Prospectus
[LOGO]
PEOPLES-SIDNEY FINANCIAL CORPORATION
(Proposed Holding Company for Peoples Federal Savings and Loan Association)
$10.00 Per Share
1,552,500 Shares of Common Stock
(Anticipated Maximum)
Peoples-Sidney Financial Corporation (the "Holding Company") is offering up
to 1,552,500 shares of common stock, par value $0.01 per share (the "Common
Stock"), in connection with the conversion of Peoples Federal Savings and Loan
Association of Sidney, Sidney, Ohio ("Peoples Federal" or the "Association")
from a federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association and the issuance of all of Peoples
Federal's outstanding stock to the Holding Company (the "Conversion"). Pursuant
to the Association's plan of conversion (the "Plan of Conversion" or the
"Plan"), non-transferable rights to subscribe for the Common Stock
("Subscription Rights") have been given, in order or priority, to (i) Peoples
Federal's depositors as of October 31, 1995 ("Eligible Account Holders"), (ii)
tax-qualified employee plans of Peoples Federal and the Holding Company
("Tax-Qualified Employee Plans"), including the Holding Company's Employee Stock
Ownership Plan (the "ESOP"), provided, however, that the Tax-Qualified Employee
Plans shall have first priority Subscription Rights to the extent that the total
number of shares of Common Stock sold in the Conversion exceeds the maximum of
the Estimated Valuation Range as defined below, (iii) Peoples Federal's
depositors as of December 31, 1996 ("Supplemental Eligible Account Holders"),
(iv) depositors as of March 10, 1997 ("Other Members"), and (v) its employees,
officers and directors (the "Subscription Offering").
(continued on next page)
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FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK
INFORMATION CENTER AT (___) ___-____.
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FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED,
SEE "RISK FACTORS" AT PAGE 13
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES REGULATOR, THE OFFICE OF THRIFT
SUPERVISION OR THE FEDERAL DEPOSIT INSURANCE CORPORATION, NOR HAS SUCH
COMMISSION, REGULATOR, OFFICE OR CORPORATION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE. THE SHARES OF COMMON STOCK OFFERED
HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
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<TABLE>
<CAPTION>
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Estimated Underwriting Fees
Commissions and Other Estimated Net
Purchase Price(1) Expenses(2) Conversion Proceeds(3)
<S> <C> <C> <C>
Per Share(4)................................. $10.00 $0.38 $9.62
Minimum Total................................ $11,475,000 $490,000 $10,985,000
Midpoint Total............................... $13,500,000 $518,000 $12,982,000
Maximum Total................................ $15,525,000 $546,000 $14,979,000
Maximum Total, As Adjusted(5)................ $17,853,750 $578,000 $17,275,750
====================================================================================================================================
</TABLE>
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(1) Determined on the basis of an appraisal prepared by Keller & Company, Inc..
("Keller") dated March 4, 1997, which states that the estimated pro forma
market value of the Common Stock ranged from $11.5 million to $15.5 million
or between 1,147,500 shares and 1,552,500 shares, of Common Stock at $10.00
per share. See "The Conversion - Stock Pricing and Number of Shares to be
Issued."
(2) Consists of the estimated costs to the Association and the Holding Company
arising from the Conversion, including the payment to Charles Webb &
Company, a Division of Keefe, Bruyette & Woods, Inc. ("Webb") of a
management fee and estimated expenses of $35,000 and estimated sales
commissions ranging from $132,180 (at the minimum) to $188,070 (at the
maximum) in connection with the sale of shares in the Offering. Such fees
may be deemed to be underwriting fees. See "Use of Proceeds" and "Pro Forma
Data" for the assumptions used to arrive at these estimates. The Holding
Company has agreed to indemnify Webb against certain liabilities, including
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). See "The Conversion - Marketing Arrangements" for a more
detailed description of underwriting fees and expenses.
(3) Net Conversion proceeds may vary from the estimated amounts, depending on
the number of shares issued and the number of shares sold subject to
commissions. The actual number of shares of Common Stock to be issued in the
Conversion will not be determined until after the close of the Offering.
(4) Assumes the sale of the midpoint number of shares. If the minimum, maximum
or 15% above the maximum number of shares are sold, estimated expenses per
share would be $0.43, $0.35 or $0.32, respectively, resulting in estimated
net Conversion proceeds per share of $9.57, $9.65 or $9.68, respectively.
(5) As adjusted to give effect to the sale of up to an additional 232,875 shares
(15% above the maximum of the Estimated Valuation Range) which may be
offered in the Conversion without the resolicitation of subscribers or any
right of cancellation, to reflect changes in market and financial conditions
following the commencement of the Offering. See "Pro Forma Data," and "The
Conversion - Stock Pricing and Number of Shares to be Issued."
CHARLES WEBB & COMPANY
A Division of Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is March 14, 1997
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(continued from prior page)
Concurrently, and subject to the prior rights of holders of Subscription
Rights, the Holding Company is offering the Common Stock for sale in a direct
community offering to members of the general public, with a first preference to
natural persons residing in Shelby, County, Ohio (the "Community Offering" and
when combined with the Subscription Offering are referred collectively as the
"Subscription and Community Offering"). The Association and the Holding Company
reserve the right, in their absolute discretion, to accept or reject, in whole
or in part, any or all orders in the Community Offering. Subscription Rights are
non-transferrable. Persons found to be selling or otherwise transferring their
right to purchase stock in the Subscription Offering or purchasing Common Stock
on behalf of another person will be subject to forfeiture of such rights and
possible further sanctions and penalties imposed by the Office of Thrift
Supervision (the "OTS"), an agency of the United States Government.
The total number of shares to be issued in the Conversion will be based
upon an appraised valuation of the estimated aggregate pro forma market value of
the Holding Company and the Association as converted. The purchase price per
share ("Purchase Price") has been fixed at $10.00. Based on the current
aggregate valuation range of $11.5 million to $15.5 million (the "Estimated
Valuation Range"), the Holding Company is offering for sale up to 1,552,500
shares. Depending upon the market and financial conditions at the time of the
completion of the Public Offering, if any, the total number of shares to be
issued in the Conversion may be increased or decreased from the 1,552,500 shares
offered hereby, provided that the product of the total number of shares
multiplied by the price per share remains within, or does not exceed by more
than 15% the maximum of the Estimated Valuation Range. If the aggregate Purchase
Price of the Common Stock sold in the Conversion is below $11,475,000 or above
$17,853,750, or if the Offering is extended beyond May 30, 1997, subscribers
will be permitted to modify or cancel their subscriptions and to have their
subscription funds returned promptly with interest. Under such circumstances, if
subscribers take no action, their subscription funds will be promptly returned
to them with interest. In all other circumstances, subscriptions are irrevocable
by subscribers. See "The Conversion - Offering of Holding Company Common Stock."
With the exception of the Tax-Qualified Employee Plans and certain large
depositors, no Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may purchase in their capacity as such in the Subscription Offering
more than $100,000 of Common Stock. As part of the Community Offering, no
person, together with associates of and persons acting in concert with such
person, may purchase more than $100,000 of Common Stock. In the aggregate, no
person, together with associates of and persons acting in concert with such
person, may purchase more than $200,000 of Common Stock offered in the
Conversion based on the Estimated Valuation Range. Under certain circumstances,
the maximum purchase limitations may be increased or decreased at the sole
discretion of the Association and the Holding Company up to 9.99% of the total
number of shares of Common Stock sold in the Conversion or to one percent of
shares of Common Stock offered in the Conversion. The minimum purchase is 25
shares. See "The Conversion - Additional Purchase Restrictions."
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The Association and the Holding Company have engaged Webb as financial
advisor to assist in the distribution of shares of Common Stock, on a
best-efforts basis, in the Subscription and Community Offering. For such
services, Webb will receive a management fee and estimated expenses of $35,000
and a 1.5% sales commission, excluding purchases by directors, officers,
employees and their immediate family members, and the ESOP for Common Stock sold
in the Subscription and Community Offering. In addition, if selected dealers are
utilized to assist in selling stock in the Community Offering commissions of
5.5% of the Common stock sold by them will be paid, and no other fees will be
payable to Webb with respect to those shares sold through selected dealers. See
"The Conversion - Marketing Arrangements" and "The Conversion - Offering of
Holding Company Common Stock."
The Holding Company must receive an order form and certification form
(together referred to as the "Order Form"), together with full payment at $10.00
per share (or appropriate instructions authorizing a withdrawal from a deposit
account at the Association) for all shares for which subscription is made, at
any office of the Association, by 5:00 p.m., Sidney, Ohio time, on April 15,
1997, unless the Subscription and Community Offering is extended, at the
discretion of the Board of Directors, up to an additional 45 days with the
approval of the OTS, if necessary, but without additional notice to subscribers
(the "Expiration Date"). See "The Conversion - Offering of Holding Company
Common Stock." Subscriptions paid by check, bank draft or money order will be
placed in a segregated account at the Association and will earn interest at the
Association's passbook rate from the date of receipt until completion or
termination of the Conversion. Payments authorized by withdrawal from deposit
accounts at the Association will continue to earn interest at the contractual
rate until the Conversion is completed or terminated; these funds will be
otherwise unavailable to the depositor until such time. Authorized withdrawals
from certificate accounts for the purchase of Common Stock will be permitted
without the imposition of early withdrawal penalties or loss of interest.
The Holding Company has received preliminary approval to have the Common
Stock listed on the Nasdaq National Stock Market under the symbol "PSFC." Prior
to this Offering there has not been a public market for the Common Stock, and
there can be no assurance that an active and liquid trading market for the
Common Stock will develop or that resales of the Common Stock can be made at or
above the Purchase Price. See "Market for Common Stock" and "The Conversion -
Stock Pricing and Number of Shares to be Issued."
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[MAP TO COME]
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PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the detailed information and financial statements appearing
elsewhere herein.
Peoples-Sidney Financial Corporation
The Holding Company, Peoples-Sidney Financial Corporation, was formed
in 1997 by Peoples Federal under the laws of Delaware for the purpose of
becoming a savings and loan holding company which will own all of the
outstanding capital stock that Peoples Federal will issue in connection with the
Conversion. Immediately following the Conversion, the only significant assets of
the Holding Company will be the capital stock of Peoples Federal and up to
approximately 50% of the net proceeds from the Conversion, a portion of which is
expected to be used to fund the Holding Company's loan to its Employee Stock
Ownership Plan ("ESOP"). See "Use of Proceeds." Upon completion of the
Conversion, the Holding Company's business initially will consist only of the
business of Peoples Federal.
The executive office of the Holding Company is located at 101 East
Court Street, Sidney, Ohio 45365 and its telephone number at that address is
(937) 492-6129. See "Peoples-Sidney Financial Corporation"
Peoples Federal
Peoples Federal was founded in 1886 as an Ohio-chartered mutual
association and converted to a federally chartered association in 1958. Peoples
Federal serves the financial needs of families and local businesses in its
primary market area through its office located at 101 East Court Street, Sidney,
Ohio. Its deposits are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC"). At October 31, 1996, Peoples Federal had total
assets of $90.0 million, deposits of $79.9 million and retained earnings of $9.2
million (or 10.2% of total assets).
Peoples Federal seeks to provide financial services to families and
local businesses residing in Shelby County, Ohio. Peoples Federal's business
involves attracting deposits from the general public and using such deposits to
originate one- to four-family permanent and construction residential mortgage
and, to a lesser extent, commercial real estate, consumer, land, multi-family
and commercial business loans in its market area, consisting primarily of Shelby
County, Ohio and to a lesser extent, contiguous counties in Ohio. The
Association also invests in investment securities consisting primarily of U.S.
government obligations and various types of short-term liquid assets. See
"Business."
The Association's basic mission is to maintain its focus as an
independent, community- oriented financial institution serving customers in its
primary market area. The Board of Directors has sought to accomplish this
mission through the adoption of a strategy designed to maintain a strong capital
position and high asset quality, manage the Association's sensitivity to
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changes in interest rates and optimize the Association's net interest margin.
This strategy has been effected by (i) emphasizing one- to four-family permanent
and construction residential mortgage lending, (ii) supplementing residential
lending with investments in commercial real estate, consumer and other loans,
(iii) emphasizing the origination of adjustable rate and short-and medium-term
(up to 15 years) loans and investments; and (iv) maintaining its core deposit
base.
Financial highlights of the Association include the following:
o Capital Position. - At October 31, 1996, the Association had
retained earnings of $9.2 million (10.2% of total assets). Peoples
Federal's regulatory capital exceeds all regulatory capital
requirements. At October 31, 1996, Peoples Federal's risk-based
capital totalled $9.5 million which was approximately $4.9 million
above the Association's capital requirement at such date. Assuming
on a pro forma basis that $15.5 million of shares, the maximum of
the Estimated Valuation Range, were sold in the Conversion and
approximately 50% of the net Conversion proceeds were contributed to
Peoples Federal by the Holding Company, as of October 31, 1996, the
Association's risk-based capital would have been $15.8 million
(26.7% of risk adjusted total assets). See "Regulation - Regulatory
Capital Requirements."
o Asset Quality. - The Association's ratio of non-performing assets to
total assets was 1.3% at October 31, 1996. While this is a
significant improvement over prior years, the Association's ratio of
such loans is higher than the peer group average of 1.2%. The
Association's non-performing assets primarily consist of one- to
four-family and commercial real estate loans. See "Business -
Delinquencies and Non-Performing Assets."
o Diversified Lending Activities. - In order to supplement its
residential lending program, the Association focuses a portion of
its lending activities on construction and commercial real estate
loans. While management believes that such loans carry a higher
level of risk than residential loans, they are generally more
interest rate sensitive and carry higher yields than residential
loans. At October 31, 1996, the Association had $9.1 million of
construction and development loans or 10.4% of total gross loans
receivable and $5.5 million of commercial real estate loans or 6.2%
of total gross loans receivable. At such date, no construction and
development loans were non-performing and $304,000 of commercial
real estate loans were non-performing.
o Interest Rate Spread. - The Association's interest rate spread, an
important component of profitability, was 2.9% and 3.0% for the four
months ended October 31, 1996 and for the year ended June 30, 1996,
respectively. Net interest income was $951,000 and $2.8 million for
the four months ended October 31,1996 and the year ended June 30,
1996, respectively.
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The information set forth above should be considered in light of the
factors described under the caption "Risk Factors." For additional information
regarding the implementation of the Association's business strategy, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management."
Forward-Looking Statements
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Association's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and in the Association's market area.
The Conversion
Plan of Conversion. Under the Plan of Conversion, the Conversion is
subject to certain conditions, including the prior approval of the Plan by the
Association's members at a Special Meeting to be held on April 22, 1997. After
the Conversion, the Association's current voting members (who include certain
deposit account holders and borrowers) will have no voting rights in Peoples
Federal and will have no voting rights in the Holding Company unless they become
Holding Company stockholders. Eligible Account Holders and Supplemental Eligible
Account Holders, however, will have certain liquidation rights in the
Association. See "The Con version - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association - Liquidation Rights."
The Subscription and Community Offering. The shares of Common Stock to
be issued in the Conversion are being offered at a Purchase Price of $10.00 per
share in the Subscription Offering pursuant to nontransferable Subscription
Rights in the following order of priority: (i) Eligible Account Holders (i.e.,
depositors in the Association on October 31, 1995); (ii) Tax- Qualified Employee
Plans (in this case, the Holding Company's ESOP); provided, however, that the
Tax- Qualified Employee Plans shall have first priority Subscription Rights to
the extent that the total number of shares of Common Stock sold in the
Conversion exceeds the maximum of the Estimated Valuation Range; (iii)
Supplemental Eligible Account Holders (i.e., depositors in the Association on
December 31, 1996); (iv) Other Members (i.e., depositors of the Association as
of March 10, 1997); and (v) employees, officers and directors of the
Association. Subscription Rights received in any of the foregoing categories
will be subordinated to the Subscription Rights received by those in a prior
category. Subscription Rights will expire if not exercised by 5:00 p.m., Sidney,
Ohio time, on April 15, 1997, unless extended (the "Expiration Date").
