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, 2000
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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
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(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
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(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
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Securities registered pursuant to Section 12(g) of
the Exchange Act:
Common Shares, without par value
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(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, 2000, were
$7.6 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 15, 2000, was $5.72 million.
1,234,085 of the issuer's common shares were issued and outstanding on
December 15, 2000.
<PAGE>
Documents Incorporated by Reference
The following sections of Peoples Financial Corporation's 2000 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 2001
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.
Transitional Small Business Disclosure Format [ ] Yes [ X ] No
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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. In July 2000, Peoples
Federal opened a full-service in-store branch inside a new Wal-Mart Supercenter,
also located in Massillon. 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,
----------------------------------------------------------
2000 1999
---------------------- ----------------------
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) $73,042 80.74% $62,062 77.73%
Home equity (secured by mortgages) 1,759 1.94 1,543 1.93
Multifamily 313 .35 392 .49
Nonresidential real estate loans 3,655 4.04 3,406 4.27
Construction loans 11,482 12.69 12,215 15.30
------ ------ ------ ------
Total real estate loans 90,251 99.76 79,618 99.72
Consumer loans:
Loans on deposits 104 .12 124 .16
Other consumer loans 113 .12 99 .12
------ ------ --------- ------
Total consumer loans 217 .24 223 .28
------ ------ -------- ------
Total loans 90,468 100.00% 79,841 100.00%
====== ======
Other items:
Deferred loan origination fees (61) (16)
Loans in process (5,338) (6,528)
Allowance for loan losses (235) (213)
------ ------
Net loans $84,834 $73,084
====== ======
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information as of September 30, 2000, 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
2001 2002 2003 9/30/00 9/30/00 9/30/00 9/30/00 Total
---- ---- ---- ------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family
(first mortgage) $13,805 $2,651 $2,616 $5,336 $13,996 $22,933 $23,187 $84,524
Home equity (first and
second mortgage) 129 143 152 302 774 259 - 1,759
Multifamily - - - - - - 313 313
Nonresidential - 19 488 257 942 1,910 39 3,655
Consumer loans 89 64 43 21 - - - 217
------ ----- ----- ----- ------ ------ ------ ------
Total loans $14,023 $2,877 $3,249 $5,916 $15,712 $25,102 $23,539 $90,468
====== ===== ===== ===== ====== ====== ====== ======
</TABLE>
Of the loans due more than one year after September 30, 2000, loans
with aggregate balances of $62.4 million have fixed rates of interest, and loans
with aggregate balances of $14.0 million have adjustable interest rates.
One- to Four-Family Residential Real Estate Loans. The primary lending
activity of Peoples Federal has been the origination of permanent conventional
loans secured by one- to four-family residences, primarily single-family
residences, located within Peoples Federal's designated lending area. Peoples
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<PAGE>
Federal also originates loans for the construction of one- to four-family
residences, home equity loans and home equity lines of credit 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 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
5 years or 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 $74.8 million at September 30, 2000, and represented 82.7% of
loans at such date. The largest individual loan balance on a one- to four-family
loan at such date was $479,812. At such date, two loans secured by one- to
four-family residential real estate in the amount of $216,000 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. 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, 2000, one- to four-family
mortgage loans included $480,000, or .5% 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 of 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 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.
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<PAGE>
Multifamily lending is generally considered to involve a higher degree
of risk because the loan amounts are larger and the borrower typically depends
upon income generated by the project to cover operating expenses and debt
service. The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower.
Peoples Federal attempts to reduce the risk associated with multifamily lending
by evaluating the creditworthiness of the borrower and the projected income from
the project and by obtaining personal guarantees on loans made to corporations
and partnerships. Peoples Federal currently requires that borrowers agree to
submit financial statements, rent rolls and tax returns annually to enable
Peoples Federal to monitor the loans.
At September 30, 2000, loans secured by multifamily properties totaled
approximately $313,000, 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. These construction speculation loans
generally have a term of 24 months and are originated only with fixed rates of
interest. Other types of construction loans may be originated with adjustable
rates of interest based on the same indices, with the same margins over the
index and the same adjustment terms as Peoples Federal offers on one- to
four-family residential real estate loans. Construction loans to developers are
repaid when the property is sold. Construction loans to homeowners are converted
to residential real estate loans when construction is completed.
