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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% is not be subject to the
interest rate risk component.
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
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, 1999, 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 1999, certain maturity requirements were removed,
which, in Peoples Federal's case, resulted in a greater eligible liquidity
amount and percentage at September 30, 1999, than at prior year ends. At
September 30, 1999, 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, 1999, was approximately $13.3 million, or
17.2%.
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. 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, 1999, 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
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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, 1999, 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, 1999.
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, 1999.
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.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (1) if the
proposed distribution would cause total distributions for that calendar year to
exceed net income for that year to date plus the savings association's retained
net income for the preceding two years; (2) if the savings association will not
be at least adequately capitalized following the capital distribution; (3) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association and
the OTS (or the FDIC), or a condition imposed on the savings association in an
OTS-approved application or notice; or (4) if the savings association has not
received certain favorable examination ratings from the OTS. If a savings
association subsidiary of a holding company is not required to file an
application, it must file a notice with the OTS.
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. 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
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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, 1999, 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.
Federal Regulation of Acquisitions of Control of PFC and Peoples
Federal. 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.
Further, any merger of PFC in which PFC is not the resulting company must also
be approved by the OTS.
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.
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.
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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 $44.3 million (subject to an exemption of up to $5.0
million), and of 10% of net transaction accounts in excess of $44.3 million. At
September 30, 1999, 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 $924,000 at
September 30, 1999.
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, 1999, Peoples
Federal's maximum limit on advances was approximately $18.5 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
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, 1999 is $191,000,
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, 1999, is $6.5 million, and, as a result,
Peoples Federal does not qualify as a small corporation exempt from the
alternative minimum tax.
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<PAGE>
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 prior to 1996,
Peoples Federal generally 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 debts 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.
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, 1999, the pre-1988 reserves of
Peoples Federal for tax purposes totaled approximately $1.8 million. Peoples
Federal believes it had approximately $3.6 million of accumulated earnings and
profits for tax purposes as of September 30, 1999, 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.
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The tax returns of Peoples Federal have been audited or closed without
audit through fiscal year 1995. 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 was imposed annually at a rate of 1.5% (for
years prior to 1999) 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 is computed as 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.
Item 2. Description of Property
The following table sets forth certain information at September 30,
1999, 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 $647,000 $50.3 million
Branch Office:
2312 Lincoln Way N.W.
Massillon, Ohio 44647 Owned 1978 1,400 $421,000 $16.0 million
Lending Office:
4344 Metro Circle, N.W.
North Canton, Ohio 44720 Leased(2) N/A - - N/A
</TABLE>
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(1) At September 30, 1999, Peoples Federal's office premises and equipment had
a total net book value of $1.4 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 2002, with a three-year
renewal option.
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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.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
There were 1,265,108 common shares of PFC outstanding on December 3,
1999, 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, 1998 and September 30, 1999, are set forth below.
Such amounts do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
09/99 06/99 03/99 12/98 09/98 06/98 03/98 12/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividends Declared $ 0.160 $ 0.160 $ 0.150 $ 0.150 $ 0.150 $ 0.150 $ 0.125 $ 0.125
High Bid During Quarter 10.000 10.125 10.875 12.000 13.063 16.375 20.000 15.250
Low Bid During Quarter 9.438 8.750 8.000 9.500 10.313 12.625 14.000 12.500
</TABLE>
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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 deposits in FHLB, from the
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.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (1) if the
proposed distribution would cause total distributions for that calendar year to
exceed net income for that year to date plus the savings association's retained
net income for the preceding two years; (2) if the savings association will not
be at least adequately capitalized following the capital distribution; (3) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association and
the OTS (or the FDIC), or a condition imposed on the savings association in an
OTS-approved application or notice; or (4) if the savings association has not
received certain favorable examination ratings from the OTS. If a savings
association subsidiary of a holding company is not required to file an
application, it must file a notice with the OTS.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information required herein is incorporated by reference from PFC's
1999 Annual Report to Shareholders ("Annual Report"), the Managements Discussion
and Analysis of which is included in Exhibit 13 as attached hereto.
-27-
<PAGE>
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.
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 2000
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.
-28-
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
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 1999 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 2000 Annual Meeting of Shareholders (incorporated by reference)
99.2 Safe Harbor Under the Private Securities Litigation Reform Act of 1995
</TABLE>
(b) No reports on Form 8-K were filed during the last quarter
of the fiscal year ended September 30, 1999.
-29-
<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
Date December 28, 1999 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 28, 1999 Date December 28, 1999
By /s/ Victor C. Baker By /s/ James P. Bordner
Victor C. Baker James P. Bordner
Director Director
Date December 28, 1999 Date December 28, 1999
By /s/ Alan C. Edie By /s/ Thomas E. Shelt
Alan C. Edie Vincent G. Matecheck
Director Secretary and Director
Date December 28, 1999 Date December 28, 1999
By /s/ Thomas E. Shelt By /s/ Vince E. Stephan
Thomas E. Shelt Vince E. Stephan
Director Chairman of the Board of Directors
Date December 28, 1999 Date December 28, 1999
-30-
<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
Corporation Amendment 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 Incorporated by reference to Exhibit A to the
and 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 1999 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 2000 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>
-31-
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 of the allowance for loan
losses set forth under "Financial Condition," "Comparison of Results
of Operations for the Years Ended September 30, 1999 and 1998" and
"Comparison of Results of Operations for the Years Ended September 30,
1998 and 1997;"
2. The analysis of interest rate risk set forth under "Asset and
Liability Management;"
3. The discussion of the liquidity of Peoples Federal's assets and the
regulatory capital of Peoples Federal set forth under "Liquidity and
Capital Resources;"
4. The discussion of legislation enacted under the "Gramm-Leach-Bliley
Act," as set forth under "Potential Impact of Current Legislation on
Future Results of Operations;"
5. Management's estimate as to the effects of recent accounting
pronouncements as set forth under "Effects of Recent Accounting
Pronouncements;" and
6. Management's determination of the effects of the year 2000 on PFC's
information technology systems as set forth under "Year 2000
Compliance Matters."
Discussion of Changes in Financial Condition from September 30, 1998 to
September 30, 1999
PFC's consolidated assets totaled $92.4 million at September 30, 1999, an
increase of $6.1 million, or 7.1%, over the $86.3 million total at September 30,
1998. The principal changes in the composition of assets during the year ended
September 30, 1999, consisted of an increase in loans receivable and
interest-bearing deposits in other financial institutions, offset by decreases
in investment and mortgage-backed securities. This increase in assets was funded
primarily from increases of $7.0 million in borrowings and $479,000 in deposits,
which were partially offset by an $832,000 decrease in shareholders' equity.