Concurrently, and subject to the prior rights of holders of
Subscription Rights, any shares of Common Stock not subscribed for in the
Subscription Offering are being offered at the same price in the Community
Offering to members of the general public, with a preference given to natural
persons residing in Shelby County, Ohio. The Association and the Holding Company
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have engaged Webb as financial advisor and to assist in the distribution of
shares of Common stock. Depending on market conditions and subject to the prior
rights of holders of Subscription Rights, the Common Stock may be offered for
sale to the general public on a best efforts basis in the Community Offering
through a selected dealers arrangement to be coordinated by Webb.
The Association has established a Stock Information Center, which will
be managed by Webb, to coordinate the Subscription and Community Offering,
including tabulating orders and answering questions about the Subscription and
Community Offering received by telephone. All subscribers will be instructed to
mail payment to the Stock Information Center or deliver payment directly to the
Association's office. Payment for shares of Common Stock may be made by cash (if
delivered in person), check or money order or by authorization of withdrawal
from deposit accounts maintained with the Association. Such funds will not be
available for withdrawal and will not be released until the Conversion is
completed or terminated. See "The Conversion - Method of Payment for
Subscriptions."
Purchase Limitations. The Plan of Conversion places limitations on the
number of shares which may be purchased in the Conversion by various categories
of persons. With the exception of the Tax-Qualified Employee Plans and certain
large depositors, no Eligible Account Holder, Supplemental Eligible Account
Holder or Other Member may purchase in their capacity as such in the
Subscription Offering more than $100,000 of Common Stock offered in the
Conversion. As part of the Community Offering, no person, together with
associates of and persons acting in concert with such person, may purchase more
than $100,000 of Common Stock. In the aggregate, no person or group of persons
acting in concert (other than the Tax- Qualified Employee Plans) may purchase
more than $200,000 of Common Stock offered in the Conversion, except that
certain large depositors may be entitled to purchase Common Stock in excess of
these limits. These purchase limits may be increased or decreased consistent
with OTS regulations at the sole discretion of the Holding Company and the
Association. See "The Con version - Offering of Holding Company Common Stock."
Prospectus Delivery and Procedure for Purchasing Shares. To ensure that
each purchaser receives a prospectus at least 48 hours prior to the Expiration
Date in accordance with Rule 15c2-8 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), no prospectus will be mailed any later than
five days prior to such date or hand delivered any later than two days prior to
such date. Execution of the order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Order forms will be distributed only with a
prospectus. The Association will accept for processing orders submitted on
original order forms with an executed certification. Photocopies or facsimile
copies of order forms or the form of certification will not be accepted. Payment
by cash, check, money order, bank draft or debit authorization to an existing
account at the Association must accompany the order form. No wire transfers will
be accepted. See "The Conversion - Method of Payment for Subscriptions."
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members receive their stock purchase priorities,
depositors must list all accounts on the Order Form, giving all names on each
account and the account number as of the applicable record date.
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Restrictions on Transfer of Subscription Rights. Prior to the
completion of the Conversion, no person may transfer or enter into any agreement
or understanding to transfer the legal or beneficial ownership of the
Subscription Rights or the shares of Common Stock to be issued upon their
exercise. Each person exercising Subscription Rights will be required to certify
that a purchase of Common Stock is solely for the purchaser's own account and
that there is no agreement or understanding regarding the sale or transfer of
such shares. Persons found to be selling or otherwise transferring their right
to purchase stock in the Subscription Offering or purchasing Common Stock on
behalf of another person will be subject to forfeiture of such rights and
possible federal penalties and sanctions. See "The Conversion - Restrictions on
Transfer of Subscription Rights and Shares."
Stock Pricing. The price of the Common Stock is $10.00 per share and is
the same for all purchasers. The aggregate pro forma market value of the Holding
Company and Peoples Federal, as converted, was estimated by Keller, which is
experienced in appraising converting thrift institutions, to range from $11.5
million to $15.5 million at March 4, 1997 (the "Estimated Valuation Range").
Depending on market and financial conditions at the completion of the
Subscription and Community Offering, the number of shares of Common Stock to be
issued in the Conversion may be increased or decreased significantly from the
1,552,500 shares offered hereby and the price per share may be decreased.
However, subscribers will be permitted to modify or rescind their subscriptions
if the product of the number of shares to be issued multiplied by the price per
share is less than $11.5 million or more than $17.9 million. See "Pro Forma
Data" and "The Conversion - Stock Pricing and Number of Shares to be Issued" for
a description of the manner in which such valuation was made and the limitations
on its use.
The appraisal by Keller is not intended to be, and must not be
interpreted as, a recommendation of any kind as to the advisability of voting to
approve the Conversion or of purchasing shares of Common Stock. The appraisal
considers Peoples Federal and the Holding Company only as going concerns and
should not be considered as any indication of the liquidation value of Peoples
Federal or the Holding Company. Moreover, the appraisal is necessarily based on
many factors which change from time to time. There can be no assurance that
persons who purchase shares in the Conversion will be able to sell such shares
at prices at or above the Purchase Price.
Purchases by Directors and Officers
The directors and officers of Peoples Federal intend to purchase, in
the Subscription Offering for investment purposes and at the same price as the
shares are sold to other investors in the Conversion, approximately $1,745,000
of Common Stock or 14.0% of the shares to be issued in the Conversion at the
midpoint of the Estimated Valuation Range (exclusive of an aggregate of 8% of
the shares to be issued in the Conversion which are anticipated to be purchased
by the ESOP). See "The Conversion - Participation by the Board."
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Potential Benefits of Conversion to Directors and Executive Officers
Employee Stock Ownership Plan. The Board of Directors of the Association
has adopted an ESOP, a tax-qualified employee benefit plan for officers and
employees of the Holding Company and the Association. All employees of the
Association are eligible to participate in the ESOP after they attain age 21 and
complete one year of service. The Association's contribution to the ESOP is
allocated among participants on the basis of their relative compensation. Each
participant's account will be credited with cash and shares of Holding Company
Common Stock based upon compensation earned during the year with respect to
which the contribution is made. The ESOP intends to buy up to 8% of the Common
Stock issued in the Conversion (approximately $918,000 to $1,242,000 of the
Common Stock based on the issuance of the minimum and the maximum of the
Estimated Valuation Range and the $10.00 per share Purchase Price). The ESOP
will purchase the shares with funds borrowed from the Holding Company, and it is
anticipated that the ESOP will repay the loans through periodic tax-deductible
contributions from the Association over a ten-year period. These contributions
will increase the compensation expense of the Association. See "Management -
Benefit Plans - Employee Stock Ownership Plan" for a description of this plan.
Employment and Severance Agreements. The Association intends to enter
into employment agreements with Douglas Stewart, President and Chief Executive
Officer; David R. Fogt, Vice President of Operations and Financial Services;
Gary N. Fullenkamp, Vice President of Mortgage Loans and Corporate Secretary and
Debra A. Geuy, Treasurer. It is anticipated that such agreements will provide
for a salary equal to each employee's current salary, will have an initial term
of three years for Mr. Stewart and one year for each of the other officers,
subject to an annual extension for an additional year following the
Association's annual performance review, and will become effective upon the
completion of the Conversion. Under certain circumstances including a change in
control, as defined in the employment agreements, such employees would be
entitled to a severance payment in lieu of salary equal to a percentage of his
base amount of compensation, as defined. In addition, the Association intends to
enter into a Change in Control Severance Agreement with Assistant Vice President
Steven Goins. The agreement will have an initial term of 12 months and become
effective upon completion of the Conversion. In the event the officer is
terminated following a "change in control" (as defined in the agreement), such
officer will be entitled to a severance payment of 100% of his current
compensation. See "Management - Executive Compensation - Employment Agreements
and Severance Agreements" for the definition of "change in control" and a more
detailed description of this agreement.
Other Stock Benefit Plans. In addition to the ESOP and the employment
agreements, in the future the Holding Company may consider the implementation of
a stock option plan ("Stock Option Plan") and recognition and retention plan
("RRP") for the benefit of selected directors, officers and employees of the
Holding Company and the Association. Any such stock option plan or RRP will not
be implemented within one year of the date of the consummation of the Stock
Conversion. If a determination is made to implement a stock option plan or RRP,
it is anticipated that any such plans will be submitted to stockholders for
their consideration at
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which time stockholders would be provided with detailed information regarding
such plan. If such plans are approved, they will have a dilutive effect on the
Holding Company's stockholders as well as affect the Holding Company's net
income and stockholders' equity, although the actual effects cannot be
determined until such plans are implemented.
Use of Proceeds
The net proceeds from the sale of Common Stock in the Conversion (estimated
at $11.0 million, $15.0 million, and $17.3 million based on the minimum,
midpoint, maximum and 15% above the maximum respectively, number of shares) will
substantially increase the capital of Peoples Federal. See "Pro Forma Data." The
Holding Company will utilize approximately 50% of the net proceeds from the
issuance of the Common Stock to purchase all of the common stock of Peoples
Federal to be issued upon Conversion and will retain approximately 50% of the
net proceeds. The proceeds retained by the Holding Company will be invested
initially in short-term securities of a type similar to those invested in by the
Association. In addition, the Holding Company, subject to regulatory approval,
is expected to fund the ESOP loan. Such proceeds will also be available for
general corporate purposes, including the possible repurchase of shares of the
Common Stock, as permitted by the OTS, and the possible expansion of facilities.
The Holding Company currently has no specific plan to make any such repurchases
of any of its Common Stock. The net proceeds received by Peoples Federal will
become part of Peoples Federal's general funds for use in its business, subject
to applicable regulatory restrictions, and will be available to use for the
acquisition of deposits or assets or both from other institutions, although no
such acquisitions are being contemplated at this time. See "Use of Proceeds" for
additional information on the utilization of the offering proceeds as well as on
the OTS restrictions on repurchases of the Holding Company's stock.
Dividends
The Holding Company's Board of Directors may consider the payment of
dividends on its Common Stock. The declaration and payment of dividends are
subject to, among other things, the Holding Company's financial condition and
results of operations, Peoples Federal's compliance with its regulatory capital
requirements, tax considerations, industry standards, economic conditions,
regulatory restrictions, general business practices and other factors. See
"Dividends."
Market for Common Stock
The Holding Company has applied to have the Common Stock quoted on the
Nasdaq National Stock Market under the symbol "PSFC." No assurance can be given,
however, that the Holding Company's stock will be quoted on the Nasdaq National
Stock Market or that an active and liquid market for the Common Stock will
develop. Further, no assurance can be given that an investor will be able to
resell the Common Stock at or above the Purchase Price after the Conversion. See
"Market for Common Stock."
10
<PAGE>
Risk Factors
Special attention should be given to the following factors discussed
under "Risk Factors": non-traditional lending activities; vulnerability to
changes in interest rates; competition; geographical concentration of loans;
certain anti-takeover provisions; voting control of shares by the Board,
management, or employee plans; low return on equity; ESOP compensation expense;
absence of prior market for common stock; proposed federal legislation; and risk
of delay.
11
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At October 31,
1996(1)
------------------------------
<S> <C>
Selected Financial Condition Data:
Total assets......................................................... $89,962
Loans receivable, net(2)............................................. 83,721
Investment securities (held to maturity)............................. 2,099
Federal Home Loan Bank ("FHLB") stock................................ 679
Time deposits with other financial institutions...................... 100
Deposits............................................................. 79,879
Retained earnings - substantially restricted......................... 9,188
</TABLE>
<TABLE>
<CAPTION>
Four Months Ended
October 31,
------------------------------
1996(1) 1995(1)
------------------------------
<S> <C> <C>
Selected Operations Data:
Total interest income................................................ $2,263 $2,123
Total interest expense............................................... 1,312 1,181
------- ------
Net interest income............................................... 951 942
Provision for loan losses............................................ 20 8
-------- --------
Net interest income after provision for loan losses.................. 931 934
Service fees and other charges....................................... 21 16
Other noninterest income(3).......................................... --- ---
---------- ---------
Total noninterest income............................................. 21 16
Total noninterest expense(3)......................................... 989 489
-------- --------
Income (loss) before income taxes and accounting change.............. (37) 461
Provision for income taxes........................................... (12) 157
Cumulative effect of change in accounting for income taxes........... --- ---
--------- ---------
Net income (loss)................................................ $ (25) $ 304
======== ========
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data: (In Thousands)
Total assets........................................... $86,882 $78,976 $76,134 $72,276 $72,885
Loans receivable, net(2)............................... 78,233 71,933 66,610 62,867 57,848
Investment securities (held to maturity)............... 2,598 3,098 3,596 4,434 4,101
Federal Home Loan Bank ("FHLB") stock.................. 667 622 572 545 535
Time deposits with other financial institutions........ 1,100 --- --- --- ---
Deposits............................................... 77,318 70,306 68,367 65,168 66,540
Retained earnings - substantially restricted........... 9,213 8,361 7,526 6,940 6,165
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Operations Data: (In Thousands)
Total interest income....................................... $6,513 $5,725 $5,071 $5,357 $6,106
Total interest expense...................................... 3,706 2,968 2,637 2,898 4,081
------- ------- ------- ------- -------
Net interest income...................................... 2,807 2,757 2,434 2,459 2,025
Provision for loan losses................................... 68 55 83 41 53
-------- -------- -------- -------- --------
Net interest income after provision for loan losses......... 2,739 2,702 2,351 2,418 1,972
Service fees and other charges.............................. 57 60 65 91 90
Other noninterest income(3)................................. --- --- --- 95 71
--------- --------- --------- -------- --------
Total noninterest income.................................... 57 60 65 186 161
Total noninterest expense(3)................................ 1,504 1,495 1,427 1,394 1,704
------- ------- ------- ------- -------
Income (loss) before income taxes and accounting change..... 1,292 1,267 989 1,210 429
Provision for income taxes.................................. 440 432 334 435 284
Cumulative effect of change in accounting for income taxes.. --- --- (69) --- ---
--------- --------- -------- --------- ---------
Net income (loss)....................................... $ 852 $ 835 $ 586 $ 775 $ 145
======= ======= ======= ======= =======
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
At or For the Four
Months Ended
October 31,
Selected Financial Ratios and Other Data(4): 1996(1) 1995(1)
- ------------------------------------------- ------------ -----------
<S> <C> <C>
Performance Ratios:
Return on assets (ratio of net income to average total assets)..................... (0.09)% 1.12%
Return on retained earnings (ratio of net income to average equity)................ (0.80) 10.72
Interest rate spread information(5):
Average during period............................................................. 2.90 3.13
End of period..................................................................... 2.66 2.77
Net interest margin(6)............................................................. 3.32 3.55
Ratio of operating expense to average total assets................................. 3.37 1.80
Ratio of average interest-earning assets to average interest-bearing liabilities... 1.09x 1.10x
Quality Ratios:
Non-performing assets to total assets at end of period(7).......................... 1.28% 1.36%
Allowance for loan losses to non-performing loans.................................. 28.27 22.50
Allowance for loan losses to gross loans receivable(8)............................. 0.37 0.35
Capital Ratios:
Retained earnings to total assets at end of period................................. 10.21 10.27
Average retained earnings to average assets........................................ 10.49 10.45
Other Data:
Number of full-service offices..................................................... 1 1
</TABLE>
<TABLE>
<CAPTION>
At or For
Year Ended June 30,
Selected Financial Ratios and Other Data(4): 1996 1995 1994 1993 1992
- ------------------------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net income to average total assets).......... 1.01% 1.07% 0.79% 1.07% 0.20%
Return on retained earnings (ratio of net income to average equity)..... 9.70 10.55 8.10 11.84 2.60
Interest rate spread information(5):
Average during period.................................................. 2.97 3.30 3.05 3.19 2.50
End of period.......................................................... 2.74 3.08 2.99 3.12 2.40
Net interest margin(6).................................................. 3.41 3.66 3.35 3.49 2.88
Ratio of operating expense to average total assets...................... 1.78 1.93 1.91 1.92 2.37
Ratio of average interest-earning assets to average interest-bearing
liabilities............................................................ 1.10x 1.09x 1.08x 1.07x 1.07x
Quality Ratios:
Non-performing assets to total assets at end of period(7)............... 1.41% 1.80% 2.10% 3.26% 3.09%
Allowance for loan losses to non-performing loans....................... 25.14 17.70 12.98 5.79 4.18
Allowance for loan losses to gross loans receivable(8).................. 0.37 0.33 0.29 0.19 0.16
Capital Ratios:
Retained earnings to total assets at end of period...................... 10.60 10.59 9.88 9.60 8.46
Average retained earnings to average assets............................. 10.43 10.24 9.70 9.03 7.74
Other Data:
Number of full-service offices.......................................... 1 1 1 1 1
</TABLE>
<PAGE>
- ---------------------------
(1) Financial information at October 31, 1996 and for the four month periods
ended October 31, 1996 and 1995 is derived from unaudited financial data,
but in the opinion of management, reflects all adjustments (consisting only
of normal recurring adjustments) which are necessary to present fairly the
results for such interim periods. Ratio data for the four month periods
ended October 31, 1996 and 1995 are annualized. Interim results at and for
the four months ended October 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1997.