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, 2000, a total of $11.5 million, or approximately 12.7%
of Peoples Federal's total loans, consisted of construction loans. Of such
total, $4.0 million consisted of loans to developers who did not have a
purchaser at the time the loan was originated. 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, 2000, 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
loans may be originated with fixed rates of interest or adjustable rates based
on the same indices, with the same margins over the index and the same
adjustment terms as Peoples Federal offers on one- to four-family residential
real estate loans.
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.
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<PAGE>
At September 30, 2000, Peoples Federal had a total of $3.7 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 4.0% of Peoples Federal's total loans at such date. At
such date, Peoples Federal had no delinquent nonresidential real estate loans.
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its tangible capital. At September 30,
2000, Peoples Federal's nonresidential mortgage loans totaled 40.6% of Peoples
Federal's tangible capital.
Consumer Loans. Peoples Federal makes various types of consumer loans,
including unsecured loans and loans secured by deposits. Such loans are made
only at fixed rates of interest for terms of up to five years. Peoples Federal
has been attempting to increase its consumer loan portfolio as part of its
interest rate risk management efforts and because a higher rate of interest is
received on consumer loans.
Consumer loans may entail greater credit risk than do residential
mortgage loans. The risk of default on consumer loans increases during periods
of recession, high unemployment and other adverse economic conditions. Although
Peoples Federal has not had significant delinquencies on consumer loans, no
assurance can be provided that delinquencies will not increase.
At September 30, 2000, Peoples Federal had approximately $217,000, or
less than one percent of its total loans, invested in consumer loans. At such
date, five 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.
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<PAGE>
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Peoples Federal's loans carry no pre-payment penalties but do provide
that the entire balance of the loan is due upon sale of the property securing
the loan. Peoples Federal generally enforces such due-on-sale provisions.
Loan Originations, Purchases and Sales. Peoples Federal originated only
fixed-rate loans until July 1995. Peoples Federal has never sold loans but
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,
-----------------------------
2000 1999
------- -------
(In thousands)
<S> <C> <C>
Loans originated:
One- to four-family residential (1) $27,781 $29,980
Multifamily residential - -
Nonresidential 560 34
Consumer 359 109
------ ------
Total loans originated 28,700 30,123
------ ------
Reductions:
Principal repayments (16,984) (21,389)
Increase in other items, net (2) 34 9
------ ------
Net increase $11,750 $ 8,743
====== ======
</TABLE>
-----------------------------
(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
$1.4 million to one borrower at September 30, 2000. The largest amount Peoples
Federal had outstanding to one borrower at September 30, 2000, was $1.4 million,
consisting of seven loans. Such loans were secured by three single-family
residences and five nonresidential properties. All of such loans were current at
September 30, 2000.
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.
-8-
<PAGE>
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, 2000.
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,
---------------------------------------------------------------------------------
2000 1999
------------------------------------ ------------------------------------
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 3 $ 62 .07% 4 $403 .51%
60 - 89 days - - - 2 18 .02
90 days and over 7 223 .25 8 114 .14
--- --- --- --- --- ---
Total delinquent loans 10 $285 .32% 14 $535 .67%
== === === == === ===
</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,
-----------------------------------
2000 1999
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $192 $ 92
Nonresidential - -
Consumer 7 7
--- ---
Total nonaccruing loans 199 99
Accruing loans contractually past due 90 days or more:
Real estate:
Residential 24 15
Nonresidential - -
Consumer - -
--- ---
Total accruing loans contractually past
due 90 days or more 24 15
--- ---
Total nonperforming loans $223 $114
=== ===
Total loan loss allowance $235 $213
=== ===
Total nonperforming assets as
a percentage of total assets .22% .12%
=== ===
Loan loss allowance as a percent
of nonperforming loans 105% 187%
=== ===
</TABLE>
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<PAGE>
For the year ended September 30, 2000, gross interest income which
would have been recorded had non-accruing loans been current in accordance with
their original terms was $7,000. During the year ended September 30, 2000,
interest which would have been recorded on nonaccruing loans increased by
$4,000. During the periods shown, Peoples Federal had no restructured loans
within the meaning of Statement of Financial Accounting Standards ("SFAS") No.