1
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Changes in Financial Condition from September 30, 1998 to
September 30, 1999 (continued)
Interest-bearing deposits in other financial institutions totaled $2.5 million
at September 30, 1999, an increase of $311,000. Investment securities and
mortgage-backed securities totaled $13.7 million at September 30, 1999, as
compared to $16.8 million at September 30, 1998, a decrease of $3.1 million, or
18.4%. Investment securities decreased due to maturities of a U.S. Government
agency obligation and municipal bonds totaling $1.0 million and sales of Federal
Home Loan Mortgage Corporation ("FHLMC") common stock totaling $527,000, which
were partially offset by purchases of FHLB certificates of deposit of $1.0
million. Mortgage-backed securities decreased due to principal repayments
totaling $4.7 million, partially offset by purchases of $2.3 million. Such
proceeds, coupled with FHLB advances, were used principally to fund the growth
in the loan portfolio.
Loans receivable totaled $73.1 million at September 30, 1999, an increase of
$8.8 million, or 13.6%, over the $64.3 million total at September 30, 1998. The
increase was comprised of a $9.4 million increase in one- to four-family and
construction loans, including a net increase in undisbursed loans in process of
$2.4 million. Multi-family and nonresidential real estate loans decreased by
$419,000 and consumer and other loans decreased by $137,000. Loan disbursements
of $30.1 million were partially offset by principal repayments of $21.4 million
during the year ended September 30, 1999. Fiscal 1998 loan disbursements totaled
$30.6 million and principal repayments amounted to $22.8 million.
Peoples Federal's allowance for loan losses totaled $213,000 at September 30,
1999, compared to the fiscal 1998 allowance of $196,000. Nonperforming loans
amounted to $114,000 at September 30, 1999, compared to $115,000 at September
30, 1998. The allowance for loan losses represented .27% and .29% of total loans
at September 30, 1999 and 1998, respectively and 186.8% and 170.4% of
nonperforming loans on the same dates.
Management believes that the allowance for loan loss level at September 30, 1999
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 $66.3 million at September 30, 1999, as compared to $65.8
million at September 30, 1998, an increase of $479,000, or .7%. Certificates of
deposit decreased by $184,000 as Peoples Federal continued to offer rates
designed to maintain certificates and cost of funds at acceptable levels.
Passbook and money market demand deposits increased by $423,000, and NOW
accounts increased by $240,000 for the year.
2
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Changes in Financial Condition from September 30, 1998 to
September 30, 1999 (continued)
Borrowings consisted of advances from the FHLB of $11.0 million at September 30,
1999, as compared to $4.0 million at September 30, 1998, an increase of $7.0
million. These borrowings were used primarily to fund the increase in loans.
Shareholders' equity totaled $14.2 million at September 30, 1999, a decrease of
$832,000, or 5.5%, from the September 30, 1998 level. The decrease resulted
primarily from payment of dividends of $807,000, purchases of treasury stock
totaling $768,000 and a decrease in net unrealized gains on securities
designated as available for sale of $366,000, which were partially offset by net
earnings of $754,000 and amortization of stock benefit plans of $355,000.
Comparison of Results of Operations for the Years Ended September 30, 1999 and
1998
General
The operating results of PFC are affected by general economic conditions, the
monetary and fiscal policies of the U. S. Government 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 $754,000 for the year ended September 30, 1999, a decrease
of $164,000, or 17.9%, from net earnings of $918,000 recorded for fiscal 1998.
The decrease in net earnings was due primarily to a decrease in net interest
income of $36,000, a decrease in net gains on the sale of investment and
mortgage-backed securities of $165,000 and an increase in general,
administrative and other expense of $108,000, which were partially offset by a
decrease in the provision for losses on loans of $30,000, an increase in other
income of $22,000 and a decrease of $93,000 in the provision for federal income
taxes.
Net Interest Income
Total interest income for the year ended September 30, 1999, totaled $6.3
million, an increase of $154,000, or 2.5%, over the $6.1 million recorded in
fiscal 1998. Interest income on loans increased by $425,000, or 8.8%. The
increase resulted primarily from an $8.2 million increase in the
weighted-average outstanding balance of loans receivable, partially offset by a
32 basis point (100 basis points equals one percent) decrease in
weighted-average yield to 7.59% in 1999, from 7.91% in 1998. Interest income on
mortgage-backed securities, investment securities and interest-bearing deposits
decreased by $271,000, or 21.0%. The decrease resulted primarily from a $2.7
million decrease in the average balance of such assets and a 73 basis point
decrease in weighted-average yield on mortgage-backed securities, a 31 basis
point decrease in weighted-average yield on investment securities and a 97 basis
point decrease in weighted average yield on interest-bearing deposits.
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, 1999 and
1998 (continued)
Net Interest Income (continued)
Interest expense on deposits for the year ended September 30, 1999, totaled $3.2
million, a decrease of $56,000, or 1.7%, from the $3.2 million recorded in
fiscal 1998. This decrease was due primarily to a decrease in the
weighted-average cost of deposits of 19 basis points, to 4.76% in 1999 from
4.95% in 1998, partially offset by a $1.6 million increase in the
weighted-average outstanding balance of deposits. Interest expense on borrowings
increased to $342,000 in fiscal 1999 from $96,000 in fiscal 1998. This increase
was due primarily to a $5.3 million increase in the weighted-average outstanding
balance of advances from the FHLB, from $1.6 million to $6.9 million, and an
increase in the weighted-average interest rate paid of 10 basis points. Peoples
Federal had advances from the FHLB outstanding throughout fiscal 1999, compared
to only approximately five months in fiscal 1998, while a note payable was
outstanding for part of the first month of fiscal 1998 only.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $36,000, or 1.3%, to $2.8 million for the year
ended September 30, 1999. The interest rate spread decreased to 2.43% in fiscal
1999, from 2.53% in fiscal 1998, while the net interest margin decreased to
3.16% in fiscal 1999, from 3.42% in fiscal 1998.
Provision for Losses on Loans
The provision for losses on loans totaled $12,000 for the year ended September
30, 1999, a decrease of $30,000, or 71.4%, from the $42,000 provision recorded
in fiscal 1998. Management believes that the continuation of periodic increases
in the allowance for loan losses is prudent 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. 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 $569,000 for the year ended September 30, 1999, compared to
$712,000 for fiscal 1998. FHLMC common stock with a book value of $9,000 was
sold during the year ended September 30, 1999 for $527,000, resulting in a gain
of $518,000. During the year ended September 30, 1998, FHLMC common stock with a
book value of $15,000 was sold and a gain of $696,000 was realized, while
mortgage-backed and investment securities with a book value of $3.5 million were
sold and a loss of $13,000 was realized. Other operating income increased by
$22,000 due to increased fee income, including ATM fees of $18,000 in fiscal
1999 compared to less than $1,000 in fiscal 1998, and safe deposit box rentals.