(2) Loans receivable are shown net of loans in process, net deferred loan
origination fees and the allowance for loan losses.
(3) During 1992, the Association lost an appeal with the Internal Revenue
Service regarding adjustments to its federal income taxes for calendar years
1973 through 1980. Net federal income taxes, interest expense and interest
income associated with these adjustments amounted to $117,000, $383,000 and
$71,000, respectively, and have been included in the Statement of Income for
the year ending June 30, 1992. The Association overestimated the interest
associated with the Internal Revenue Service federal income tax adjustments
for the years noted. As a result, the Association received a refund of
interest of $95,000 which was included in noninterest income for the year
ended June 30, 1993. During the four months ended October 31, 1996, the
Association accrued $456,000 as a result of a special SAIF deposit insurance
assessment.
(4) Quality Ratios are end of period ratios. With the exception of end of period
ratios, all ratios are based on average monthly balances during the
indicated periods and are annualized where appropriate.
(5) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted averaged
cost of interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) Non-performing assets consist of non-performing loans and foreclosed assets.
Non-performing loans consist of all accruing loans 90 days or more past due
and all non-accrual loans.
(8) Gross loans receivable are stated at unpaid principal balances.
13
<PAGE>
RECENT FINANCIAL DEVELOPMENTS
The following tables set forth certain selected financial data for
Peoples Federal Savings and Loan Association as of December 31, 1996 and June
30, 1996, and for the six months ended December 31, 1996 and 1995. Information
at December 31, 1996, and for the six month periods ended December 31, 1996 and
1995 is derived from unaudited financial data, but in the opinion of management,
reflects all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results for such interim periods. Interim
results at and for the six months ended December 31, 1996 are not necessarily
indicative of the results that may be expected for the year ended June 30, 1997.
Ratio data for the six month periods ended December 31, 1996 and 1995 is
annualized.
At At
December 31, June 30,
1996 1996
------------ --------
(Dollars in Thousands)
Selected Financial Condition Data:
- ----------------------------------
Total Assets....................................... $92,296 $86,882
Loan receivable, net(1)............................ 85,226 78,233
Investment securities (held to maturity)........... 2,099 2,598
Federal Home Loan Bank stock....................... 691 667
Time deposits with other financial institutions.... --- 1,100
Deposits........................................... 81,230 77,318
Federal Home Loan Bank advances.................... 1,500 ---
Retained earnings - substantially restricted....... 9,307 9,213
Six Months Ended
----------------
December 31, December 31,
1996 1995
------------ ------------
(Dollars in Thousands)
Selected Operations Data:
- -------------------------
Total interest income.............................. $ 3,442 $ 3,215
Total interest expense............................. (1,998) (1,813)
------- -------
Net interest income............................. 1,444 1,402
Provision for loan losses.......................... (42) (36)
------- -------
Net interest income after provision for laon losses 1,402 1,366
Total noninterest income........................... 30 27
Total noninterst expense(2)........................ (1,290) (749)
------- -------
Income before income taxes......................... 142 644
Provision for income taxes......................... (48) (219)
------- -------
Net income.................................. $ 94 $ 425
======= ======
14
<PAGE>
At or For the
Six Months Ended
----------------
December 31, December 31,
1996 1996
------------ ------------
Selected Financial Ratios and Other Data(3):
- --------------------------------------------
Performance Ratios:
Return on average assets........................ .21% 1.03%
Return on average equity........................ 2.03 9.90
Interest rate spread information(4):
Average during the period..................... 2.88 3.05
End of period................................. 2.66 2.78
Net interest margin(5).......................... 3.32 3.48
Ratio of operating expense to average
total assets................................ 2.90 1.81
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 1.10x 1.09x
Quality Ratios:
Non-performing assets to total assets at end
of period(6).................................. 1.11% 1.50%
Allowances for loan losses to non-performing
loans......................................... 33.30 21.93
Allowance for loan losses to gross loans
receivable(7)................................. .38 .36
Capital Ratios:
Retained earnings to total assets at end
of period..................................... 10.08% 10.28%
Average retained earnings to average assets..... 10.38 10.38
Tangible capital................................ 10.08 10.27
Core capital.................................... 10.08 10.27
Risk-based capital.............................. 15.70 16.77
- -----------
(1) Loans receivable are shown net of loans in process, net deferred loan
origination fees and the allowance for loan losses.
(2) During the six months ended December 31, 1996, the Association paid
$456,000 as a result of a special SAIF deposit insurance assessment.
(3) Quality Ratios are end of period ratios. With the exception of end of
period ratios, all ratios are based on average monthly balances during the
indicated periods and are annualized where appropriate.
(4) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(6) Non-performing assets consist of non-performing loans and foreclosed assets.
Non-performing loans consist of all accruing loans 90 days or more past due
and all non-accrual loans.
(7) Gross loans receivable are stated at unpaid principal balances.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RECENT FINANCIAL DEVELOPMENTS
Comparison of Financial Condition at December 31, 1996 and June 30, 1996.
Total assets at December 31, 1996 were $92.3 million compared to $86.9
million at June 30, 1996, an increase of $5.4 million. The primary factor in
this increase was a $7.0 million increase in loans receivable offset by a
$499,000 decrease in investment securities and a $1.1 million decrease in time
deposits with other financial institutions. The increase in loans receivable is
reflective of a strong local economy coupled by the Association's attractive
rates and products compared to the local competition. The decrease in investment
securities and time deposits with other financial institutions was the result of
the redirection of funds provided from the maturities of time deposits and
investment securities to partially fund the loan growth.
Total deposits increased $3.9 million from $77.3 million at June 30,
1996 to $81.2 million at December 31, 1996 primarily due to growth in
certificates of deposit partially offset by a decrease in savings accounts.
Advances from the Federal Home Loan Bank of Cincinnati totaled $1.5
million at December 31, 1996. The borrowings are used as a source of short-term
liquidity to provide funding for loan demand.
Comparison of Results of Operation for the Six Months Ended December 31, 1996
and 1995.
Net income. Net income for the six months ended December 31,1996
totaled $94,000, compared to $425,000 for the six months ended December 31,
1995. The decrease in net income was primarily the result of a special SAIF
deposit insurance assessment of $456,000, as more fully discussed below.
Net Interest Income. Net interest income totaled $1,444,000 for the six
months ended December 31, 1996, as compared to $1,402,000 for the six months
ended December 31, 1995 an increase of $42,000, or 3.00%. This occured despite
the average net interest margin decreasing from 3.48% for the six months ended
December 31, 1995 to 3.32% for the six months ended December 31, 1996. The
effect of this decrease was more than offset by the increase in the average
balance of interest-earning assets compared to the increase in the average
balance of interest-bearing liabilities.
The decline in the average net interest margin was the result of a
slight decrease in the average yield on interest earning assets combined with an
increase in the cost of funds. The increase in the cost of funds occurred due to
a larger portion of the deposit base being in higher yielding certificates of
deposit and an increased level of borrowed funds. The average yield on
interest-earning assets declined from 7.98% for the six months ended December
31, 1995 to 7.92% for the six months ended December 31, 1996, while the average
cost of funds increased from 4.93% to 5.04% for the same periods.
16
<PAGE>
Provision for loan losses. The Association's provision for loan losses
for the six months ended December 31, 1996 was $42,000 compared to $36,000 for
the six months ended December 31, 1995. The amount of the provision for loan
losses is based upon management's periodic analysis of the adequacy of the
allowance for loan losses. The allowance for loan losses totaled $340,000, or
.38% of gross loans receivable and 33.30% of total non-performing loans at
December 31, 1996, compared to $279,000, or .36% of gross loans receivable and
21.93% of total non-performing loans at December 31, 1995. The increase in the
provision for loan losses reflected the increase in the total loan portfolio for
the six months ended December 31, 1996 as compared to the six months ended
December 31, 1995.
Noninterest Income. Noninterest income for the six months ended
December 31, 1996 was $30,000 compared to $27,000 for the six months ended
December 31, 1995, an increase of $3,000, or 11.1%. The increase was primarily a
result of an increase in service fees collected on deposit accounts and other
miscellaneous fees.
Noninterest Expense. Noninterest expense was $1.3 million for the six
months ended December 31, 1996 compared to $749,000 for the six months ended
December 31, 1995, an increase of $541,000, or 72.23%. The increase was
primarily a result of $456, 000 paid for a special deposit insurance assessment
resulting from legislation passed and enacted into law on September 30, 1996 to
recapitalize the SAIF of the FDIC. The SAIF was below the level required by law
because a significant portion of the assessments paid in the SAIF by thrifts,
like the Association, were used to pay the cost of prior thrift failures. The
legislation called for a one-time assessment established at $.0657 for each $100
indeposits held as of March 31, 1995. As a result of the recapitalization of the
SAIF, the current disparity between Association and the thrift insurance
premiums will be reduced. Thrifts had been paying assessments of $.23 per $100
of deposits, which, for most thrifts, will be reduced to $.064 per $100 in
deposits in January 1997 and are expected to be reduced to $.024 per $100 in
deposits no later than January 2000.
For the six months ended December 31, 1996 as compared to the same
period during 1995, there were no other significant changes in the various other
noninterest expense categories.
Income Tax Expense. The volatility of income tax expense is primarily
attributable to the change in the net income before income taxes. The provision
for income taxes totaled $48,000 for the six months ended December 31, 1996
compared to $219,000 for the six months ended December 31, 1995, a decrease of
$171,000, or 78.08%. The decrease was largely due to the tax benefit of $155,000
related to the special assessment discussed above. The effective tax rates were
33.8% and 34.0% for the six months ended December 31, 1996 and 1995,
respectively.
17
<PAGE>
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered in the Subscription and Community Offering.
Non-Traditional Lending Activities
As a part of its effort to provide more comprehensive financial
services to families and community businesses in its primary market area, obtain
higher yields on its lending portfolio and reduce its vulnerability to changes
in interest rates, the Association has, during the last five years, offered loan
products other than traditional one- to four-family residential loans. Included
among these diversified loans are construction, commercial real estate,
consumer, land, multi-family, and commercial business loans. While such loans
are generally more interest rate sensitive and carry higher yields than do
residential loans, they are generally believed to carry a higher level of credit
risk than do residential loans. In addition, diversified loans are generally
more expensive to administer than are residential loans. At October 31, 1996,
the Association's allowance for loan losses was 28.3% of its non-performing
loans, and the Association had $1.2 million of non-performing assets
(representing 1.3% of total assets). While the Association has not experienced
any significant losses in its non-traditional lending activities, the
Association has considered these types of loans in its valuation of its
allowance for loan losses. There can be no assurance that the Association will
not be required to make additional provisions for loan losses in the future that
may have a material adverse impact on operations. See "Business - Lending
Activities" and "-Delinquencies and Non-Performing Assets."
Vulnerability to Changes in Interest Rates
The Association's profitability, like that of many financial
institutions, is dependent to a large extent upon its net interest income, which
is the difference between its interest income on interest-earning assets, such
as loans and investments, and its interest expense on interest-bearing
liabilities, such as deposits. When interest-bearing liabilities mature or
reprice more quickly than interest-earning assets in a given period, a
significant increase in market rates of interest could adversely affect net
interest income. Similarly, when interest-earning assets mature or reprice more
quickly than interest-bearing liabilities, falling interest rates could result
in a decrease in net interest income. At October 31, 1996, fixed-rate loans
totalled $23.2 million or 26.4% of the Association's loan portfolio while
adjustable-rate loans totalled $64.8 million or 73.6% of the Association's loan
portfolio. Notwithstanding the relatively small size of the Association's fixed
rate loan portfolio, the Association would still likely experience a decrease in
net income in the event of an increase in general interest rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management."
Competition
The Association experiences strong competition in its local market area
in both originating loans and attracting deposits. This competition arises from
a highly competitive
18
<PAGE>
market area with numerous savings institutions and commercial banks, as well as
credit unions, mortgage bankers and national and local securities firms. The
Association recognizes its need to monitor competition and modify its products
and services as necessary and possible, taking into consideration the cost
impact. As a result, such competition may limit Peoples Federal's growth and
profitability in the future. See "Business - Competition" and "- Originations,
Purchases and Sales of Loans."
Geographical Concentration of Loans
At October 31, 1996, substantially all of the Association's real estate
mortgage loans were secured by properties located in the Association's market
area of Shelby County and its contiguous counties in Ohio. While the Association
currently believes that its loans are adequately secured or reserved for, in the
event that real estate prices in the Association's market area substantially
weaken or economic conditions in its market area deteriorate, reducing the value
of properties securing the Association's loans, some borrowers may default and
the value of the real estate collateral may be insufficient to fully secure the
loan. In either event, the Association may experience increased levels of
delinquencies and related losses having an adverse impact on net income.
Certain Anti-Takeover Provisions
Certain provisions of the Holding Company's certificate of
incorporation and bylaws, including a provision limiting voting rights of
beneficial owners of more than 10% of the Common Stock, and Peoples Federal's
stock charter and bylaws as well as certain Delaware laws and regulations, will
assist the Holding Company in maintaining its status as an independent publicly
owned corporation and may have certain anti-takeover effects. See "Restrictions
on Acquisition of Stock and Related Takeover Defensive Provisions."
Certificate of Incorporation and Bylaws of the Holding Company. The
Holding Company's certificate of incorporation and bylaws provide for, among
other things, a limit on voting more than 10% of the Common Stock described
above, staggered terms for members of its Board of Directors, noncumulative
voting for directors, limits on the calling of special meetings of stockholders
and director nominations, a fair price or supermajority stockholder approval
requirement for certain business combinations and certain shareholder proposal
notice requirements.