15. There are no loans which are not currently classified as nonaccrual, more
than 90 days past due or restructured but which may be so classified in the near
future because management has concerns as to the ability of the borrowers to
comply with repayment terms.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. "Doubtful" assets
have the same weaknesses as "substandard" assets, with the additional
characteristics that (i) the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions and values questionable and
(ii) there is a high possibility of loss. An asset classified "loss" is
considered uncollectible and of such little value that its continuance as an
asset of the institution is not warranted. The regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving management's
close attention.
Generally, Peoples Federal classifies as "substandard" all loans that
are delinquent more than 90 days, unless management believes the delinquency
status is short term due to unusual circumstances. Loans delinquent fewer than
90 days may also be classified if the loans have the characteristics described
above rendering classification appropriate.
No mortgage loans and five consumer loans in Peoples Federal's
portfolio were classified as substandard at September 30, 2000.
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,
--------------------------------
2000 1999
-------- --------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $213 $196
Charge-offs - -
Recoveries 10 5
Provision for loan losses (charged to operations) 12 12
--- ---
Balance at end of period $235 $213
=== ===
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 .26% .27%
</TABLE>
At September 30, 2000, $30,000 of the allowance for loan losses was
allocated to nonresidential loans and $205,000 was allocated to residential
loans. 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.
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 $566,000 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 second such security was repaid during the year ended September 30,
2000.
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 Peoples Federal's CMOs, except one, are issued by and guaranteed by FNMA and
FHLMC. None of Peoples Federal's CMOs are considered "high risk" under OTS
pronouncements.
Peoples Federal has purchased a privately issued CMO issued by General
Motors Acceptance Corporation ("GMAC"). The GMAC security carries an investment
grade rating and is backed by a diversified pool of fixed-rate mortgage loans
with first liens on primarily multifamily residential, retail, commercial and
-11-
<PAGE>
industrial real estate properties. The GMAC security is carried at a market
value of $1.1 million as of September 30, 2000. Peoples Federal is receiving, on
a timely basis, the anticipated monthly interest payments related to the
investments from the issuer's trustee. Principal payments are expected to be
received in full by December 2007, the legal final maturity date.
The risks of privately issued mortgage-backed and related 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. Peoples Federal is receiving timely payments on both
privately issued securities. Neither of the privately issued securities are
guaranteed.
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, 2000, $5.0 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
---------------------------------
2000 1999
--------- --------
(In thousands)
<S> <C> <C>
FNMA certificates $1,479 $ 1,659
GNMA certificates 2,976 3,568
FHLMC certificates 3,191 4,544
Guardian Savings and Loan certificate 566 684
Discovery Resort Limited Partnership Notes - 34
Collateralized mortgage obligations -
GMAC 1,060 -
FHLMC REMIC 96 123
----- ------
Total mortgage-backed and related securities $9,368 $10,612
===== ======
</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, 2000. 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, 2000
------------------------------------------------------------------------------------------------------------
After one to Total mortgage-backed and related
One year or less five years After five to ten After ten years securities portfolio
----------------- ----------------- ----------------- ------------------ ------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
value yield value yield value yield value yield value value yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA certificates $ - -% $ - - % $ 285 8.48% $1,194 6.91% $1,479 $1,494 7.08%
GNMA certificates - - - - - - 2,976 6.95 2,976 2,988 6.95
FHLMC certificates - - 85 8.14 382 7.95 2,724 6.87 3,191 3,202 6.94
Guardian Savings and
Loan certificate - - - - - - 566 6.52 566 566 6.52
GMAC CMO - - - - 1,060 8.04 - - 1,060 1,060 8.04
FHLMC REMICs - - - - - - 96 7.47 96 96 7.47
--- -- -- ---- ----- ---- ----- ---- ----- ----- ----
Total $ - -% $85 8.14% $1,727 8.09% $7,556 6.89% $9,368 $9,406 7.12%
=== == == ==== ===== ==== ===== ==== ===== ===== ====
</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 1999 and 2000 were recorded as a recovery to the
allowance for loan losses. Final collections on these certificates were made
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,
-------------------------------------------------------------------------------------
2000 1999
-------------------------------------------- ---------------------------------------
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:
FHLB and FHLMC stock 1,511 61.50 1,511 60.56 2,074 51.47 2,074 50.90
Municipal securities 946 38.50 984 39.44 956 23.72 1,000 24.55
----- ------ ----- ------ ----- ------ ----- ------
Total interest-bearing deposits
and investment securities $2,457 100.00% $2,495 100.00% $4,030 100.00% $4,074 100.00%
===== ====== ===== ====== ===== ====== ===== ======
</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,
2000.