Also included in other operating income are late charges on loans.
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, 1999 and
1998 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $2.2 million for the year
ended September 30, 1999, compared to $2.1 million for fiscal 1998, an increase
of $108,000, or 5.2%.
Employee compensation and benefits increased by $45,000, or 3.9% in fiscal 1999,
compared to fiscal 1998. Salaries and wages and directors fees increased by
$22,000 due to normal merit increases and hiring of additional personnel.
Contributions to Peoples Federal's 401(k) benefit plan were frozen during fiscal
1999 and 1998, and in fiscal 1998 an excess provision of $12,000 for Peoples
Federal's 401(k) benefit plans was reversed. Other employee benefit plans
increased by $3,000 in fiscal 1999 over fiscal 1998. Other employment benefits
increased by $8,000 primarily due to increases in health insurance premium rates
and payroll taxes.
Occupancy and equipment for the year ended September 30, 1999 totaled $262,000,
an increase of $40,000, or 18.0%, over fiscal 1998. Depreciation expense
increased by $22,000 primarily due to automated teller machine ("ATM") equipment
acquired in the fall of 1998. Repairs and maintenance increased by $26,000 due
to increased building and ground maintenance, maintenance agreement costs on ATM
equipment and winter weather. A refund of rental cost and an adjustment of
utility costs realized at the end of the first lease term of the North Canton
lending office reduced fiscal 1999 occupancy costs by a net amount of $9,000.
Ohio franchise taxes for the year ended September 30, 1999 were $201,000, a
decrease of $29,000, or 12.6%, from fiscal 1998, based on decreased tax rates.
Data processing totaled $119,000 for fiscal 1999, an increase of $38,000, or
46.9%, over fiscal 1998, principally due to ATM operations and year 2000
compliance testing. Advertising totaled $41,000 for fiscal 1999, an increase of
$8,000, or 24.2%, over fiscal 1998, principally due to increased local newspaper
advertising. Other operating expense totaled $328,000 for fiscal 1999, an
increase of $6,000, or 1.9%, over fiscal 1998, principally due to year 2000
compliance costs.
Federal Income Taxes
The provision for federal income taxes totaled $360,000 for the year ended
September 30, 1999, a decrease of $93,000, or 20.5%, from the $453,000 provision
recorded in fiscal 1998. The decrease was primarily due to the decrease in net
earnings before taxes of $257,000, or 18.7%. PFC's effective tax rates were
32.3% for fiscal 1999 and 33.0% for fiscal 1998.
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, 1998 and
1997
General
Net earnings totaled $918,000 for the year ended September 30, 1998, an increase
of $112,000, or 13.9%, over net earnings of $806,000 recorded for fiscal 1997.
The increase resulted primarily 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, totaled $6.1
million, a decrease of $148,000, or 2.4%, from the $6.3 million recorded in
fiscal 1997. Interest income on loans increased by $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 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-bearing 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 the
weighted-average yield on mortgage-backed securities.
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 FHLB were outstanding
for approximately 5 months in fiscal 1998, with no advances in fiscal 1997,
while a 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.
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, 1998 and
1997 (continued)
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 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.
Other Income
Other income totaled $712,000 for the year ended September 30, 1998, compared to
$52,000 for fiscal 1997. The increase resulted primarily 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%.
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
Recognition and Retention Plan ("RRP") and the change in average market value of
PFC stock increased expense of employee 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.
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 by $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 premium rates effective January 1, 1997.
7
<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)
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.
8
<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,
1999 1998
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 $ 2,246 $ 108 4.81% $ 3,443 $ 199 5.78%
Investment securities 3,841 164 4.27 4,850 222 4.58
Mortgage-backed and related securities 11,916 748 6.28 12,413 870 7.01
Loans receivable (1) 69,039 5,239 7.59 60,876 4,814 7.91
------ ----- ------ ------ ----- -----
Total interest-earning assets 87,042 6,259 7.19 81,582 6,105 7.48
Non-interest-earning assets
Cash and amounts due from depository institutions 264 273
Premises and equipment, net 1,442 1,403
Other non-earning assets 522 401
------ ------
Total assets $89,270 $83,659
====== ======
Interest-bearing liabilities:
NOW accounts $ 1,942 24 1.24 $ 1,698 22 1.30
Money market accounts 2,624 58 2.21 2,590 62 2.39
Passbook savings accounts 10,778 216 2.00 10,799 217 2.01
Certificates of deposit 51,311 2,865 5.58 50,013 2,918 5.83
Borrowings 6,917 342 4.94 1,814 96 5.29
------ ----- ------ ------ ----- -----
Total interest-bearing liabilities 73,572 3,505 4.76 66,914 3,315 4.95
----- ------ ----- -----
Non-interest-bearing liabilities 1,325 1,432
------ ------
Total liabilities 74,897 68,346
Shareholders' equity 14,373 15,313
------ ------
Total liabilities and shareholders' equity $89,270 $83,659
====== ======
Net interest income; interest rate spread $2,754 2.43% $2,790 2.53%
===== ====== ===== ======
Net interest margin (net interest income as a percent of
average interest-earning assets) 3.16% 3.42%
====== ======
Average interest-earning assets to average interest-bearing liabilities 118.31% 121.92%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30,
1997
Average Interest
tstanding earned/ Yield/
balance paid rate
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 5,806 $ 322 5.55%
Investment securities 8,255 448 5.42
Mortgage-backed and related securities 21,674 1,483 6.84
Loans receivable (1) 49,717 4,000 8.05
------ ----- -----
Total interest-earning assets 85,452 6,253 7.32
Non-interest-earning assets
Cash and amounts due from depository institutions 269
Premises and equipment, net 1,463
Other non-earning assets 640
-------
Total assets $87,824
======
Interest-bearing liabilities:
NOW accounts $ 1,536 18 1.17
Money market accounts 2,708 57 2.10
Passbook savings accounts 12,026 241 2.00
Certificates of deposit 46,941 2,727 5.81
Borrowings 250 4 1.60
------ ----- ------
Total interest-bearing liabilities 63,461 3,047 4.80
----- ------
Non-interest-bearing liabilities 1,435
------
Total liabilities 64,896
Shareholders' equity 22,928
------
Total liabilities and shareholders' equity $87,824
======
Net interest income; interest rate spread $3,206 2.52%
===== ======
Net interest margin (net interest income as a percent of
average interest-earning assets) 3.75%
======
Average interest-earning assets to average interest-bearing liabilities 134.65%
======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
the allowance for loan losses.