Federal Stock Charter of the Association. Provisions in Peoples
Federal's federal stock charter that have an anti-takeover effect could also be
applicable to changes in control of the Holding Company as the sole shareholder
of the Association. Peoples Federal's federal stock charter will include a
provision applicable for five years which prohibits the acquisition or offer to
acquire directly or indirectly the beneficial ownership of more than 10% of
Peoples Federal's securities by any person or entity other than the Holding
Company. Any person violating this restriction may not vote Peoples Federal's
securities in excess of 10%.
These provisions in the Holding Company's and Peoples Federal's
governing instruments may discourage potential proxy contests and other takeover
attempts by making the Holding Company less attractive to a potential acquiror,
particularly those takeover attempts which have
19
<PAGE>
not been negotiated with the Board of Directors of the Holding Company and/or
Peoples Federal, as the case may be. These provisions may also have the effect
of discouraging a future takeover attempt which would not be approved by the
Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. In addition, certain of these provisions that
limit the ability of persons (including management or others) owning more than
10% of the shares to vote their shares will be enforced by the Board of
Directors of the Holding Company or Peoples Federal, as the case may be, to
limit the voting rights of 10% or greater stockholders and thus could have the
effect in a proxy contest or other solicitation to defeat a proposal that is
desired by the holders of a majority of the shares of Common Stock.
Federal Law and Regulations. Federal law also requires OTS approval
prior to the acquisition of "control" (as defined in OTS regulations) of an
insured institution, including a holding company thereof. In the event any
person or group of persons acquires shares in violation of these limitations,
such person or group may be restricted from voting his shares in excess of 10%
of the outstanding Common Stock. Such laws and regulations may also limit a
person's ability without regulatory approval to solicit proxies enabling him to
elect one third or more of the Holding Company's Board of Directors or exert a
controlling influence on the operations of Peoples Federal or the Holding
Company.
In addition, certain of these provisions may limit the ability of
persons (including management or others) owning more than 10% of the shares to
vote their shares (by proxy or otherwise) for proposals that they believe to be
in the best interests of shareholders. See "Management of the Association -
Benefit Plans," "Description of Capital Stock" and "Restrictions on Acquisitions
of Stock and Related Takeover Defensive Provisions."
Voting Control of Shares by the Board, Management and Employee Plans
The proposed purchases by the Board of Directors, management and
employees in the Subscription and Community Offerings could render it more
difficult to obtain majority support for stockholder proposals opposed by the
Board and management. Assuming the sale of shares at the minimum, midpoint and
maximum of the Estimated Valuation Range, the proposed purchases of $1,745,000
of shares of the Common Stock by the Board and the executive officers would
represent 15.2%, 12.9% and 11.2%, respectively, of the shares to be outstanding
upon completion of the Stock Conversion. In addition, the ESOP intends to
purchase 8% of the shares of Common Stock sold in the Subscription and Community
Offerings. (Prior to allocation, shares held by the ESOP will be voted by the
independent trustee in its sole discretion.) See "Management - Benefit Plans,"
"Description of Capital Stock" and "Takeover Defensive Provisions."
Low Return on Equity
As a result of the Association's high capital levels and the additional
capital that will be raised in the Conversion, its ability to leverage quickly
the net proceeds from the Conversion is likely to be limited. In addition,
recent policy changes under consideration by the OTS may
20
<PAGE>
limit the amount of repurchase of common stock that can be effected by the
Holding Company. Accordingly, for the near term, return on equity is likely to
be low.
ESOP Compensation Expense
In November, 1993, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 93-6 "Employers' Accounting
for Employee Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 requires an employer
to record compensation expense in an amount equal to the fair value of shares
committed to be released to employees from an employee stock ownership plan.
Assuming shares of Common Stock appreciate in value over time, the adoption of
SOP 93-6 will increase compensation expense relating to the ESOP to be
established in connection with the Conversion. It is impossible to determine at
this time the extent of such impact on future net income.
Absence of Prior Market for Common Stock
Peoples Federal, as a mutual thrift institution, and the Holding
Company, as a newly organized company, have never issued capital stock.
Consequently, there is not at this time an existing market for the Common Stock.
The Holding Company has applied to have the Common Stock quoted on the Nasdaq
National Stock Market under the symbol "PSFC" upon completion of the Conversion
and expects to receive approval to be so quoted prior to the completion of the
Conversion.
There can be no assurance that an active and liquid market for the
Common Stock will develop or be maintained, or that resales of the Common Stock
can be made at or above the conversion offering price after the completion of
the Conversion. See "Market for Common Stock."
A public trading market having the desirable characteristics of depth,
liquidity and orderliness depends upon the presence in the marketplace of both
willing buyers and sellers of the Common Stock at any given time. Accordingly,
there can be no assurance that an active and liquid market for the Common Stock
will develop or be maintained or that resales of the Common Stock can be made at
or above the Purchase Price. See "Market for Common Stock" and "The Conversion -
Stock Pricing and Number of Shares to be Issued."
Proposed Federal Legislation
The United States Congress is considering legislation that would
require all federal thrift institutions, such as Peoples Federal, to either
convert to a national bank or a state chartered financial institution by a
specified date to be determined. In addition, under the legislation the Holding
Company would likely not be regulated as a thrift holding company, but rather as
a bank holding company. The OTS would also be abolished and its functions
transferred among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and therefore no assurance can be given as to
whether or in what form the legislation will be enacted or its effect on the
Holding Company and the Association.
21
<PAGE>
Risk of Delay
The Subscription and Community Offering will expire at 5:00 p.m.,
Sidney, Ohio time on April 15, 1997 unless extended by the Association and the
Holding Company. However, unless waived by the Holding Company or the
Association, all orders will be irrevocable unless the Conversion is not
completed by May 30, 1997. In the event the Conversion is not completed by May
30, 1997, subscribers will have the right to modify or rescind their
subscriptions and to have their subscription funds returned with interest.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that such net proceeds will be between $11.0 million and $15.0
million (or up to $17.3 million in the event of an increase in the aggregate pro
forma market value of the Common Stock of up to 15% above the maximum of the
Estimated Valuation Range. See "Pro Forma Data" and "The Conversion Stock
Pricing and Number of Shares to be Issued" as to the assumptions used to arrive
at such amounts.
The net proceeds from the sale of the Common Stock in the Conversion
will substantially increase the capital of Peoples Federal and will be used for
general corporate purposes including its lending and investment activities and
possible expansion of its facilities. For information on the amount of pro forma
net proceeds assuming the sale of various amounts of Common Stock, see "Pro
Forma Data."
While the new capital resulting from the Conversion could increase the
Association's return on assets (as a result of the earnings on the new capital),
it will probably result in a decline in return on equity because it is unlikely
that the Association will quickly be able to (i) invest the new capital in
assets with rates equal to the average rates earned on the Association's
seasoned asset portfolio and (ii) leverage the new capital by increasing
liabilities to fund asset growth.
In exchange for all of the common stock of Peoples Federal issued upon
conversion, the Holding Company will contribute to Peoples Federal approximately
50% of the net proceeds from the sale of the Holding Company's Common Stock and
the Holding Company will retain the remaining 50% of the net proceeds. On an
interim basis, the proceeds will be invested by the Holding Company and Peoples
Federal in short-term investments or to repay borrowings. Such short-term
investments are generally anticipated to be similar to those currently contained
in the Association's portfolio. The specific types and amounts of short-term
assets will be determined based on market conditions at the time of the
completion of the Conversion. In addition, the Holding Company, subject to
regulatory approval, is expected to provide the funding for the ESOP loan. See
"Business - Lending Activities" and " - Investment Activities" and "Management
of the Association - Benefit Plans - Employee Stock Ownership Plan."
22
<PAGE>
In the future the Holding Company may consider the adoption of a
restricted stock plan (i.e., the RRP), at the earliest, one-year following the
Conversion and subject to stockholder ratification. If such a plan is
implemented, the Holding Company may use a portion of the net proceeds to fund
the purchase by the plan of the Holding Company's Common Stock.
After the completion of the Conversion, it is anticipated that the
Association will reinvest the proceeds of the interim short-term investments in
loans and, to a lesser extent, investment securities. Proceeds reinvested in
loans are anticipated to be allocated among the Association's loan programs in
proportions similar to recent lending volumes, provided suitable opportunities
are available to the Association. Investment securities are anticipated to be
similar to those in the Association's current portfolio. However, the
reinvestment of the proceeds will be based on future market conditions and
investment opportunities. The timing and amount of such investments cannot now
be determined nor can the Association identify the specific assets in which
investments will be made.
The proceeds may also be utilized by the Holding Company to repurchase
(at prices which may be above or below the initial offering price) shares of the
Common Stock through an open market repurchase program available to all
stockholders subject to limitations contained in OTS regulations, although the
Holding Company currently has no specific plan to repurchase any of its stock.
In the future, the Board of Directors of the Holding Company will make decisions
on the repurchase of the Common Stock based on its view of the appropriateness
of the price of the Common Stock as well as the Holding Company's and the
Association's investment opportunities and capital needs. Under current OTS
regulations, no repurchases may be made within the first year following
Conversion except with OTS approval under "exceptional circumstances." During
the second and third years following Conversion, OTS regulations permit, subject
to certain limitations, the repurchase of up to 5% of the outstanding shares of
stock during each twelve-month period with a greater amount permitted with OTS
approval. In general, the OTS regulations do not restrict repurchases thereafter
other than indirectly by virtue of limits on the Association's ability to pay
dividends to the Holding Company which may be necessary to fund the repurchase.
For a description of the restrictions on the Association's ability to provide
the Holding Company with funds through dividends or other distributions, see
"Dividends" and "The Conversion -Restrictions on Repurchase of Stock."
The Holding Company or Peoples Federal may consider expansion through
the acquisition of other financial services providers (or branches, deposits or
assets thereof), although there are no specific plans, negotiations or written
or oral agreements regarding any acquisitions at this time. In general, the
Board will evaluate acquisition and diversification opportunities, if any, by
whether they would enhance the Holding Company's and the Association's ability
to fulfill their financial goals. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Holding Company may use
remaining net proceeds to engage in activities not permissible for the
Association. See "Regulation - Holding Company Regulation."
23
<PAGE>
DIVIDENDS
The Holding Company's Board of Directors may consider a policy of
paying cash dividends on the Common Stock in the future. The declaration and
payment of dividends are subject to, among other things, the Holding Company's
financial condition and results of operations, the Association's regulatory
capital requirements, tax considerations, industry standards, economic
conditions, regulatory restrictions, general business practices and other
factors.
It is not presently anticipated that the Holding Company will conduct
significant operations independent of those of Peoples Federal for some time
following Conversion. Therefore, the Holding Company does not expect to have any
significant source of income other than earnings on the net Conversion proceeds
retained by the Holding Company (which proceeds are currently estimated to range
from $11.0 million to $15.0 million based on the minimum and the maximum of the
Estimated Valuation Range, respectively) and dividends from Peoples Federal, if
any. Consequently, the ability of the Holding Company to pay cash dividends to
its stockholders will be dependent upon such retained proceeds and earnings
thereon, and upon the ability of Peoples Federal to pay dividends to the Holding
Company. See "Description of Capital Stock - Holding Company Capital Stock -
Dividends." Peoples Federal, like all savings associations regulated by the OTS,
is subject to certain restrictions on the payment of dividends based on its net
income, its capital in excess of the regulatory capital requirements and the
amount of regulatory capital required for the liquidation account to be
established in connection with the Conversion. At October 31, 1996, the
Association had available $2.4 million (without giving effect to any proceeds
received upon Conversion or the requirement to maintain a liquidation account
upon Conversion for the benefit of depositors) which could be distributed
pursuant to OTS regulations. See "The Conversion - Effects of Conversion to
Stock Form on Depositors and Borrowers of the Association - Liquidation Rights
in Proposed Converted Institution" and "Regulation - Regulatory Capital
Requirements" and "- Limitations on Dividends and Other Capital Distributions."
Earnings allocated to Peoples Federal's "excess" bad debt reserves and deducted
for federal income tax purposes cannot be used by Peoples Federal to pay cash
dividends to the Holding Company without adverse tax consequences. See
"Regulation - Federal and State Taxation."
MARKET FOR COMMON STOCK
Peoples Federal, as a mutual thrift institution, and the Holding
Company, as a newly organized company, have never issued capital stock.
Consequently, there is not at this time an existing market for the Common Stock.
The Holding Company has applied to have the Common Stock quoted on the Nasdaq
National Stock Market under the symbol "PSFC" upon completion of the Conversion.
In order to be quoted in the Nasdaq National Stock Market, there must be at
least three market makers for the Common Stock. Keefe, Bruyette & Woods, Inc.
has agreed to act as a market maker in the Holding Company's Common Stock. The
Holding Company anticipates that it will be able to secure two other market
makers to enable the stock to be quoted on the Nasdaq National Stock Market.
However, a public trading market having the desirable
24
<PAGE>
characteristics of depth, liquidity and orderliness depends upon the presence in
the marketplace of both willing buyers and sellers of the Common Stock at any
given time. Accordingly, there can be no assurance that an active and liquid
market for the Common Stock will develop or be maintained or that resales of the
Common Stock can be made at or above the Purchase Price. See also, "The
Conversion - Stock Pricing and Number of Shares to be Issued."
25
<PAGE>
PRO FORMA DATA
The following table sets forth the historical net income and retained
earnings of Peoples Federal at and for the year ended June 30, 1996 and at and
for the four months ended October 31, 1996 and, after giving effect to the
Conversion, the pro forma consolidated net income, capital stock and
stockholders' equity of the Holding Company at and for the year ended June 30,
1996 and at and for the four months ended October 31, 1996. The pro forma data
is computed on the assumptions that (i) the specified number of shares of Common
Stock was sold at the beginning of the specified periods and yielded net
proceeds to the Holding Company as indicated, (ii) 50% of such net proceeds were
retained by the Holding Company and the remainder were used to purchase all of
the stock of Peoples Federal, and (iii) such net proceeds, less the amount of
the ESOP funding, were invested by the Association and Holding Company at the
beginning of the periods to yield a net after-tax return of 3.66% and 3.62% for
the year ended June 30, 1996 and for the four months ended October 31, 1996,
respectively. The assumed return is based on the one year treasury bills, as
adjusted for applicable federal taxes totalling 34.0% of such assumed returns.
The use of this current rate is viewed to be more relevant in the current low
rate environment than the use of an arithmetic average of the weighted average
yield earned by the Association on its interest-earning assets and the weighted
average rate paid on its deposits during such periods. In calculating the
underwriting fees, the table assumes that (i) no commission was paid on
$1,745,000 of shares sold to directors and officers, (ii) 8% of the total shares
sold in the Conversion were sold to the ESOP at no commission, (iii) the
remaining shares were sold at a 1.5% commission. (These assumptions represent
management's estimate as to the distribution of stock orders in the Conversion.
However, there can be no assurance that such estimate will be accurate and that
a greater proportion of shares will not be sold at a higher commission, thus
increasing offering expenses.) Fixed expenses are estimated to be $358,000.
Actual Conversion expenses may be more or less than those estimated because the
fees paid to Webb and other brokers will depend upon the categories of
purchasers, the Purchase Price and market conditions and other factors. The pro
forma net income amounts derived from the assumptions set forth herein should
not be considered indicative of the actual results of operations of the Holding
Company that would have been attained for any period if the Conversion had been
actually consummated at the beginning of such period, and the assumptions
regarding investment yields should not be considered indicative of the actual
yields expected to be achieved during any future period.