<TABLE>
<CAPTION>
At September 30, 2000
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:
FHLB and FHLMC stock $1,511 5.38% $ - - % $ - - %
Municipal securities 87 6.28 191 5.88 668 6.13
----- ---- --- ---- --- ----
Total $1,598 5.43% $191 5.88% $668 6.13%
===== ==== === ==== === ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 2000
--------------------------------------------------------------
Average Weighted
life Carrying Market average
in years value value yield
-------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities:
FHLB and FHLMC stock - $1,511 $1,511 5.38%
Municipal securities 4.82 946 984 6.09
---- ----- ----- ----
Total 4.82 $2,457 $2,495 5.65%
==== ===== ===== ====
</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. FHLB advances
have become a substantial source of funds on which Peoples Federal relies.
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, 2000, Peoples Federal's certificates of deposit
totaled $54.6 million, or 77% of total deposits. Of such amount, approximately
$28.8 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,
-----------------------------------------------------------
2000 1999
-------------------------- --------------------------
Percent Percent
of total of total
Amount deposits Amount deposits
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
--------------------
NOW accounts (1) $2,865 4.05% $ 2,064 3.11%
Money market accounts (2) 3,072 4.34 2,603 3.93
Passbook savings accounts (3) 10,189 14.40 10,869 16.40
------ ------ ------ ------
Total transaction accounts 16,126 22.79 15,536 23.44
Certificates of deposit:
-----------------------
2.01 - 4.00% 661 .93 1,268 1.91
4.01 - 6.00% 23,564 33.30 40,699 61.41
6.01 - 8.00% 30,407 42.97 8,773 13.24
------ ------ ------ ------
Total certificates of deposit 54,632 77.21 50,740 76.56
------ ------ ------ ------
Total deposits $70,758 100.00% $66,276 100.00%
====== ====== ====== ======
</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 .48% and 1.29% at September 30, 2000 and
1999, 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 3.98% and 2.19% at
September 30, 2000 and 1999, respectively.
(3) Peoples Federal's weighted average rate on passbook savings accounts
fluctuates with the general movement of interest rates. The weighted
average rate on passbook accounts was 2.00% at September 30, 2000 and 1999.
The following table shows rate and maturity information for Peoples
Federal's certificates of deposit as of September 30, 2000:
<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% $ 651 $ 10 $ - $ - $ 661
4.01 - 6.00 18,094 1,861 2,893 716 23,564
Over 6.01 10,025 13,321 3,490 3,571 30,407
------ ------ ----- ----- ------
Total certificates
of deposit $28,770 $15,192 $6,383 $4,287 $54,632
====== ====== ===== ===== ======
</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, 2000:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $2,439
Over 3 months to 6 months 1,726
Over 6 months to 12 months 486
Over 12 months 3,174
-----
Total $7,825
=====
</TABLE>
The following table sets forth Peoples Federal's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------
2000 1999
-------- --------
(Dollars in thousands)
<S> <C> <C>
Beginning balance $66,276 $65,797
Deposits 68,497 56,363
Withdrawals (66,747) (58,380)
------ ------
Net increase (decrease) before interest credited 1,750 (2,017)
Interest credited 2,732 2,496
------ ------
Ending balance $70,758 $66,276
====== ======
Net increase $ 4,482 $ 479
====== ======
Percent increase 6.76% .73%
==== ===
</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, 2000, 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,
------------------------------
2000 1999
--------- --------
(Dollars in thousands)
<S> <C> <C>
FHLB advances $18,650 $11,000
Weighted average interest rate of FHLB
advances 6.92% 5.45%
</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,
2000 1999
(Dollars in thousands)
<S> <C> <C>
Maximum balance $19,500 $12,000
Average balance 15,950 6,917
Weighted average interest rate 6.25% 4.94%
</TABLE>
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 2.31%
for the year ended September 30, 2000, from 2.43% for the year ended September
30, 1999. The spread for the year ended September 30, 1999, decreased from 2.53%
for the year ended September 30, 1998.