9
<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,
1999 vs. 1998 1998 vs. 1997
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-bearing deposits $ (58) $ (33) $(91) $(136) $ 13 $(123)
Investment securities (43) (15) (58) (156) (70) (226)
Mortgage-backed and related securities (32) (90) (122) (648) 35 (613)
Loans receivable 619 (194) 425 882 (68) 814
--- ---- --- ---- ---- ----
Total interest income 486 (332) 154 (58) (90) (148)
Interest expense attributable to:
NOW accounts 3 (1) 2 2 3 5
Money market accounts 1 (5) (4) (3) 7 4
Passbook savings accounts - (1) (1) (25) 1 (24)
Certificates of deposit 73 (126) (53) 179 12 191
Borrowings 252 (6) 246 83 9 92
--- ---- --- ---- ---- ----
Total interest expense 329 (139) 190 236 32 268
--- ---- --- ---- ---- ----
Increase (decrease) in net interest income $157 $(193) $(36) $(294) $(122) $(416)
=== ==== === ==== ==== ====
</TABLE>
10
<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 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, 1999, 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 $5.1 million at September 30, 1999, Peoples
Federal would have been required to deduct approximately $1.7 million (50% of
the approximate $3.3 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, 1999,
would still have exceeded the regulatory requirement by $3.6 million.
Presented below, as of September 30, 1999 and 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. The declaration of the $3.00 special
dividend in September 30, 1999, caused Peoples Federal to temporarily exceed the
Board's preexisting NPV policy limits. Management believes Peoples Federal will
be operating within the Board policy limits by March 31, 2000.
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, 1999, fixed-rate
loans constituted approximately 89.0% of Peoples Federal's loan portfolio. 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 of
repricing. Assumptions in calculating the amounts in this table are OTS
assumptions.
11
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
September 30, 1999 September 30, 1998
Change in interest rate Board limit $ Change % Change $ Change % Change
(Basis Points) % change in NPV in NPV in NPV in NPV
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+300 (70)% $(7,743) (84)% $(5,668) (40)%
+200 (45) (5,098) (55) (3,494) (25)
+100 (25) (2,440) (26) (1,578) (11)
- - - - - -
-100 (25) 1,913 21 1,177 8
-200 (45) 3,489 38 2,500 18
-300 (70) 5,095 55 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.
12
<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, 1999, 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 and advances from the FHLB. 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, 1999, Peoples
Federal's regulatory liquidity ratio was 17.2%. At such date, Peoples Federal
had commitments to originate loans totaling $1.4 million and, in addition, had
undisbursed loans in process of $6.5 million. At September 30, 1999, 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, 1999, Peoples Federal had commitments for
capital expenditures and fees in connection with a new branch office totaling
approximately $250,000.
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Net earnings $ 754 $ 918 $ 806
Adjustments to reconcile net earnings to
net cash from operating activities (718) 511 (289)
----- ----- ------
Net cash from operating activities 36 1,429 517
Net cash from investing activities (5,741) (3,239) (2,803)
Net cash from financing activities 5,904 (552) (5,464)
----- ----- ------
Net change in cash and cash equivalents 199 (2,362) (7,750)
Cash and cash equivalents at
beginning of year 2,421 4,783 12,533
----- ----- ------
Cash and cash equivalents at end
of year $2,620 $2,421 $ 4,783
===== ===== ======
</TABLE>
13
<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 4% or 5% of the association's total assets,
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 adjusted core capital plus certain additional items of capital, which
in the case of Peoples Federal includes a general loan loss allowance of
$213,000 at September 30, 1999.
Peoples Federal exceeded all of its regulatory capital requirements at September
30, 1999. The following table summarizes Peoples Federal's regulatory capital
requirements and regulatory capital at September 30, 1999:
<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 $8,160 8.9% $1,370 1.5% $6,790 7.4% $91,365
Core capital 8,160 8.9% 3,655 4.0% 4,505 4.9% 91,365
Risk-based capital 8,881 19.3% 3,673 8.0% 5,208 11.3% 45,909
</TABLE>
14
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established 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.
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. 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.
Management adopted SFAS No. 130 as of October 1, 1998, as required, without
material impact on the Corporation'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. Management adopted SFAS No. 131 effective October 1, 1998, as
required, without material impact on the Corporation'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.
15
<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. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. 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 the Corporation's financial position or results of operations.
Potential Impact of Current Legislation on Future Results of Operations
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted
into law. The GLB Act makes sweeping changes in the financial services in which
various types of financial institutions may engage. The Glass-Steagall Act,
which had generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in existence on
May 4, 1999, including PFC, to continue to engage in all activities that they
were permitted to engage in prior to the enactment of the Act. Such activities
are essentially unlimited, provided that the thrift subsidiary remains a
qualified thrift lender. Any thrift holding company formed after May 4, 1999,
will be subject to the same restrictions as a multiple thrift holding company.
In addition, a unitary thrift holding company in existence on May 4, 1999, may
be sold only to a financial holding company engaged in activities permissible
for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities in which
PFC and Peoples Federal currently engage, except to the extent that competition
with other types of financial institutions may increase as they engage in
activities not permitted prior to enactment of the GLB Act.
Year 2000 Compliance Matters
As with most providers of financial services, Peoples Federal's operations are
heavily dependent on information technology systems. Peoples Federal has
addressed 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.
16
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters (continued)
PFC's primary data processing applications are handled by a third-party service
bureau which has advised PFC that it has transferred to a fully year
2000-compliant processing system that was fully tested prior to June 30, 1999.
Management has also reviewed PFC's ancillary equipment and has provided the
appropriate remedial measures. Total cost incurred to make Peoples Federal Year
2000 compliant, of approximately $40,000, has been charged to general,
administrative and other expense.
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 future
periods in connection with this issue and does not expect to incur significant
additional 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 has endeavored 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. Finally, Peoples Federal has developed a cash demand,
sources of funding and cash delivery plan as part of its Year 2000 contingency
planning to meet anticipated additional cash needs between now and early
calendar year 2000. PFC could be adversely affected if customers react to
publicity about year 2000 by withdrawing deposits or if other third parties,
such as governmental agencies, clearing houses, telephone companies, utilities
and other services, fail to prepare properly.