The total number of shares to be issued in the Conversion may be
increased or decreased significantly, and/or the price per share decreased, to
reflect changes in market and financial conditions prior to the close of the
Subscription and Community Offering. However, if the aggregate Purchase Price of
the Common Stock sold in the Conversion is below $11.5 million (the minimum of
the Estimated Valuation Range) or more than $17.9 million (15% above the
Estimated Valuation Range), subscribers will be offered the opportunity to
modify or cancel their subscriptions. See "The Conversion - Stock Pricing and
Number of Shares to be Issued."
26
<PAGE>
<TABLE>
<CAPTION>
At or For the Four Months Ended October 31, 1996
--------------------------------------------------------------
15%
Above
Minimum Midpoint Maximum Maximum
1,147,500 1,350,000 1,552,500 1,785,375
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds .................................. $ 11,475 $ 13,500 $ 15,525 $ 17,854
Less offering expenses and commissions .......... (490) (518) (546) (578)
----------- ----------- ----------- -----------
Estimated net conversion proceeds(1) ........... 10,985 12,982 14,979 17,276
Less ESOP funding ............................... (918) (1,080) (1,242) (1,428)
----------- ----------- ----------- -----------
Estimated proceeds available for investment .... $ 10,067 $ 11,902 $ 13,737 $ 15,848
=========== =========== =========== ===========
Net Income (Loss):
Historical .................................... $ (25) $ (25) $ (25) $ (25)
Pro Forma Adjustments:
Net earnings from proceeds(2) ................ 121 144 166 191
ESOP(3) ...................................... (20) (24) (27) (31)
----------- ----------- ----------- -----------
Pro forma net income ....................... $ 76 $ 95 $ 114 $ 135
=========== =========== =========== ===========
Net Income (Loss) Per Share:
Historical(4) ............................... $ (0.02) $ (0.02) $ (0.02) $ (0.02)
Pro forma Adjustments:
Net earnings from proceeds ................. 0.11 0.12 0.12 0.12
ESOP(3) .................................... (0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- -----------
Pro forma net income per share ......... $ 0.07 $ 0.08 $ 0.08 $ 0.08
=========== =========== =========== ===========
Pro forma price to earnings per share (P/E ratio) 47.62x 41.67x 41.67x 41.67x
Number of shares ................................ 1,058,760 1,245,600 1,432,440 1,647,306
Stockholders' Equity (Book Value)(5):
Historical .................................... $ 9,188 $ 9,188 $ 9,188 $ 9,188
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds ............. 10,985 12,982 14,979 17,276
Less common stock acquired by:
ESOP(3) ...................................... (918) (1,080) (1,242) (1,428)
----------- ----------- ----------- -----------
Pro forma stockholder's equity ........... $ 19,255 $ 21,090 $ 22,925 $ 25,036
=========== =========== =========== ===========
Stockholders' Equity (Book Value)(5):
Per Share(4):
Historical .................................... $ 8.01 $ 6.80 $ 5.92 $ 5.15
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds ............. 9.57 9.62 9.65 9.67
Less common stock acquired by:
ESOP(3) ...................................... (0.80) (0.80) (0.80) (0.80)
----------- ----------- ----------- -----------
Pro forma book value per share ........... $ 16.78 $ 15.62 $ 14.77 $ 14.02
=========== =========== =========== ===========
Pro forma price to book value ................... 59.59% 64.02% 67.70% 71.32%
Number of shares ................................ 1,147,500 1,350,000 1,552,500 1,785,375
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
At or For the Four Months Ended October 31, 1996
--------------------------------------------------------------
15%
Above
Minimum Midpoint Maximum Maximum
1,147,500 1,350,000 1,552,500 1,785,375
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds .................................. $ 11,475 $ 13,500 $ 15,525 $ 17,854
Less offering expenses and commissions .......... (490) (518) (546) (578)
----------- ----------- ----------- -----------
Estimated net conversion proceeds(1) ........... 10,985 12,982 14,979 17,276
Less ESOP funding ............................... (918) (1,080) (1,242) (1,428)
----------- ----------- ----------- -----------
Estimated proceeds available for investment .... $ 10,067 $ 11,902 $ 13,737 $ 15,848
=========== =========== =========== ===========
Net Income:
Historical .................................... $ 852 $ 852 $ 852 $ 852
Pro Forma Adjustments:
Net earnings from proceeds(2) ................ 368 436 503 580
ESOP(3) ...................................... (61) (71) (82) (94)
----------- ----------- ----------- -----------
Pro forma net income ....................... $ 1,159 $ 1,217 $ 1,273 $ 1,338
=========== =========== =========== ===========
Net Income Per Share:
Historical(4) ............................... $ 0.80 $ 0.68 $ 0.59 $ 0.51
Pro forma Adjustments:
Net earnings from proceeds ................. 0.35 0.35 0.35 0.35
ESOP(3) .................................... (0.06) (0.06) (0.06) (0.06)
----------- ----------- ----------- -----------
Pro forma net income per share ......... $ 1.09 $ .97 $ 0.88 $ 0.80
=========== =========== =========== ===========
Pro forma price to earnings per share (P/E ratio) 9.17x 10.31x 11.36x 12.50x
Number of shares ................................ 1,064,880 1,252,800 1,440,720 1,656,828
Stockholders' Equity (Book Value)(5):
Historical .................................... $ 9,213 $ 9,213 $ 9,213 $ 9,213
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds ............. 10,985 12,982 14,979 17,276
Less common stock acquired by:
ESOP(3) ...................................... (918) (1,080) (1,242) (1,428)
----------- ----------- ----------- -----------
Pro forma stockholder's equity ........... $ 19,280 $ 21,115 $ 22,950 $ 25,061
=========== =========== =========== ===========
Stockholders' Equity (Book Value)(5):
Per Share(4):
Historical .................................... $ 8.03 $ 6.82 $ 5.93 $ 5.17
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds ............. 9.57 9.62 9.65 9.68
Less common stock acquired by:
ESOP(3) ...................................... (0.80) (0.80) (0.80) (0.80)
----------- ----------- ----------- -----------
Pro forma book value per share ........... $ 16.80 $ 15.64 $ 14.78 $ 14.04
=========== =========== =========== ===========
Pro forma price to book value ................... 59.52% 63.94% 67.66% 71.23%
Number of shares ................................ 1,147,500 1,350,000 1,552,500 1,785,375
</TABLE>
- ----------
(1) It is assumed that the cost of the ESOP will be funded from the net proceeds
retained by the Holding Company.
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion. For purposes of
calculating pro forma net income, proceeds attributable to purchases by the
ESOP, which purchases are to be funded by the Holding Company and the
Association, have been deducted from net proceeds.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares are expected to be borrowed by the ESOP from the net proceeds from
the Conversion retained by the Holding Company. The Association intends to
make contributions to the ESOP in amounts at least equal to the principal
and interest
28
<PAGE>
requirement of the debt. The Association's payment of the ESOP debt is
based upon equal installments of principal and interest over a 10-year
period. However, assuming the Holding Company makes the ESOP loan, interest
income earned by the Holding Company on the ESOP debt will offset the
interest paid by the Association. Accordingly, only the principal payments
on the ESOP debt are recorded as an expense (tax-effected) to the Holding
Company on a consolidated basis. The amount of ESOP debt is reflected as a
reduction of stockholders' equity. In the event that the ESOP were to
receive a loan from an independent third party, both ESOP expense and
earnings on the proceeds retained by the Holding Company would be expected
to increase.
For purposes of this table, the Purchase Price of $10.00 was utilized to
calculate ESOP expense. The Holding Company intends to record compensation
expense related to the ESOP in accordance with Statement of Accounting
Principles 93-6 ("SOP 93-6"). As a result, to the extent the value of the
Common Stock appreciates over time, compensation expense related to the ESOP
will increase. SOP 93-6 also requires that, for the earnings per share
computations for leveraged ESOPs, outstanding shares include only such
shares as have been committed to be released to participants. See
"Management of the Association - Benefit Plans - Employee Stock Ownership
Plan."
(4) Historical pro forma per share amounts have been computed as if the shares
of Common Stock indicated had been outstanding at the beginning of the
periods or on the dates shown, but without any adjustment of historical net
income or historical equity to reflect the investment of the estimated net
proceeds of the sale of shares in the Conversion as described above. All
ESOP shares have been considered outstanding for purposes of computing book
value per share. Pro forma share amounts have been computed by dividing the
pro forma net income or stockholders' equity (book value) by the number of
shares indicated.
(5) "Book value" represents the difference between the stated amounts of the
Association's assets (based on historical cost) and liabilities computed in
accordance with generally accepted accounting principles. The amounts shown
do not reflect the effect of the Liquidation Account which will be
established for the benefit of Eligible and Supplemental Eligible Account
Holders in the Conversion, or the federal income tax consequences of the
restoration to income of the Association's special bad debt reserves for
income tax purposes which would be required in the unlikely event of
liquidation. See "The Conversion - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association" and "Regulation - Federal and
State Taxation." The amounts shown for book value do not represent fair
market values or amounts, if any, distributable to stockholders in the
unlikely event of liquidation.
29
<PAGE>
PRO FORMA REGULATORY CAPITAL ANALYSIS
At October 31, 1996, the Association exceeded each of the three OTS
capital requirements. Set forth below is a summary of the Association's
compliance with the OTS capital standards as of October 31, 1996 on a historical
basis, in accordance with generally accepted accounting principles ("GAAP"), and
on a pro forma basis using the assumptions contained under the caption "Pro
Forma Data" and assuming that the indicated number of shares were sold as of
such date.
<TABLE>
<CAPTION>
Pro Forma at
October 31, 1996
----------------------
1,147,500 Shares
Historical Minimum
Amount Percent(1) Amount Percent(1)
---------------------------------------------------
<S> <C> <C> <C> <C>
GAAP Capital(2)............ $9,188 10.2% $13,763 14.5%
====== ==== ======= =====
Tangible Capital:
Capital level............ $9,188 10.2% $13,763 14.5%
Requirement.............. 1,351 1.5 1,419 1.5
------ ----- -------- -----
Excess................... $7,837 8.7% $12,344 13.0%
====== ===== ======= =====
Core Capital:
Capital level............ $9,188 10.2% $13,763 14.5%
Requirement.............. 2,701 3.0 2,839 3.0
------ ----- -------- -----
Excess................... $6,487 7.2% $10,924 11.5%
====== ===== ======= =====
Risk-Based Capital:
Capital level(3)......... $9,514 16.5% $14,089 24.0%
Requirement(4)........... 4,627 8.0 4,700 8.0
------ ----- -------- -----
Excess................... $4,887 8.5% $ 9,389 16.0%
====== ===== ======= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at October 31, 1996
---------------------------------------------------------------------------
1,785,375 Shares
1,350,000 Shares 1,552,500 Shares 15% above
Midpoint Maximum Maximum
Amount Percent(1) Amount Percent(1) Amount Percent(1)
-----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital(2)............ $14,599 15.3% $15,436 16.0% $16,398 16.9%
======= ==== ======= ==== ======= =====
Tangible Capital:
Capital level............ $14,599 15.3% $15,436 16.0% $16,398 16.9%
Requirement.............. 1,432 1.5 1,444 1.5 1,459 1.5
-------- ----- -------- ----- -------- -----
Excess................... $13,167 13.8% $13,992 14.5% $14,939 15.4%
======= ==== ======= ===== ======= =====
Core Capital:
Capital level............ $14,599 15.3% $15,436 16.0% $16,398 16.9%
Requirement.............. 2,864 3.0 2,189 3.0 2,918 3.0
-------- ---- -------- ----- -------- -----
Excess................... $11,735 12.3% $12,547 13.0% $13,480 13.9%
======= ==== ======= ===== ======= =====
Risk-Based Capital:
Capital level(3)......... $14,925 25.3% $15,762 26.7% $16,724 28.2%
Requirement(4)........... 4,713 8.0 4,727 8.0 4,742 8.0
-------- ----- -------- ----- -------- -----
Excess................... $10,212 17.3% $11,035 18.7% $11,982 20.2%
======= ===== ======= ==== ======= ====
</TABLE>
- --------------------
(1) Tangible and core capital levels are shown as a percentage of adjusted total
assets; risk-based capital levels are shown as a percentage of risk-weighted
assets.
(2) Total retained earnings as calculated under GAAP. Assumes that the
Association receives 50% of the net proceeds, offset in part by the
aggregate purchase price of Common Stock acquired at $10.00 per share by the
ESOP in the Conversion. The amount expected to be borrowed by the ESOP is
deducted from pro forma capital to illustrate the possible impact on the
Association.
(3) Includes $326,000 of general valuation allowances, all of which qualify as
supplementary capital. See "Regulation - Regulatory Capital Requirements."
(4) Assumes reinvestment of net proceeds in 20% risk-weighted assets.
30
<PAGE>
CAPITALIZATION
Set forth below is the capitalization, including deposits, of Peoples
Federal as of October 31, 1996, and the pro forma capitalization of the Holding
Company at the minimum, the midpoint, the maximum and 15% above the maximum of
the Estimated Valuation Range, after giving effect to the Conversion and based
on other assumptions set forth in the table and under the caption "Pro Forma
Data."
<TABLE>
<CAPTION>
Holding Company - Pro Forma Based
Upon Sale at $10.00 per share
----------------------------------------------------
Existing 15% Above
Capitalization Minimum Midpoint Maximum Maximum
for 1,147,500 1,350,000 1,552,500 1,785,375
Association Shares Shares Shares Shares
--------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1)................................. $79,879 $79,879 $79,879 $79,879 $79,879
======= ======= ======= ======= =======
Stockholders' Equity:
Serial Preferred Stock ($0.01 par value)
authorized - 500,000 shares; none to be
outstanding............................... $ --- $ --- $ --- $ --- $ ---
Common Stock ($0.01 par value) authorized
- 3,500,000 shares; to be outstanding (as
shown)(2)................................. --- 11 14 16 18
Additional paid-in capital................. --- 10,974 12,968 14,963 17,258
Retained earnings, substantially
restricted(3)............................. 9,188 9,188 9,188 9,188 9,188
Less:
Common Stock acquired by ESOP(4).......... --- 918 1,080 1,242 1,428
---------- -------- -------- ------- --------
Total Stockholders' Equity.................. $ 9,188 $19,255 $21,090 $22,925 $25,036
======= ======= ======= ======= =======
</TABLE>
- -----------------
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion. Any such withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) Does not reflect the shares of Common Stock that may be reserved for
issuance pursuant to the Stock Option Plan.
(3) See "Dividends" and "Regulation - Limitations on Dividends and Other Capital
Distributions" regarding restrictions on future dividend payments and "The
Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers
of the Association" regarding the liquidation account to be established upon
Conversion.
(4) Assumes that 8% of the shares sold in the Conversion will be purchased by
the ESOP. The funds used to acquire the ESOP shares will be borrowed from
the Holding Company. The Association intends to make contributions to the
ESOP sufficient to service and ultimately retire the ESOP's debt. The amount
to be borrowed by the ESOP is reflected as a reduction of stockholders'
equity. See "Management - Benefit Plans - Employee Stock Ownership Plan."
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following is management's analysis of the financial condition and
the results of operations of Peoples Federal during recent periods. This
discussion is designed to provide a more comprehensive review of the operating
results and financial position than could be obtained from an examination of the
financial statements alone. This analysis should be read in conjunction with the
financial statements and related footnotes and the selected financial data
included elsewhere in this prospectus.