The yield on interest-earning assets increased to 7.40% for the year
ended September 30, 2000, from 7.19% for the year ended September 30, 1999, as
the loans receivable average balance increased, with a small decrease in average
rate and the average rates on investments and mortgage-backed securities
increased. The cost of funds to Peoples Federal increased to 5.09% for the year
ended September 30, 2000, from 4.76% for the year ended September 30, 1999, due
primarily to higher rates and higher average balances on certificates of deposit
and FHLB advances.
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.
-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,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Weighted average yield on loan portfolio 7.56% 7.47%
Weighted average yield on mortgage-backed and related securities 7.12 6.44
Weighted average yield on investment securities 5.63 4.71
Weighted average yield on interest-bearing deposits 5.33 4.29
Weighted average yield on all interest-earning assets 7.44 7.14
Weighted average yield on deposits 5.38 4.78
Weighted average yield on borrowings 6.92 5.45
Weighted average yield paid on all interest-bearing liabilities 5.71 4.88
---- ----
Interest rate spread (spread between weighted average interest rate
on all interest-bearing assets and all interest-bearing liabilities) 1.73% 2.26%
==== ====
</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, an inactive corporation.
Personnel
As of September 30, 2000, Peoples Federal had 26 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 $235,000 at September 30, 2000.
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 must measure the effect of an immediate 200 basis point change in
interest rates on the value of its portfolio as determined under the methodology
of the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
such excess exposure from its total capital when determining its risk-based
capital. In general, an association with less than $300 million in assets and a
risk-based capital ratio in excess of 12% is not subject to the interest rate
risk component.
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<PAGE>
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, 2000, 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 balance of liquid assets (such as cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations). At September 30, 2000, such minimum requirement was an
amount equal to a daily average of not less than 4% of its net withdrawable
savings deposits plus borrowings payable in one year or less computed as of the
end of the prior quarter or based on the average daily balance during the prior
quarter. Monetary penalties may be imposed upon associations failing to meet the
liquidity requirement. The eligible liquidity of Peoples Federal at September
30, 2000, was approximately $10.4 million, or 12.3%.
Qualified Thrift Lender Test. Savings associations must meet one of two
tests in order to be a qualified thrift lender ("QTL"). The first test requires
a savings association to maintain a specified level of investments in assets
that are designated as qualifying thrift investments ("QTIs"). Generally, QTIs
are assets related to domestic residential real estate and manufactured housing,
although they also include credit card, student and small business loans and
stock issued by any FHLB, the FHLMC or the FNMA. Under the QTL 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. The
second test permits a savings association to 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 its 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 tests under certain circumstances. If a savings
association fails to meet one of the QTL tests, the association and its holding
company become subject to certain operating and regulatory restrictions and the
savings association will not be eligible for new FHLB advances. At September 30,
2000, Peoples Federal was a QTL.
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, 2000.
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<PAGE>
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, 2000.
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
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, 2000, 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.
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<PAGE>
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.
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.
Federal Reserve Requirements
Effective December 21, 2000, FRB regulations require savings
associations to maintain reserves of 3% of net transaction accounts (primarily
NOW accounts) up to $42.8 million (subject to an exemption of up to $5.5
million), and of 10% of net transaction accounts in excess of $42.8 million. At
September 30, 2000, 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 $993,000 at
September 30, 2000.
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, 2000, Peoples
Federal's maximum limit on advances was approximately $19.9 million and Peoples
Federal had advances totaling $18.7 million. The granting of advances is also
subject to the FHLB's collateral and credit underwriting guidelines.
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<PAGE>
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.
Each 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, 2000 is $41,000,
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, 2000, is $7.1 million, and, as a result,
Peoples Federal does not qualify as a small corporation exempt from the
alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as Peoples Federal, were allowed deductions for bad debts
under methods more favorable than those granted to other taxpayers. Qualified
thrift institutions could compute deductions for bad debts using either the
specific charge-off method of Section 166 of the Code or one of two reserve
methods of Section 593 of the Code. The reserve methods under Section 593 of the
Code permitted a thrift institution annually to elect to deduct bad debts under
either (i) the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the "experience" method, a thrift
institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 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.