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, 1999 and 1998, and the
related consolidated statements of earnings, comprehensive income, shareholders'
equity and cash flows for each of the years ended September 30, 1999, 1998 and
1997. 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the years ended September 30,
1999, 1998 and 1997, in conformity with generally accepted accounting
principles.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
November 9, 1999
18
<PAGE>
Peoples Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 157 $ 269
Interest-bearing deposits in other financial institutions 2,463 2,152
------ ------
Cash and cash equivalents 2,620 2,421
Investment securities designated as available
for sale - at market 1,150 2,591
Investment securities held to maturity - at cost, approximate market value
of $2,000 and $1,045 as of September 30, 1999 and 1998 1,956 967
Mortgage-backed securities designated as available for
sale - at market 7,394 8,859
Mortgage-backed securities held to maturity - at amortized cost,
approximate market value of $3,288 and $4,521
as of September 30, 1999 and 1998 3,218 4,400
Loans receivable - net 73,084 64,341
Office premises and equipment - at depreciated cost 1,389 1,471
Stock in Federal Home Loan Bank - at cost 924 861
Accrued interest receivable 311 298
Prepaid federal income taxes 230 -
Prepaid expenses and other assets 161 87
------ ------
Total assets $92,437 $86,296
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $66,276 $65,797
Advances from the Federal Home Loan Bank 11,000 4,000
Other liabilities 285 251
Accrued federal income taxes - 329
Deferred federal income taxes 675 886
------ ------
Total liabilities 78,236 71,263
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 7,360 7,287
Retained earnings - restricted 9,874 9,927
Accumulated comprehensive income, unrealized gains on securities
designated as available for sale, net of related tax effects 729 1,095
Shares acquired by stock benefit plans (625) (1,097)
Less 225,904 and 139,327 treasury shares, at cost (3,137) (2,179)
------ ------
Total shareholders' equity 14,201 15,033
------ ------
Total liabilities and shareholders' equity $92,437 $86,296
====== ======
</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)
1999 1998 1997
<S> <C> <C> <C>
Interest income
Loans $5,239 $4,814 $4,000
Mortgage-backed securities 748 870 1,483
Investment securities 164 222 448
Interest-bearing deposits and other 108 199 322
----- ----- -----
Total interest income 6,259 6,105 6,253
Interest expense
Deposits 3,163 3,219 3,043
Borrowings 342 96 4
----- ----- -----
Total interest expense 3,505 3,315 3,047
----- ----- -----
Net interest income 2,754 2,790 3,206
Provision for losses on loans 12 42 12
----- ----- -----
Net interest income after
provision for losses on loans 2,742 2,748 3,194
Other income
Gain on sale of investment and mortgage-backed
securities designated as available for sale 518 683 15
Other operating 51 29 37
----- ----- -----
Total other income 569 712 52
General, administrative and other expense
Employee compensation and benefits 1,206 1,161 1,057
Occupancy and equipment 262 222 228
Franchise taxes 201 230 227
Federal deposit insurance premiums 40 40 61
Data processing 119 81 75
Advertising 41 33 37
Other operating 328 322 319
----- ----- -----
Total general, administrative
and other expense 2,197 2,089 2,004
----- ----- -----
Earnings before income taxes 1,114 1,371 1,242
Federal income taxes
Current 381 455 275
Deferred (21) (2) 161
----- ----- -----
Total federal income taxes 360 453 436
----- ----- -----
NET EARNINGS $ 754 $ 918 $ 806
===== ===== =====
EARNINGS PER SHARE
Basic $.60 $.68 $.57
=== === ====
Diluted $.60 $.67 $.57
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
Peoples Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
(In thousands)
1999 1998 1997
<S> <C> <C> <C>
Net earnings $754 $ 918 $ 806
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities during
the period, net of tax (credits) of $(12), $239 and $231
for the years ended September 30, 1999, 1998 and 1997 (24) 463 448
Reclassification adjustment for realized gains included
in earnings, net of tax of $176, $232 and $5 for the
years ended September 30, 1999, 1998 and 1997 (342) (451) (10)
--- ----- -----
Comprehensive income $388 $ 930 $1,244
=== ===== =====
Accumulated comprehensive income $729 $1,095 $1,083
=== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
Peoples Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1999, 1998 and 1997
(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, 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 plans - 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
Purchase of treasury shares - - - (768) - - (768)
Transfer of shares to treasury upon stock benefit plan termination - - 190 (190) - - -
Amortization expense of stock benefit plans - 73 282 - - - 355
Dividends of $.62 per share - - - - - (807) (807)
Net earnings for the year ended September 30, 1999 - - - - - 754 754
Decrease in unrealized gains on securities designated as
available for sale, net of related tax effects - - - - (366) - (366)
-- ------ ----- ------ ----- ----- ------
Balance at September 30, 1999 $- $ 7,360 $ (625) $(3,137) $ 729 $9,874 $14,201
== ====== ====== ======= ===== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
Peoples Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 754 $ 918 $ 806
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 30 20 36
Gain on sale of investment and mortgage-backed
securities designated as available for sale (518) (683) (15)
Amortization of deferred loan origination fees (27) (32) (9)
Depreciation and amortization 120 98 102
Provision for losses on loans 12 42 12
Amortization expense of stock benefit plans 355 466 145
Recovery of loss on investments 5 9 -
Federal Home Loan Bank stock dividends (62) (60) (54)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (13) 18 81
Prepaid expenses and other assets (74) 392 (384)
Other liabilities 3 (91) (347)
Accrued interest payable 31 15 5
Federal income taxes
Current (559) 319 (22)
Deferred (21) (2) 161
------ ------ ------
Net cash provided by operating activities 36 1,429 517
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities designated
as available for sale (2,258) (4,085) (3,498)
Proceeds from sale of mortgage-backed securities
designated as available for sale - 1,998 6,501
Principal repayments on mortgage-backed securities 4,749 4,348 4,616
Purchase of investment securities designated as available
for sale - (999) (1,500)
Proceeds from sale of investment securities designated
as available for sale 527 2,211 3,499
Purchase of investment securities designated as
held to maturity (1,000) - (2,000)
Principal repayments and maturities of investment securities 1,012 1,153 1,967
Loan principal repayments 21,389 22,834 16,323
Loan disbursements (30,123) (30,552) (28,702)
Purchase of office premises and equipment (37) (147) (9)
------ ------ ------
Net cash used in investing activities (5,741) (3,239) (2,803)
------ ------ ------
Net cash used in operating and investing
activities (balance carried forward) (5,705) (1,810) (2,286)
------ ------ ------
</TABLE>
23
<PAGE>
Peoples Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
1999 1998 1997
<S> <C> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $(5,705) $(1,810) $(2,286)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 479 137 1,305
Proceeds from note payable - - 3,000
Repayment of note payable - (3,000) -
Proceeds from Federal Home Loan Bank advances 18,000 4,000 -
Repayment of Federal Home Loan Bank advances (11,000) - -
Return of capital distribution on common stock - - (7,083)
Purchase of treasury shares (768) (995) (1,285)
Purchase of shares for stock benefit plans - - (919)
Dividends paid on common stock (807) (770) (482)
Proceeds from exercise of stock options - 76 -
------ ------ ------
Net cash provided by (used in) financing activities 5,904 (552) (5,464)
------ ------ ------
Net increase (decrease) in cash and cash equivalents 199 (2,362) (7,750)
Cash and cash equivalents at beginning of year 2,421 4,783 12,533
------ ------ ------
Cash and cash equivalents at end of year $ 2,620 $ 2,421 $ 4,783
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 929 $ 135 $ 298
====== ====== ======
Interest on deposits and borrowings $ 3,474 $ 3,304 $ 3,039
====== ====== ======
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (366) $ 12 $ 438
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Peoples Financial Corporation (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock
of Peoples Federal Savings and Loan Association of Massillon (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, 1999 and
1998, Massillon had no assets and was inactive. All intercompany balances
and transactions have been eliminated in the accompanying consolidated
financial statements.