The Association is a financial intermediary primarily engaged in the
business of attracting savings deposits from the general public and investing
such funds in permanent mortgage loans secured by one- to four-family
residential real estate located primarily in Shelby County, Ohio, and to a
lesser extent in the contiguous counties of Logan, Auglaize, Miami, Darke and
Champaign. The Association also originates, to a lesser extent, loans for the
construction of one- to four-family real estate, loans secured by multi-family
real estate (over four units) and nonresidential real estate, and consumer loans
and invests in U.S. government obligations, interest bearing deposits in other
financial institutions and other investments permitted by applicable law.
Financial Condition
Comparison of Financial Condition at October 31, 1996 and June 30,
1996. Total assets at October 31, 1996 were $90.0 million compared to $86.9
million at June 30, 1996, an increase of $3.1 million, or 3.6%. The increase in
total assets was primarily due to increases in loans receivable of $5.5 million,
partially offset by decreases in cash and cash equivalents of $900,000,
investment securities of $500,000 and time deposits with other financial
institutions of $1.0 million. The increase in loans receivable was largely in
one- to four-family residential loans, increasing $3.5 million, and real estate
construction loans, increasing $2.0 million. These increases are reflective of a
strong local economy coupled with attractive construction loan rates and
products compared to the local competition. Consumer and other loan balances
remained relatively stable, with a only slight increase of $47,000. The decrease
in cash and cash equivalents, investment securities and time deposits with other
financial institutions was the result of the redirection of funds provided from
the maturities of time deposits and investment securities and other available
funds to provide for loan growth.
Total liabilities at October 31, 1996 were $80.8 million compared to
$77.7 million at June 30, 1996, an increase of $3.1 million, or 4.0%. Total
deposits increased $2.6 million from $77.3 million at June 30, 1996 to $79.9
million at October 31, 1996. The growth in total deposits was a combination of
an increase of $4.7 million in certificates of deposit and a $2.1 million
decrease in savings accounts. The movement of funds from savings accounts to
certificates of deposit, as well as the additional growth in certificates, was
the result of several special promotions conducted by the Association. In
addition, accrued expenses and other
32
<PAGE>
liabilities increased by $544,000, which was primarily the result of a special
deposit insurance assessment resulting from legislation passed and enacted into
law on September 30, 1996 to recapitalize the Savings Association Insurance Fund
("SAIF") of the FDIC. For a further discussion of the special assessment, see "-
Results of Operations."
Comparison of Financial Condition at June 30, 1996 and 1995. Total
assets at June 30, 1996 were $86.9 million compared to $79.0 million at June 30,
1995, an increase of $7.9, or 10.0%. Growth in net loans receivable accounted
for $6.3 million of the asset growth increasing from $71.9 million at June 30,
1995 to $78.2 million at June 30, 1996. The growth in loans receivable was
primarily comprised of one- to four-family residential mortgage loans. The
increase is attributable to a new 20-year mortgage loan product which the
Association began offering in fiscal 1996, as well as a strong local economy.
Time deposits with other financial institutions totaled $1.1 million at June 30,
1996 while there were none at June 30, 1995. Additionally, cash and cash
equivalents increased approximately $880,000 from June 30, 1995 to June 30,
1996. These increases are the result of the short-term investment of excess
funds provided by maturities of investment securities and deposit growth.
Total liabilities were $77.7 million at June 30, 1996 compared to $70.6
million at June 30, 1995, an increase of $7.1 million, or $10.1%. Total deposit
accounts increased by $7.0 million from $70.3 million at June 30, 1995 to $77.3
million at June 30, 1996. Deposit growth was primarily limited to certificates
of deposit accounts. The growth was attributable to several interest rate
promotions combined with an increasing interest rate environment.
Equity at June 30, 1996 was $9.2 million compared to $8.4 million at
June 30, 1995. The increase of $852,000, or 10.1% was comprised completely of
the net income for the fiscal year ended June 30, 1996.
Results of Operations
The operating results of the Association are affected by the general
economic conditions, the monetary and fiscal policies of federal agencies and
the regulatory policies of agencies that regulate financial institutions. The
Association's cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by the demand for real estate loans and other types of loans, which
in turn is affected by the interest rates at which such loans are made, general
economic conditions and the availability of funds for lending activities.
The Association's net income primarily depends upon its net interest
income, which is the difference between the interest income earned on
interest-earning assets, such as loans and securities, and interest expense
incurred on interest-bearing liabilities, such as deposits and other borrowings.
The level of net interest income is dependent upon the interest rate environment
and the volume and composition of interest-earning assets and interest-bearing
liabilities. Net income is also affected by provisions for loan losses, service
charges, gains on the sale of assets and other income, noninterest expense and
income taxes.
33
<PAGE>
Comparison of Results of Operations for the Four Months Ended October 31, 1996
and 1995
Net Income. The Association experienced a net loss of $25,000 for the
four months ended October 31, 1996, compared to net income of $304,000 for the
four months ended October 31, 1995. The decrease in net income was primarily the
result of a special SAIF deposit insurance assessment of $456,000, as more fully
discussed below.
Net Interest Income. Net interest income totaled $951,000 for the four
months ended October 31, 1996, as compared to $942,000 for the four months ended
October 31, 1995, an increase of $9,000, or 1.0%. The change in net interest
income is attributable to higher average balances of interest earning assets
partially offset by an overall increase in the cost of funds for an increased
volume of deposits with a larger portion of the deposit base being in higher
yielding certificates of deposit and an increased level of borrowed funds. See
"-- Yields Earned and Rates Paid."
Interest and fees on loans increased approximately $175,000, or 8.8%,
from $1,992,000 for the four months ended October 31, 1995 to $2,167,000 the
four months ended October 31, 1996. The increase in interest income was due to
higher average loans receivable, partially offset by a decline in the average
yield earned from 8.25% for the four months ended October 31, 1995 to 8.04% for
the four months ended October 31, 1996.
Interest earned on investment securities totaled $44,000 for the four
months ended October 31, 1996, as compared to $51,000 for the four months ended
October 31, 1995. The decrease was a result of lower average balances of
investment securities combined with a decreased yield earned.
Interest on interest-bearing deposits and overnight deposits decreased
approximately $30,000 for the four months ended October 31, 1996, as compared to
the four months ended October 31, 1995. The decline was the result of lower
average balances of interest-bearing deposits and overnight funds, partially
offset by higher rates earned.
Dividends on FHLB stock increased slightly for the four months ended
October 31, 1996, compared to the four months ended October 31, 1995, primarily
due to an increase in the number of shares of FHLB stock owned.
Interest paid on deposits increased approximately $97,000 for the four
months ended October 31, 1996, as compared to the four months ended October 31,
1995. The increase in interest expense was due to an increase in average deposit
balances combined with an increase in the cost of funds. The average cost of
deposits increased from 4.88% for the four months ended October 31, 1995, to
4.98% for the four months ended October 31, 1996. The increase in the average
cost of deposits was the result of a shift in deposit accounts from savings and
demand deposit accounts to higher yielding certificates of deposits as a result
of special interest rate promotions for certificates of deposit. Certificates of
deposit increased from 69.9% of total deposits at October 31, 1995 to 73.2% of
total deposits at October 31, 1996. The yield on certificates of deposits was
5.79% for the four months ended October 31, 1995, compared to
34
<PAGE>
5.83% for the four months ended October 31, 1996, while the average yield on
savings and demand deposit accounts remained stable at 2.92% for the same four
month periods.
Interest on the borrowings totaled $33,000 for the four months ended
October 31, 1996. The average yield paid on the borrowings was 5.68%. The
Association borrowed funds for the first time from the FHLB of Cincinnati during
the four months ended October 31, 1996. The borrowings were used as a source of
short-term liquidity to provide funding for loan demand and were repaid prior to
October 31, 1996.
Provision for Loan Losses. The Association maintains an allowance for
loan losses in an amount which, in management's judgment, is adequate to absorb
reasonably foreseeable losses inherent in the loan portfolio. While management
utilizes its best judgment and information available, the ultimate adequacy of
the allowance is dependent upon a variety of factors, including the performance
of the Association's loan portfolio, the economy, changes in real estate values
and interest rates and the view of the regulatory authorities toward loan
classifications. The provision for loan losses is determined by management as
the amount to be added to the allowance for loan losses after net charge-offs
have been deducted to bring the allowance to a level which is considered
adequate to absorb losses inherent in the loan portfolio. The amount of the
provision is based on management's monthly review of the loan portfolio and
consideration of such factors as historical loss experience, general prevailing
economic conditions, changes in the size and composition of the loan portfolio
and specific borrower considerations, including the ability of the borrower to
repay the loan and the estimated value of the underlying collateral.
The provision for loan losses for the four months ended October 31,
1996 totaled $21,000 compared to $8,000 for the four months ended October 31,
1995, an increase of $13,000, or 162.5%. The allowance for loan losses totaled
$326,000, or 0.37% of gross loans receivable and 28.3% of total non-performing
loans at October 31, 1996, compared to $259,000, or 0.35% of gross loans
receivable and 22.5% of total non-performing loans at October 31, 1995. The
increase in the provision for loan losses was attributable to an increase in the
total loan portfolio as well as an increase in the level of non-performing
assets for the four months ended October 31, 1996 as compared to the four months
ended October 31, 1995.
Noninterest income. Noninterest income for the four months ended
October 31, 1996 was $21,000 compared to $16,000 for the four months ended
October 31, 1995, an increase of $5,000, or 31.3%. The increase was primarily a
result of an increase in service fees collected on deposit accounts and other
miscellaneous fees.
Noninterest expense. Noninterest expense was $989,000 for the four
months ended October 31, 1996 compared to $489,000 for the four months ended
October 31, 1995, an increase of $500,000, or 102.2%. The increase was primarily
a result of $456,000 accrued for a special deposit insurance assessment
resulting from legislation passed and enacted into law on September 30, 1996 to
recapitalize the SAIF of the FDIC. The SAIF was below the level required by law
because a significant portion of the assessments paid into the SAIF by thrifts,
like the Association, were used to pay the cost of prior thrift failures. The
legislation called for a one-time assessment of $.0657 for each $100 in deposits
held as of March 31, 1995. As a result of the recapitalization of the SAIF, the
current disparity between bank and thrift insurance
35
<PAGE>
assessments will be reduced. Thrifts had generally been paying assessments of
$.23 per $100 of deposits, which, for most thrifts, will be reduced to $.064 per
$100 in deposits in January 1997 and to $.024 per $100 in deposits no later than
January 2000.
The legislation also provides for the merger of the SAIF and the Bank
Insurance Fund ("BIF") effective January 1, 1999, assuming there are no savings
associations chartered under federal law. Under separate proposed legislation,
Congress is considering the elimination of the federal thrift charter and the
separate federal regulation of thrifts. As a result, the Association would be
required to convert to a different financial institution charter and possibly
become subject to more restrictive activity limits. The Association cannot
predict the impact of any such legislation until it is enacted.
For the four months ended October 31, 1996 as compared to the same
period during 1995, there were no significant changes in the various other
noninterest expense categories.
Income Tax Expense. The volatility of income tax expense is primarily
attributable to the change in net income before income taxes. The provision for
income taxes totaled $(13,000) for the four months ended October 31, 1996
compared to $157,000 for the four months ended October 31, 1995, a decrease of
$170,000, or 108.3%. The decrease was largely due to the tax effect of
$(155,000) for the special assessment discussed above. The effective tax rates
were (34.0)% and 34.0% for the four months ended October 31, 1996 and 1995,
respectively.
Prior to the enactment of legislation discussed below, thrifts which
met certain tests relating to the composition of assets had been permitted to
establish reserves for bad debts and to make annual additions thereto which
could, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "nonqualifying loans" was computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" could be computed under either the experience method or the
percentage of taxable income method, based on an annual election.
In August 1996, legislation was enacted that repeals the reserve method
of accounting used by many thrifts to calculate their bad debt reserve for
federal income tax purposes. As a result, small thrifts such as the Association
must recapture that portion of the reserve that exceeds the amount that could
have been taken under the experience method for tax years beginning after
December 31, 1987. The legislation also requires thrifts to account for bad
debts for federal income tax purposes on the same basis as commercial banks for
tax years beginning after December 31, 1995. The recapture will occur over a
six-year period, the commencement of which will be delayed until the first
taxable year beginning after December 31, 1997, provided the institution meets
certain residential lending requirements. At October 31, 1996, the Association
had approximately $607,000 in bad debt reserves subject to recapture for federal
income tax purposes. The deferred tax liability related to the recapture has
been previously established so there will be no effect on future net income.
36
<PAGE>
Comparison of Results of Operations for the Years Ended June 30, 1996 and 1995
Net Income. Net income for the year ended June 30, 1996 was $852,000,
an increase of $17,000, or 2.0%, from net earnings of $835,000 for the year
ended June 30, 1995. The increase was primarily a result of an increase in net
interest income partially offset by increases in noninterest expense and
provision for income taxes.
Net Interest Income. Net interest income increased approximately
$50,000, or 1.8%, from $2,756,000 for the year ended June 30, 1995 compared to
$2,806,000 for the year ended June 30, 1996. The increase in net interest income
was the result of an increase in average balances of higher yielding
interest-earning assets, partially offset by an overall increase in the cost of
funds for an increased volume of deposits with a larger portion of the deposit
base being in higher yielding certificates of deposit. See "-- Yields Earned and
Rates Paid."
Interest and fees on loans increased approximately $644,000, or 11.9%,
from $5,404,000 for the year ended June 30, 1995, to $6,048,000 for the year
ended June 30, 1996. The increase in interest income was due to higher average
loans receivable related to the origination of new one- to four-family
residential real estate loans, combined with an increase in the average yield
earned on loans receivable from 7.78% for the year ended June 30, 1995 to 8.17%
for the year ended June 30, 1996.
Interest earned on investment securities totaled $150,000 for the year
ended June 30, 1996, as compared to $161,000 for the year ended June 30, 1995.
The decrease was a result of lower average balances of investment securities
partially offset by an increase in the yield earned.
Interest on interest-bearing deposits and overnight deposits increased
approximately $149,000, or 123.1%, from $121,000 for the year ended June 30,
1995 to $270,000 for the year ended June 30, 1996. The increase was the result
of higher average balances due to the temporary investment of excess funds
received from deposit growth in short-term time deposits with other financial
institutions and overnight deposits with the FHLB. Additionally, the average
yield earned on such investments increased slightly from 5.33% for the year
ended June 30, 1995 to 5.45% for the year ended June 30, 1996.
Dividends on FHLB stock increased slightly for the year ended June 30,
1996, compared to the year ended June 30, 1995, primarily due to an increase in
the number of shares of FHLB stock owned.
Interest paid on deposits totaled $3,706,000 for the year ended June
30, 1996, as compared to $2,968,000 for the year ended June 30, 1995, an
increase of $738,000, or 24.9%. The increase in interest expense was due to an
increase in average deposit balances combined with an increase in the cost of
funds. The average cost of deposits increased from 4.30% for the year ended June
30, 1995, to 4.94% for the year ended June 30, 1996. The increase in the average
cost of deposits was the result a shift in deposit accounts from savings and
demand deposit accounts to higher yielding certificates of deposits as a result
of special interest rate promotions for certificates of deposit as well as a
general increase in the interest rates on certificates of deposit offered by the
Association. Certificates of deposit increased from 66.8%
37
<PAGE>
of total deposits at June 30, 1995 to 69.5% of total deposits at June 30, 1996.