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<PAGE>
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, 2000, the pre-1988 reserves of
Peoples Federal for tax purposes totaled approximately $1.8 million. Peoples
Federal believes it had approximately $4.3 million of accumulated earnings and
profits for tax purposes as of September 30, 2000, which would be available for
dividend distributions, provided regulatory restrictions applicable to the
payment of dividends are met. No representation can be made as to whether
Peoples Federal will have current or accumulated earnings and profits in
subsequent years.
The tax returns of Peoples Federal have been audited or closed without
audit through fiscal year 1996. 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
8.5% 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.
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<PAGE>
Peoples Federal is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.3% for tax
year 2000 and after of the taxable book net worth of Peoples Federal determined
in accordance with generally accepted accounting principles. For tax years 1999
and 1998 and prior the franchise tax on financial institutions was computed as
1.4% and 1.5%, respectively, 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,
2000, 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
-------- --------- -------- ------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Main Office:
211 Lincoln Way East
Massillon, Ohio 44646 Owned 1958 7,200 $974 $51,992
Branch Offices:
2312 Lincoln Way N.W.
Massillon, Ohio 44647 Owned 1978 1,400 $307 $18,271
One Massillon Marketplace Drive S.W.
Massillon, Ohio 44646 Leased(2) 2000 - $287 $495
Lending Office:
4344 Metro Circle, N.W.
North Canton, Ohio 44720 Leased(3) N/A - $ 20 N/A
</TABLE>
-----------------------------
(1) At September 30, 2000, Peoples Federal's office premises and equipment had
a total net book value of $1.6 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 five years, expiring in 2005, with two five-year
option renewals.
(3) The lease is for a term of three years, expiring in 2002, with a three-year
renewal option.
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.
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<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
There were 1,234,085 common shares of PFC outstanding on December 4,
2000, held of record by approximately 364 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, 1999 and September 30, 2000, are set forth below.
Such amounts do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
09/00 06/00 03/00 12/99 09/99 06/99 03/99 12/98
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividends Declared $ 0.120 $0.120 $0.115 $ 3.160 $ 0.160 $ 0.160 $ 0.150 $ 0.150
High Bid During Quarter 5.906 6.500 8.000 11.000 10.000 10.125 10.875 12.000
Low Bid During Quarter 5.125 5.000 5.125 6.250 9.438 8.750 8.000 9.500
</TABLE>
---------------------------
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
2000 Annual Report to Shareholders ("Annual Report"), Management's Discussion
and Analysis of which is included in Exhibit 13 as attached hereto.
Item 7. Financial Statements
The financial statements required herein are incorporated by reference
from the Annual Report, the financial statements of which are included in
Exhibit 13 attached hereto.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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<PAGE>
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 2001
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.
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<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (incorporated by reference)
3.2 Code of Regulations (incorporated by reference)
10.1 Employment Agreement with Mr. Paul von Gunten
10.2 Employment Agreement with Mr. Alan Edie
10.3 Employment Agreement with Mr. James Rinehart
10.4 Peoples Financial Corporation 1997 Stock Option and
Incentive Plan (incorporated by reference)
10.5 Peoples Financial Corporation Recognition and Retention
Plan and Trust Agreement (incorporated by reference)
13 Portions of 2000 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 2001 Annual Meeting of Shareholders
(incorporated by reference)
99.2 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
(b) No reports on Form 8-K were filed during the last quarter of
the fiscal year ended September 30, 2000.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PEOPLES FINANCIAL CORPORATION
By/s/Paul von Gunten
---------------------------------
Paul von Gunten
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By /s/ Paul von Gunten By /s/ James R. Rinehart
-------------------------- --------------------------------
Paul von Gunten James R. Rinehart
President and Director Treasurer
(Principal Financial Officer)
Date: December 28, 2000 Date: December 28, 2000
By /s/ Victor C. Baker By /s/ James P. Bordner
-------------------------- --------------------------------
Victor C. Baker James P. Bordner
Director Director
Date: December 28, 2000 Date: December 28, 2000
By /s/ Alan C. Edie By /s/ Thomas E. Shelt
-------------------------- --------------------------------
Alan C. Edie Vincent G. Matecheck
Director Secretary and Director
Date: December 28, 2000 Date: December 28, 2000
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, 2000 Date: December 28, 2000
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<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
10.2 Employment Agreement with Mr. Edie
10.3 Employment Agreement with Mr. Rinehart
10.4 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.
10.5 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 2000 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 2001 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>
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