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. The Corporation's shareholders' equity reflected a net
unrealized gain on securities designated as available for sale totaling
approximately $729,000 and $1.1 million at September 30, 1999 and 1998,
respectively.
25
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities (continued)
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.
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).
26
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
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.
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, 1999 and 1998, 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.
27
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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, 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
The Corporation has an Employee Stock Ownership Plan ("ESOP"), which
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
$218,000, $215,000 and $203,000 for the fiscal years ended September 30,
1999, 1998 and 1997, respectively. During 1999, the Board adopted a
resolution terminating the ESOP. Accordingly, the remaining 18,930
unallocated ESOP shares have been reflected as treasury shares following
retirement of the outstanding ESOP loan.
28
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Benefit Plans (continued)
The Association also provides retirement benefits through contributions to a
discretionary 401(k) plan. Expense recorded under the plan totaled $21,000
for fiscal 1997. Due to contributions made to the ESOP, the Company did not
make matching contributions to the 401(k) plan during fiscal 1999 and 1998.
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. A total of 49,501 shares
available under the RRP have been awarded to officers and directors of the
Corporation, leaving 10,139 shares available for allocation. Common stock
awarded under the RRP is earned by plan participants and distributed ratably
over a five year period, commencing with the date of grant. A provision of
$147,000 related to the RRP was charged to expense for each of the fiscal
years ended September 30, 1999 and 1998 and $80,000 for fiscal 1997.
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 31,812, 45,676 and 59,132
weighted-average unallocated shares held by the ESOP, totaled 1,265,566,
1,354,032 and 1,420,414 for the fiscal years ended September 30, 1999, 1998
and 1997, respectively.
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
1,265,566, 1,372,595 and 1,420,414 for the fiscal years ended September 30,
1999, 1998 and 1997, respectively. Incremental shares related to the assumed
exercise of stock options included in the calculation of diluted earnings
per share totaled 18,563 for the fiscal year ended September 30, 1998.
Options to purchase 131,422, 3,000 and 104,371 shares of common stock with a
respective weighted average exercise price of $12.38, $12.50 and $12.41,
were outstanding at September 30, 1999, 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.
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 determined that
approximately $5.00 of the distribution constituted a tax-free return of
capital. In October 1999, the Corporation declared a special $3.00 per share
distribution which is payable in November 1999.
29
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at September
30, 1999 and 1998:
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.
30
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
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.
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, 1999 and 1998, was not material.
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>
1999 1998
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,620 $ 2,620 $ 2,421 $ 2,421
Investment securities 3,106 3,150 3,558 3,636
Mortgage-backed securities 10,612 10,682 13,259 13,380
Loans receivable 73,084 71,731 64,341 67,752
Federal Home Loan Bank stock 924 924 861 861
------ ------ ------ ------
$90,346 $89,107 $84,440 $88,050
====== ====== ====== ======
Financial liabilities
Deposits $66,276 $66,234 $65,797 $66,094
Advances from the Federal Home Loan Bank 11,000 10,999 4,000 4,001
------ ------ ------ ------
$77,276 $77,233 $69,797 $70,095
====== ====== ====== ======
</TABLE>
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1999
consolidated financial statement presentation.
31
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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, 1999 and
1998, are as follows:
<TABLE>
<CAPTION>
1999
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
Municipal obligations $ 956 $ 47 $ 3 $1,000
Federal Home Loan Bank obligations 1,000 - - 1,000
----- ----- --- -----
1,956 47 3 2,000
Available for sale:
FHLMC stock 22 1,128 - 1,150
----- ----- --- -----
Total investment securities $1,978 $1,175 $ 3 $3,150
===== ===== === =====
</TABLE>
<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>
32
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of investment securities at
September 30, 1999, 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 $1,012 $ 1,012
Due after one year through five years 143 143
Due in five to ten years 170 175
Due after ten years 631 670
----- -----
1,956 2,000
FHLMC stock 22 1,150
----- -----
$1,978 $3,150
===== =====
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of mortgage-backed securities at September 30, 1999 and
1998, are shown below:
<TABLE>
<CAPTION>
1999
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 $ 1,664 $ 23 $ - $ 1,687
Federal Home Loan Mortgage
Corporation participation certificates 874 18 - 892
Federal National Mortgage Association
participation certificates 680 29 - 709
------ --- --- ------
Total mortgage-backed securities
held to maturity 3,218 70 - 3,288
Available for sale:
Government National Mortgage
Association participation certificates 1,898 12 6 1,904
Federal Home Loan Mortgage
Corporation participation certificates 3,665 13 8 3,670
Federal National Mortgage Association
participation certificates 1,007 - 28 979
Collateralized mortgage obligation -
FHLMC REMIC 121 2 - 123
Guardian Savings and Loan participation
certificates 694 - 10 684
Discovery Resort Limited, partnership notes 34 - - 34
------ --- --- ------
Total mortgage-backed securities
available for sale 7,419 27 52 7,394
------ --- --- ------
Total mortgage-backed securities $10,637 $ 97 $ 52 $10,682
====== === === ======
</TABLE>
33
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<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>
The amortized cost and estimated fair values of mortgage-backed securities
at September 30, 1999, 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 $ 34 $ 34
Due in five to ten years 954 979
Due after ten years 9,649 9,669
------ ------
$10,637 $10,682
====== ======
</TABLE>
34
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family $63,605 $54,237
Multi-family 392 320
Construction 12,215 9,831
Nonresidential real estate 3,406 3,897
Consumer and other loans 223 360
------ ------
79,841 68,645
Less:
Deferred loan origination fees (costs), net 16 (26)
Undisbursed portion of loans in process 6,528 4,134
Allowance for losses on loans 213 196
------ ------
$73,084 $64,341
====== ======
</TABLE>
The Association's lending efforts have historically focused on one- to
four-family residential real estate loans, which comprise approximately
$69.1 million, or 95%, of the total loan portfolio at September 30, 1999,
and approximately $59.9 million, or 93% of the total loan portfolio, at
September 30, 1998. 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 $290,000 and $263,000 at
September 30, 1999 and 1998, respectively.