The yield on certificates of deposits was 5.02% for the year ended June 30,
1995, compared to 5.84% for the year ended June 30, 1996, while the average
yield on savings and demand deposit accounts declined from 2.96% at 2.91% over
the same periods.
Provision for Loan Losses. The provision for loan losses for the year
ended June 30, 1996 was $68,000 compared to $55,000 for the year ended June 30,
1995, an increase of $13,000, or 23.6%. The allowance for loan losses totaled
$307,000, or 0.37% of gross loans receivable and 25.1% of total non-performing
loans at June 30, 1996, compared with $251,000, or 0.33% of gross loans
receivable and 17.7% of total non-performing loans at June 30, 1995. The amount
of the provision and allowance for estimated losses on loans is influenced by
loan volume, current economic conditions, actual loss experience, industry
trends and other factors. The increase in the provision for loan losses was the
result of a higher volume of loans receivable during the year ended June 30,
1996 when compared to the year ended June 30, 1995 and to management's policy of
allocating a percentage of the allowance for loan losses to loans which
performed pursuant to their terms in order to recognize the inherent potential
of unforeseen risks.
Noninterest income. Noninterest income remained relatively stable
totaling $57,000 for the year ended June 30, 1996, compared to $60,000 for the
year ended June 30, 1995.
Noninterest expense. Noninterest expense increased $8,000, or 0.5%,
from $1,495,000 for the year ended June 30, 1995 to $1,503,000 for the year
ended June 30, 1996. There were no significant changes in the various
noninterest expense categories.
Income Tax Expense. The volatility of income tax expense is primarily
attributable to the change in net income before income taxes. The provision for
income taxes totaled $441,000 for the year ended June 30, 1996, compared to
$432,000 for the year ended June 30, 1995, resulting in an effective tax rate of
34.1% for both years.
Comparison of Results of Operations for the Years Ended June 30, 1995 and 1994
Net Income. Net income for the year ended June 30, 1995 totaled
$835,000, an increase of $249,000, or 42.5%, from net earnings of $586,000 for
the year ended June 30, 1994. The increase was primarily the result of an
increase in net interest income combined with the nonrecurrence of the
cumulative effect of the change in the method for accounting for income taxes
partially offset by an increase in noninterest expense.
Interest and fees on loans increased approximately $653,000, or 13.7%,
from $4,751,000 for the year ended June 30, 1994, to $5,404,000 for the year
ended June 30, 1995. The increase in interest income was due to higher average
loans receivable related to the origination of new one- to four-family
residential real estate loans and consumer loans, combined with an increase in
the average yield earned on loans receivable from 7.32% for the year ended June
30, 1994 to 7.78% for the year ended June 30, 1995.
38
<PAGE>
Interest earned on investment securities totaled $161,000 for the year
ended June 30, 1995, as compared to $180,000 for the year ended June 30, 1994.
The decrease was a result of lower average balances of investment securities
combined with a slight decrease in the yield earned.
Interest on interest-bearing deposits and overnight deposits increased
approximately $8,000, or 7.1%, from $113,000 for the year ended June 30, 1995 to
$121,000 for the year ended June 30, 1996. The increase was the result of an
increase in the average yield earned on such investments from 2.92% for the year
ended June 30, 1994 to 5.28% for the year ended June 30, 1995. The increase in
interest income from the higher yield earned on interest-bearing deposits and
overnight deposits was mostly offset by the decrease in interest income
resulting from a decrease in the average balances of such investments held
during fiscal 1995.
Dividends on FHLB stock increased slightly for the year ended June 30,
1995, compared to the year ended June 30, 1994, primarily due to an increase in
the number of shares of FHLB stock owned.
Interest paid on deposits totaled $2,968,000 for the year ended June
30, 1995, compared to $2,637,000 for the year ended June 30, 1994, an increase
of $331,000, or 12.6%. The increase in interest paid was the combined result of
an increase in the volume of certificates of deposit accounts resulting from
various special promotions and new products offered throughout fiscal 1995 and
an increase in the overall cost of funds. The increase in the overall cost of
funds was a result of consumers shifting funds from lower yielding savings and
demand deposit accounts and shorter-term certificates of deposits to higher
yielding, longer-term certificates of deposit. As such, certificates of deposit
increased from 62.3% of total deposits at June 30, 1994 to 66.8% of total
deposits at June 30, 1995. The yield on certificates of deposits increased from
4.53% for the year ended June 30, 1994, to 5.02% for the year ended June 30,
1995, while the average yield on savings and demand deposit accounts remained
relatively stable increasing from 2.95% to 2.96% over the same periods.
Provision for Loan Losses. The provision for loan losses for the year
ended June 30, 1995 was $55,000 compared to $83,000 for the year ended June 30,
1994, a decrease of $28,000, or 33.7%. The allowance for loan losses totaled
$251,000, or 0.33% of gross loans receivable and 17.7% of total non-performing
loans at June 30, 1995, compared with $198,000, or 0.29% of gross loans
receivable and 12.4% of total non-performing loans at June 30, 1994. The amount
of the provision and allowance for estimated losses on loans is influenced by
loan volume, current economic conditions, actual loss experience, industry
trends and other factors. The provision for loan losses was higher for the year
ended June 30, 1994, as compared to the year ended June 30, 1995, as a result of
a change in the methodology for classifying loans in the Association's portfolio
which impacted the level of the allowance for loan losses. As such, management
increased the provision for fiscal 1994 to bring the allowance for loan losses
to the newly required level.
Noninterest income. Noninterest income remained relatively stable
totaling $60,000 for the year ended June 30, 1995, compared to $65,000 for the
year ended June 30, 1994.
39
<PAGE>
Noninterest expense. Noninterest expense totaled $1,495,000 for the
year ended June 30, 1995, compared to $1,427,000 for the year ended June 30,
1994, an increase of $68,000, or 4.8%. The major components of the increase were
increases in compensation and
benefits expense of $43,000, primarily due to annual merit increases, and a
$17,000 increase in occupancy and equipment expense.
Income Tax Expense. The volatility of income tax expense is primarily
attributable to the change in net income before income taxes. The provision for
income taxes totaled $432,000 for the year ended June 30, 1995 and $334,000 for
the year ended June 30, 1994, resulting in effective tax rates of 34.1% and
33.8%, respectively.
During the year ended June 30, 1994, the Association adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the Association to follow the liability method in accounting for income
taxes. The liability method provides that deferred tax assets and liabilities
are recorded based on the difference between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes, at
enacted tax rates. The cumulative effect on changing to this method of
accounting was a $69,000 reduction in income in fiscal 1994.
40
<PAGE>
Yields Earned and Rates Paid
The following table sets forth certain information relating to the
Association's average balance sheet information and reflects the average yield
on interest-earning assets and the average cost of interest-bearing liabilities
for the periods indicated. Such yields and costs are derived by dividing income
or expense by the average balances of interest-earning assets or
interest-bearing liabilities, respectively, for the periods presented. Average
balances are derived from average month-end balances. Nonaccruing loans have
been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Four Months Ended October 31,
1996 1995
--------------------------------- -----------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
---------------------- ---------- ---------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)................ $80,873 $2,167 8.04% $72,397 $1,992 8.25%
Interest-bearing deposits.......... 1,894 36 5.70 3,724 66 5.32
Investment securities(2)........... 2,519 44 5.24 2,799 51 5.47
FHLB stock......................... 672 16 7.14 625 14 6.72
-------- ------- ------- ------
Total interest-earning assets..... $85,958 2,263 7.90 $79,545 2,123 8.01
======= ------ ======= ------
Interest-Bearing Liabilities:
Savings deposits................... $17,988 183 3.05 $18,241 187 3.08
Demand and NOW deposits............ 4,412 35 2.38 4,745 37 2.34
Certificate accounts............... 54,504 1,061 5.83 49,615 957 5.79
Borrowings......................... 1,744 33 5.68 --- --- ---
--------- ------- ------- ------
Total interest-bearing liabilities $78,648 1,312 5.00 $72,601 1,181 4.88
======= ------ ======= ------
Net interest income................. $ 951 $ 942
====== ======
Net interest rate spread(3)......... 2.90% 3.13%
==== ====
Net earning assets.................. $ 7,310 $ 6,944
======= =======
Net interest margin(4)..............
3.32% 3.55%
==== ====
Average interest-earning assets to
average interest-bearing 1.09x 1.10x
liabilities........................ ==== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995 1994
------------------------------------------------------------------ -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
---------------------- -------------------------------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)................ $74,071 $6,048 8.17% $69,453 $5,404 7.78% $64,886 $4,751 7.32%
Interest-bearing deposits.......... 4,849 270 5.57 2,293 121 5.28 3,865 113 2.92
Investment securities(2)........... 2,752 150 5.45 3,020 161 5.33 3,317 180 5.43
FHLB stock......................... 640 45 7.03 591 38 6.43 556 27 4.86
------- ------ ------- ------ ------- ------
Total interest-earning assets..... $82,312 6,513 7.91 $75,357 5,724 7.60 $72,624 5,071 6.98
======= ------ ======= ------ ======= ------
Interest-Bearing Liabilities:
Savings deposits................... $18,484 563 3.05 $19,491 602 3.09 $20,330 628 3.09
Demand and NOW deposits............ 4,580 108 2.36 4,819 118 2.45 5,182 125 2.41
Certificate accounts............... 52,012 3,035 5.84 44,760 2,248 5.02 41,573 1,884 4.53
Borrowings......................... --- --- --- --- --- --- --- --- ---
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities $75,076 3,706 4.94 $69,070 2,968 4.30 $67,085 2,637 3.93
======= ------ ======= ------ ======= ------
Net interest income................. $2,807 $2,756 $2,434
====== ====== ======
Net interest rate spread(3)......... 2.97% 3.30% 3.05%
==== ===== ====
Net earning assets.................. $ 7,236 $ 6,287 $ 5,539
======== ======= ========
Net interest margin(4)..............
3.41% 3.66% 3.35%
==== ===== ====
Average interest-earning assets to
average interest-bearing 1.10x 1.09x 1.08x
liabilities........................ ==== ==== ====
</TABLE>
- -----------------
(1) Amount is net of loans in process, net deferred loan origination fees and
allowance for loan losses and includes non-performing loans.
(2) Includes unamortized discounts and premiums
(3) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
41
<PAGE>
The following table presents the weighted average yields earned on
loans, investments and other interest-earning assets, and the weighted average
rates paid on savings deposits and the resultant interest rate spreads at the
dates indicated.
<TABLE>
<CAPTION>
At At June 30,
October 31, ----------------------------------
1996 1996 1995 1994
-------------- ----------------------------------
<S> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable.......................................... 7.92% 7.89% 7.98% 7.17%
Time deposits............................................. 5.50 5.68 --- ---
Investment securities..................................... 5.59 5.71 5.73 5.25
Overnight deposits........................................ --- 5.20 6.05 4.90
Interest-bearing checking accounts........................ 5.40 5.10 5.95 4.80
FHLB stock................................................ 7.04 6.96 6.61 5.73
Combined weighted average yield on
interest-earning assets.............................. 7.83 7.72 7.85 6.97
Weighted average rate paid on:
Savings deposits.......................................... 3.05 3.05 3.05 3.05
Demand and NOW deposits................................... 2.42 2.41 2.41 2.42
Certificate accounts...................................... 6.00 5.88 5.68 4.62
Money market accounts..................................... 2.50 2.50 2.50 2.50
Combined weighted average rate paid on interest-
bearing liabilities................................... 5.17 4.98 4.77 3.98
Spread..................................................... 2.66 2.74 3.08 2.99
</TABLE>
42
<PAGE>
Rate Volume Analysis
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and that due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Four Months Ended
October 31, Year Ended June 30,
--------------------------------- -----------------------------------
1995 vs. 1996 1995 vs. 1996
--------------------------------- ----------------------------------
Increase Increase
(Decrease) Total (Decrease)
Due to Increase Due to Total
---------------------------------------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $228 $(53) $ 175 $371 $273 $644
Interest-earning deposits............. (34) 4 (30) 142 7 149
Investment securities................. (5) (2) (7) (15) 4 (11)
FHLB stock............................ 1 1 2 3 4 7
----- ----- ------ ------ ----- ------
Total interest-earning assets....... $190 $(50) 140 $501 $288 789
==== ==== ----- ==== ==== -----
Interest-bearing liabilities:
Savings deposits...................... $ (3) $ (1) (4) $ (31) $ (8) (39)
Demand and NOW deposits............... (3) 1 (2) (6) (4) (10)
Certificate accounts.................. 95 9 104 393 394 787
Borrowings............................ 33 --- 33 --- --- ---
----- ------ ----- ------ ----- ------
Total interest-bearing liabilities.. $122 $ 9 131 $356 $382 738
==== ===== ----- ==== ==== -----
Net interest income.................... $ 9 $ 51
====== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1994 vs. 1995
---------------------------------
Increase
(Decrease)
Due to Total
----------------- Increase
Volume Rate (Decrease)
---------------------------------
(In Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $345 $308 $653
Interest-earning deposits............. (58) 66 8
Investment securities................. (16) (3) (19)
FHLB stock............................ 2 9 11
------ ----- -----
Total interest-earning assets....... $273 $380 653
==== ==== -----
Interest-bearing liabilities:
Savings deposits...................... $ (26) $ --- (26)
Demand and NOW deposits............... (9) 2 (7)
Certificate accounts.................. 151 213 364
Borrowings............................ --- --- ---
------- ----- ------
Total interest-bearing liabilities.. $116 $215 331
==== ==== -----
Net interest income.................... $322
====
</TABLE>
43
<PAGE>
Asset and Liability Management
The Association, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. As part of its effort to
monitor and manage interest rate risk, the Association uses the "net portfolio
value" ("NPV") methodology prepared by a third party as part of its capital
regulations. Although the Association is not currently subject to NPV regulation
because such regulation does not apply to institutions with less than $300
million in assets and risk-based capital in excess of 12%, application of NPV
methodology may illustrate the Association's interest rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and outgoing
cash flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
that would result from a theoretical 200 basis point (1 basis point equals
0.01%) change in market interest rates. Both a 200 basis point increase in
market interest rates and a 200 basis point decrease in market interest rates
are considered. If the NPV would decrease by more than 2% of the present value
of the institution's assets with either an increase or a decrease in market
rates, the institution must deduct 50% of the amount of decrease in excess of
such 2% in the calculation of the institution's risk-based capital. See "--
Liquidity and Capital Resources."
At September 30, 1996, 2% of the present value of the Association's
assets was $1,772,000. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point decrease) was $907,000 at September 30, 1996, the
Association would not have been required to make additional deductions from its
capital in determining whether the Association met its risk-based capital
requirement.
Presented below, as of September 30, 1996, is an analysis of the
Association's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts of 100 basis points in market interest rates. As
illustrated in the table, NPV is more sensitive to rising rates than declining
rates. Such difference in sensitivity occurs principally because, as rates rise,
borrowers do not prepay adjustable-rate loans which reprice less frequently than
on an annual basis, adjustable-rate loans with interest rate adjustment caps and
fixed-rate loans as quickly as they do when interest rates are declining. Thus,
in a rising interest rate environment, the amount of interest the Association
would receive on its loans would increase relatively slowly as loans are slowly
prepaid and new loans at higher rates are made. Moreover, the interest the
Association would pay on its deposits would increase rapidly because the
Association's deposits generally have shorter periods to repricing.