From time to time, the Corporation has retained a director to perform legal
services. Fees paid for such services totaled approximately $16,000 in each
of the years ended September 30, 1999 and 1998 and $17,000 for the year
ended September 30, 1997.
35
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $196 $145 $ 193
Provision for losses on loans 12 42 12
Charge-offs - - (60)
Recoveries 5 9 -
--- --- ---
Balance at end of year $213 $196 $145
=== === ===
</TABLE>
As of September 30, 1999, 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, 1999, 1998 and 1997,
totaled $114,000, $115,000 and $2,000, respectively. There was no material
loss of interest income on nonperforming loans for the years ended September
30, 1999, 1998 and 1997.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 is comprised of the following:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Land $ 355 $ 355
Building and improvements 1,216 1,216
Furniture and equipment 1,028 990
----- -----
2,599 2,561
Less accumulated depreciation and
amortization 1,210 1,090
----- -----
$1,389 $1,471
===== =====
</TABLE>
36
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
Deposit type and weighted-
average interest rate 1999 1998
Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts
1999 - 1.50% $ 2,064 3.1%
1998 - 1.75% $ 1,824 2.8%
Passbook
1999 - 2.00% 10,869 16.4
1998 - 2.00% 10,433 15.8
Money market demand accounts
1999 - 2.19% 2,603 3.9
1998 - 2.19% 2,616 4.0
------ ----- ------ -----
Total demand, transaction and
passbook deposits 15,536 23.4 14,873 22.6
Certificates of deposit
Original maturities of:
Up to 12 months
1999 - 4.69% 11,085 16.8
1998 - 5.25% 12,507 19.0
Over 12 months to 94 months
1999 - 5.67% 39,567 59.7
1998 - 5.98% 38,291 58.2
Individual retirement accounts
1999 - 1.50% 88 .1
1998 - 1.50% 126 .2
------ ----- ------ -----
Total certificates of deposit 50,740 76.6 50,924 77.4
------ ----- ------ -----
Total deposit accounts $66,276 100.0% $65,797 100.0%
====== ===== ====== =====
</TABLE>
At September 30, 1999 and 1998, the Association had deposit accounts with
balances of $100,000 or more totaling $5.4 million and $5.9 million,
respectively.
Interest expense on deposits is summarized as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
NOW accounts $ 24 $ 22 $ 18
Passbook 216 217 241
Money market demand accounts 58 62 57
Certificates of deposit 2,865 2,918 2,727
----- ----- -----
$3,163 $3,219 $3,043
===== ===== =====
</TABLE>
37
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Up to one year $28,674 $29,268
Over one year to two years 12,562 14,383
Over two years to three years 5,144 3,310
Over three years to four years 3,750 1,413
Over four years to five years 593 2,218
Over five years 17 332
------ ------
$50,740 $50,924
====== ======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1999 and 1998, by pledges of certain residential mortgage loans totaling
$16.5 million and $6.0 million, respectively, and the Association's
investment in Federal Home Loan Bank stock, are summarized as follows:
<TABLE>
<CAPTION>
Maturing fiscal
Interest rate year ending in 1999 1998
(In thousands)
<S> <C> <C> <C>
5.69% - 5.90% 1999 $ - $4,000
5.39% - 5.57% 2000 11,000 -
------ -----
$11,000 $4,000
====== =====
Weighted-average interest rate 5.45% 5.74%
==== ====
</TABLE>
38
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE H - 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>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $379 $466 $422
Increase (decrease) in taxes resulting from:
Interest on municipal obligations (17) (12) (12)
Other (2) (1) 26
--- --- ---
Federal income taxes per consolidated
financial statements $360 $453 $436
=== === ===
Effective tax rate 32.3% 33.0% 35.1%
==== ==== ====
</TABLE>
The composition of the Corporation's net deferred tax liability at September
30 is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1999 1998
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Net deferred loan origination fees $ 81 $ 71
General loan loss allowance 72 67
Employee benefit plan expense 73 27
Other - 11
---- -----
Deferred tax assets 226 176
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (215) (194)
Difference between book and tax depreciation (121) (115)
Percentage of earnings bad debt deduction (189) (189)
Unrealized gains on securities designated as available for sale (374) (564)
Other (2) -
---- -----
Deferred tax liabilities (901) (1,062)
---- -----
Net deferred tax liability $(675) $ (886)
==== =====
</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, 1999, 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, 1999. 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 amortize the recapture of its bad debt reserve over a six
year period, commencing in fiscal 1999.
39
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE I - 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, 1999, the Association had outstanding commitments of
approximately $1.4 million to originate loans. Additionally, the Association
had undisbursed loans in process of $6.5 million at September 30, 1999. In
the opinion of management, all loan commitments equaled or exceeded
prevalent market interest rates as of September 30, 1999, and will be funded
from normal cash flow from operations.
NOTE J - 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 stockholders' 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) generally equal to 4.0% of adjusted total assets except for those
associations with the highest examination rating and acceptable levels of
risk.
40
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE J - REGULATORY CAPITAL (continued)
The risk-based capital requirement provides for the maintenance of adjusted
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, 1999 and 1998, management believes that the Association
met all capital adequacy requirements to which it was subject. The major
cause of changes in capital and ratios presented below is the declaration of
dividends of $3.8 million from the Association to the Corporation during
fiscal 1999.
<TABLE>
<CAPTION>
As of September 30, 1999
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 $8,160 8.9% =>$1,370 =>1.5% =>$4,568 => 5.0%
Core capital $8,160 8.9% =>$3,655 =>4.0% =>$5,482 => 6.0%
Risk-based capital $8,881 19.3% =>$3,673 =>8.0% =>$4,591 =>10.0%
</TABLE>
<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>
41
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE J - 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 area, could adversely affect future
earnings and, consequently, the ability to meet future minimum regulatory
capital requirements.
NOTE K - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of Peoples Financial Corporation as of September 30, 1999 and 1998,
and the results of its operations and its cash flows for the years ended
September 30, 1999, 1998 and 1997.
Peoples Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $1,145 $ -
Interest-bearing deposits in other financial institutions 13 205
Loan receivable from ESOP - 336
Investment in Peoples Federal Savings and Loan Association
of Massillon 8,889 12,042
Prepaid expenses and other assets 66 70
Accounts receivable from Peoples Federal Savings and Loan
Association of Massillon 4,097 2,405
------ ------
Total assets $14,210 $15,058
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 9 $ 25
Shareholders' equity
Additional paid-in capital 7,360 7,287
Unrealized gains on securities designated as available
for sale, net of related tax effects 729 1,095
Retained earnings 9,874 9,927
Shares acquired by stock benefit plans (625) (1,097)
Treasury shares (3,137) (2,179)
------ ------
Total shareholders' equity 14,201 15,033
------ ------
Total liabilities and shareholders' equity $14,210 $15,058
====== ======
</TABLE>
42
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE K - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION
(continued)
Peoples Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands)
1999 1998 1997
<S> <C> <C> <C>
Revenue
Interest income $ 46 $ 54 $ 437
Other income - - 4
Equity in earnings of subsidiary 805 997 664
--- ----- -----
Total revenue 851 1,051 1,105
Interest expense - 19 20
General and administrative expenses 123 154 198
--- ----- -----
Earnings before income taxes (credits) 728 878 887
Federal income taxes (credits) (26) (40) 81
--- ----- -----
NET EARNINGS $754 $ 918 $ 806
=== ===== =====
</TABLE>
43
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE K - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION
(continued)
Peoples Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
1999 1998 1997
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $ 754 $ 918 $ 806
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Undistributed earnings of consolidated subsidiary (805) (997) (809)
Amortization of expense related to stock benefit plans 147 147 145
Gain on sale of securities designated as available for sale - - (4)
Increases (decreases) in cash due to changes in:
Other assets 4 330 (362)
Other liabilities (16) (65) 1
Other - - (530)
----- ----- -----
Net cash provided by (used in) operating activities 84 333 (753)
Cash flows provided by (used in) investing activities:
Purchase of securities available for sale - - (3,020)
Dividends received from subsidiary 2,108 4,090 -
Maturities of investment securities - - 3,502
Proceeds from sale of securities designated as available
for sale - - 4,293
Repayments on ESOP loan 336 161 100
----- ----- -----
Net cash provided by investment activities 2,444 4,251 4,875
Cash flows provided by (used in) financing activities:
Proceeds from (repayment of) note payable - (3,000) 3,000
Return of capital distribution - - (7,083)
Dividends on common stock (807) (770) (482)
Purchase of shares for stock benefit plan - - (919)
Purchase of treasury stock (768) (995) (1,285)
Proceeds from exercise of stock options - 76 -
----- ----- -----
Net cash used in financing activities (1,575) (4,689) (6,769)
----- ----- -----
Net increase (decrease) in cash and cash equivalents 953 (105) (2,647)
Cash and cash equivalents at beginning of year 205 310 2,957
----- ----- -----
Cash and cash equivalents at end of year $1,158 $ 205 $ 310
===== ===== =====
</TABLE>
44
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE L - 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. The
Corporation granted options to purchase 37,275 shares to members of the
Board of Directors and 67,096 shares to certain employees at an exercise
price of $16.00 per share. In order to give effect to a return of capital
distribution paid in fiscal 1997, the number of shares granted under option
and the exercise price were adjusted in fiscal 1998 to 134,427 and $12.41
per share, respectively.
The Corporation accounts for the stock option plan in accordance with 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 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 APB 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>
1999 1998 1997
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported $754 $918 $806
=== === ===
Pro-forma $752 $917 $767
=== === ===
Earnings per share
Basic As reported $.60 $.68 $.57
=== === ===
Pro-forma $.59 $.68 $.54
=== === ===
Diluted As reported $.60 $.67 $.57
=== === ===
Pro-forma $.59 $.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
assumptions used for grants in fiscal 1999, 1998 and 1997; dividend yield of
1.7% and expected volatility of 12.0%; risk-free interest rate of 6.5% and
expected life of ten years.
45
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE L - STOCK OPTION PLAN (continued)
A summary of the status of the Corporation's stock option plan as of
September 30, 1999, 1998 and 1997, and changes during the years then ended,
is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 131,262 $12.50 104,371 $16.00 - $ -
Adjustment for return of capital
distribution - - 30,056 (3.59) - -
Granted 5,761 9.69 3,000 16.44 104,371 16.00
Exercised - - (6,165) 12.41 - -
Forfeited (5,601) 12.41 - - - -
------- ----- ------- ----- ------- -----
Outstanding at end of year 131,422 $12.38 131,262 $12.50 104,371 $16.00
======= ===== ======= ===== ======= =====
Options exercisable at year-end 46,053 $12.46 20,716 $12.41 - $ -
======= ===== ======= ===== ======= =====
Weighted-average fair value of
options granted during the year $ 3.41 $ 1.96 $ 4.76
===== ===== =====
</TABLE>
The following information applies to options outstanding at September 30,
1999:
Number outstanding 131,422
Exercise price $9.69 - $16.44
Weighted-average exercise price $12.38
Weighted-average remaining contractual life 7.6 years
46
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We have issued our report dated November 9, 1999, 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,
1999. We hereby consent to the incorporation by reference of said report in the
Registration Statement of Peoples Financial Corporation on Form S-8.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
December 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 157
<INT-BEARING-DEPOSITS> 2,463
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,544
<INVESTMENTS-CARRYING> 5,174
<INVESTMENTS-MARKET> 5,288
<LOANS> 73,084
<ALLOWANCE> 213
<TOTAL-ASSETS> 92,437
<DEPOSITS> 66,276
<SHORT-TERM> 0
<LIABILITIES-OTHER> 960
<LONG-TERM> 11,000
0
0
<COMMON> 0
<OTHER-SE> 14,201
<TOTAL-LIABILITIES-AND-EQUITY> 92,437
<INTEREST-LOAN> 5,239
<INTEREST-INVEST> 912
<INTEREST-OTHER> 108
<INTEREST-TOTAL> 6,259
<INTEREST-DEPOSIT> 3,163
<INTEREST-EXPENSE> 3,505
<INTEREST-INCOME-NET> 2,754
<LOAN-LOSSES> 12
<SECURITIES-GAINS> 518
<EXPENSE-OTHER> 2,197
<INCOME-PRETAX> 1,114
<INCOME-PRE-EXTRAORDINARY> 754
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 754
<EPS-BASIC> .60
<EPS-DILUTED> .60
<YIELD-ACTUAL> 3.16
<LOANS-NON> 99
<LOANS-PAST> 15
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 196
<CHARGE-OFFS> 0
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 213
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 213
</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 1999 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.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including PFC, to continue to engage in all activities
that they were permitted to engage in prior to the enactment of the Act. Such
activities are essentially unlimited, provided that the thrift subsidiary
remains a qualified thrift lender. Any thrift holding company formed after May
4, 1999, will be subject to the same restrictions as a multiple thrift holding
company. In addition, a unitary thrift holding company in existence on May 4,
1999, may be sold only to a financial holding company engaged in activities
permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities
in which PFC and Peoples Federal currently engage, except to the extent that
competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