44
<PAGE>
<TABLE>
<CAPTION>
NPV as % of
Net Portfolio Value Portfolio Value
Change ---------------------------------------------- of Assets
in Rates $ Amount $ Change % Change NPV Ratio % Change
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
+400 $5,888 $(2,919) (33.1)% 6.64% (33.2)%
+300 6,904 (1,903) (21.6) 7.79 (21.8)
+200 7,900 (907) (10.3) 8.91 (10.4)
+100 8,638 (169) (1.9) 9.75 (2.0)
Static 8,807 0 0.0 9.94 0.0
(100) 8,668 (138) (1.6) 9.78 (1.6)
(200) 8,092 (715) (8.1) 9.13 (8.2)
(300) 7,624 (1,182) (13.4) 8.60 (13.5)
(400) 7,632 (1,175) (13.3) 8.61 (13.4)
</TABLE>
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Further, in the event of a change in
interest rates, expected rates of prepayment on loans and mortgage-backed
securities and early withdrawal levels from certificates of deposit would likely
deviate significantly from those assumed in making risk calculations.
45
<PAGE>
Liquidity and Capital Resources
The Association's liquidity, primarily represented by cash equivalents,
is a result of its operating, investing and financing activities. These
activities are summarized below for the four months ended October 31, 1996 and
1995, and years ended June 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Four Months
Ended October 31, Year Ended June 30,
1996 1995 1996 1995 1994
----------- ----------- ---------------- ------------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net income $ (25) $ 304 $ 852 $ 835 $ 586
Adjustments to reconcile net
income to net cash from
operating activities 545 202 (15) (2) 165
--------- --------- --------- --------- ----------
Net cash from operating
activities 520 506 837 833 751
Net cash from investing
activities (4,008) (1,920) (6,968) (4,887) (2,817)
Net cash from financing
activities 2,561 4,910 7,012 1,939 3,199
--------- --------- --------- --------- ----------
Net change in cash and cash
equivalents (927) 3,496 881 (2,115) 1,133
Cash and cash equivalents
at beginning of period 2,721 1,840 1,840 3,955 2,822
--------- --------- --------- --------- ----------
Cash and cash equivalents
at end of period $ 1,794 $ 5,336 $ 2,721 $ 1,840 $ 3,955
========= ========= ========= ========= ==========
</TABLE>
The Association's principal sources of funds are deposits, loan
repayments, maturities of securities, and other funds provided by operations.
The Association also has the ability to borrow from the FHLB. While scheduled
loan repayments and maturing investments are relatively predictable, deposit
flows and early loan prepayments are more influenced by interest rates, general
economic conditions, and competition. The Association maintains investments in
liquid assets based upon management's assessment of (1) need for funds, (2)
expected deposit flows, (3) yields available on short-term liquid assets and (4)
objectives of the asset/liability management program.
OTS regulations presently require the Association to maintain an
average daily balance of investments in United States Treasury, federal agency
obligations and other investments having maturities of five years or less in an
amount equal to 5% of the sum of the Association's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. The
liquidity requirement, which may be changed from time to time by the OTS to
reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which the Association may rely, if necessary, to
fund deposit withdrawals or other short-term funding needs. At October 31, 1996,
the Association's regulatory liquidity was 6.8%. For the month of December,
1996, the Association did not meet its regulatory liquidity requirement.
46
<PAGE>
At all periods both before and after such month, the Association was in
compliance with such requirement and management believes that the Association's
liquidity is adequate. With respect to this one-time violation, the OTS has
taken no supervisory action. It should be noted that the Association has an
immediately accessible line of credit with FHLB Cincinnati for $5.0 million. See
also Note 11 to the Notes to the Financial Statements. On October 31, 1996, the
Association had commitments to originate fixed-rate commercial andresidential
loans totaling $264,000, and variable rate commercial and residential real
estate mortgage loans totaling $574,000. Loan commitments are generally for 30
days. The Association considers its liquidity and capital reserves sufficient to
meet its outstanding short- and long-term needs.
The Association is required by OTS regulations to meet certain minimum
capital requirements, which must be generally as stringent as the requirements
established for banks. Current capital requirements call for tangible capital of
1.5% of adjusted total assets, core capital (which for the Association consists
solely of tangible capital) of 3.0% of adjusted total assets and risk-based
capital (which for the Association consists of core capital and general
valuation allowances) of 8% of risk-weighted assets (assets are weighted at
percentage levels ranging from 0% to 100% depending on their relative risk). The
OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and an acceptable
level of risk will be required to maintain core capital of from 4% to 5%,
depending on the association's examination rating and overall risk. The
Association does not anticipate that it will be adversely affected if the core
capital requirements regulations are amended as proposed.
The following table summarizes the Association's regulatory capital
requirements and actual capital at October 31, 1996. (See Note 10 of Notes to
Financial Statements for a reconciliation of capital under generally accepted
accounting principles and regulatory capital amounts.)
<TABLE>
<CAPTION>
Excess of Actual
Capital Over Current
Actual Capital Current Requirement Requirement Applicable
Amount Percent Amount Percent Amount Percent Asset Total
------ ------- ------ ------- -------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible Capital $ 9,188 10.2% $ 1,351 1.5% $ 7,837 8.7% $ 90,049
Core Capital 9,188 10.2 2,701 3.0 6,487 7.2 90,049
Risk-based Capital 9,514 16.5 4,627 8.0 4,887 8.5 57,833
</TABLE>
At October 31, 1996, the Association had no material commitments for capital
expenditures.
Impact of New Accounting Standards
The Association became subject to SFAS No. 122, "Accounting for
Mortgage Servicing Rights," on July 1, 1996. SFAS No. 122 requires companies to
recognize, as separate assets, rights to service mortgage loans for others,
regardless of how these rights are acquired. Mortgage servicing rights acquired
through either the purchase or the origination of mortgage
47
<PAGE>
loans which are subsequently sold with servicing rights retained should be
determined by allocating the total cost of the mortgage loans to mortgage
servicing rights and to loans (without the mortgage servicing rights) based on
their relative fair values. Mortgage servicing rights recorded as a separate
asset are amortized in proportion to, and over the period of, estimated net
servicing income. This pronouncement was superseded by SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which extends the accounting and disclosure rules for mortgage
servicing rights to all servicing rights including mortgage, consumer and
commercial loans. SFAS 122 did not have a material impact on the Association's
financial statements at July 1, 1996 because the Association does not sell
loans. SFAS 125 will be effective on July 1, 1997 and is not expected to have a
material impact on the Association's financial statements.
On July 1, 1996, the Association became subject to SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 encourages, but does not
require, entities to use a "fair value based method" to account for stock-based
compensation plans. If the fair value accounting encouraged by SFAS No. 123 is
not adopted, entities must disclose the pro forma effect on net income and on
earnings per share had the fair value accounting been adopted. Fair value of a
stock option is to be estimated using an option pricing model which considers
the current price of the stock, expected price volatility, expected dividends on
the stock and the risk- free interest rate. Once estimated, the fair value of an
option is not later changed. The accounting and disclosure requirements of this
statement are effective for transactions entered into in fiscal years beginning
after December 15, 1995. Pro forma disclosures required for entities that elect
to continue to measure compensation cost using existing accounting methods must
include the effects of all awards granted in the first fiscal year beginning
after December 15, 1994. Currently, the Association does not have any stock
options outstanding.
Impact of Inflation and Changing Prices
The Financial Statements and Notes included herein have been prepared
in accordance with generally accepted accounting principles ("GAAP"). Presently,
GAAP requires the Association to measure financial position and operating
results primarily in terms of historic dollars. Changes in the relative value of
money due to inflation or recession are generally not considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies.
48
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
The Holding Company was incorporated by Peoples Federal under the laws
of the State of Delaware in January 1997 for the purpose of owning all of the
outstanding stock of Peoples Federal issued in the Conversion. The Holding
Company has applied to the OTS to acquire all of the common stock of Peoples
Federal which will be outstanding upon completion of the Conversion.
As a Delaware corporation, the Holding Company is authorized to engage
in any activity that is permitted by the Delaware General Corporation Law. The
Board of Directors of the Holding Company anticipates that, after completion of
the Conversion, the Holding Company will conduct its business as a thrift
institution holding company. The holding company structure will provide the
Holding Company with greater flexibility than the Association by itself would
have to diversify its business activities, through existing or newly formed
subsidiaries, or through acquisitions or mergers of both mutual and stock thrift
institutions as well as other companies. Although there are no current
arrangements, understandings or agreements regarding any such acquisition, the
Holding Company will be in a position after the Conversion to take advantage of
any favorable acquisition opportunities that may arise, subject to regulatory
restrictions.
The assets of the Holding Company will initially consist of the stock
of Peoples Federal and approximately 50% of the net proceeds from the
Conversion. The initial activities of the Holding Company are anticipated to be
funded by such retained proceeds and the income thereon. Thereafter, activities
of the Holding Company may also be funded through dividends from Peoples
Federal, if any, sales of additional securities, borrowings and income generated
by other activities of the Holding Company. At this time, there are no plans
regarding such activities. See "Dividends" and "Regulation-Holding Company
Regulation."
BUSINESS
General
The Association is a financial intermediary primarily engaged in the
business of attracting savings deposits from the general public and investing
such funds in permanent mortgage loans secured by one- to four-family
residential real estate located primarily in Shelby County, Ohio, and to a
lesser extent in the contiguous counties of Logan, Auglaize, Miami, Darke and
Champaign. The Association also originates, to a lesser extent, loans for the
construction of one- to four-family real estate, loans secured by multi-family
real estate (over four units) and nonresidential real estate, and consumer loans
and invests in U.S. government obligations, interest bearing deposits in other
financial institutions and other investments permitted by applicable law.
49
<PAGE>
Market Area
Peoples Federal has one office located in Sidney, Shelby County, Ohio.
The Association considers its market area to be Shelby County, Ohio, and its
contiguous counties. Sidney is located on the Interstate 75 corridor,
approximately 45 miles north of Dayton, Ohio between Dayton and Toledo, Ohio.
The unemployment rate for Shelby County at October 1996 was 4.0%. The
unemployment rate for Shelby County was lower than the rates of 4.3% for the
State of Ohio and 4.9% for the United States.
The per capita income level in Shelby County is lower than the national
level, but its growth rate between 1990 and 1995 exceeded that of the Ohio and
United States averages during the same period. During this period, the per
capita income in Shelby County rose approximately 47.6% from $11,082 to $16,362;
in Ohio, the per capita income rose 30.6% from $12,030 to $15,708; and in the
United States, the per capita income rose 33.2% from $12,313 to $16,405.
Shelby County is primarily agricultural with the services and
manufacturing industries also contributing to the economy. Shelby County's
earnings are predominantly generated by automobile manufacturing, automotive
parts and metal products. Some of Shelby County's largest employers are: Honda,
Emerson Electric, Alcoa, and Clopay Corporation.
Lending Activities
General. The principal lending activity of the Association is
originating for its portfolio first mortgage loans secured by owner-occupied
one- to four-family residential properties located in its primary market areas.
In addition, in order to increase the yield and/or the interest rate sensitivity
of its portfolio and in order to provide more comprehensive financial services
to families and community businesses in the Association's primary market area,
Peoples Federal also originates construction or development, commercial real
estate, consumer, land, multi-family and commercial business loans. See "-
Originations, Purchases and Sales of Loans." The Association reserves the right
in the future to adjust or discontinue any product offerings to respond to
competitive or economic factors.
50
<PAGE>
Loan Portfolio Composition. The following information sets forth the
composition of the Association's loan portfolios in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
October 31, -----------------------------------------------------------------
1996 1996 1995 1994
------------------------ ------------------------ ------------------ --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.............. $68,969 78.38% $65,448 79.60% $59,181 78.95% $53,531 77.64%
Construction and development..... 9,121 10.37 7,091 8.63 6,639 8.86 6,254 9.07
Commercial....................... 5,490 6.24 5,302 6.45 5,750 7.67 6,080 8.82
Multi-family..................... 456 0.52 485 0.59 335 0.45 579 0.84
Land............................. 1,357 1.54 1,342 1.63 909 1.21 805 1.16
-------- ------ -------- -------- -------- ------- -------- --------
Total real estate loans...... 85,393 97.05 79,668 96.90 72,814 97.14 67,249 97.53
-------- ------ ------- -------- -------- ------- -------- --------
Other Loans:
Consumer Loans:
Automobile...................... 1,272 1.44 1,274 1.55 1,042 1.39 706 1.02
Deposit account................. 226 0.26 167 0.20 262 0.35 190 0.28
Home equity..................... 254 0.29 183 0.22 43 0.05 --- ---
Other........................... 803 0.91 844 1.03 778 1.04 749 1.09
--------- ----- -------- -------- -------- ------ -------- -------
Total consumer loans......... 2,555 2.90 2,468 3.00 2,125 2.83 1,645 2.39
--------- ------- ------- ------- -------- ------ -------- -------
Commercial business loans........ 41 0.05 81 0.10 22 0.03 55 0.08
---------- ------- -------- -------- -------- ------- -------- -------
Total loans.................. 87,989 100.00% 82,217 100.00% 74,961 100.00% 68,949 100.00%
====== ====== ====== ======
Less:
Loans in process................. (3,773) (3,508) (2,579) (1,929)
Deferred fees and discounts...... (169) (169) (198) (212)
Allowance for losses............. (326) (307) (251) (198)
-------- -------- -------- --------
Total loans receivable, net...... $83,721 $78,233 $71,933 $66,610
======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
1993 1992
---------------------------------------------
Amount Percent Amount Percent
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.............. $51,547 78.72% $46,079 76.97%
Construction and development..... 5,185 7.92 4,498 7.51
Commercial....................... 5,595 8.54 5,726 9.56
Multi-family..................... 624 0.95 855 1.43
Land............................. 810 1.24 805 1.35
--------- ------- ------- ------
Total real estate loans...... 63,761 97.37 57,963 96.82
--------- ------ ------- ------
Other Loans:
Consumer Loans:
Automobile...................... 689 1.05 835 1.39
Deposit account................. 188 0.29 292 0.49
Home equity..................... --- --- --- ---
Other........................... 764 1.17 683 1.14
---------- -------- ------- ------
Total consumer loans......... 1,641 2.51 1,810 3.02
---------- ------- ------- ------
Commercial business loans........ 79 0.12 93 0.16
----------- ------- ------- ------
Total loans.................. 65,481 100.00% 59,866 100.00%
====== ======
Less:
Loans in process................. (2,213) (1,575)
Deferred fees and discounts...... (278) (349)
Allowance for losses............. (123) (94)
---------- ---------
Total loans receivable, net...... $62,867 $57,848
======= =======
</TABLE>
51
<PAGE>
The following table shows the composition of the Association's loan
portfolios by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
October 31, --------------------------------------------------------
1996 1996 1995 1994
-------------------- ----------------- --------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family................ $18,930 21.51% $17,166 20.88% $12,254 16.35% $11,708 16.98%
Construction and development....... 1,579 1.80 775 0.94 526 0.70 768 1.11
Commercial......................... 43 0.05 179 0.22 313 0.42 395 0.57
Multi-family....................... --- --- --- --- --- --- 12 0.02
Land............................... 42 0.05 20 0.02 5 0.01 0.04
-------- ------ ------- ------ ------- ------- ------- -------
Total real estate loans......... 20,594 23.41 18,140 22.06 13,098 17.48 12,912 18.72
-------- ------ ------- ------ ------- ------- ------- -------
Consumer............................ 2,555 2.90 2,468 3.00 2,125 2.83 1,645 2.39
Commercial business................. 41 0.05 81 0.10 22 0.03 55 .08
--------- ------ ------- ------ ------- ------- ------- -------
Total fixed-rate loans.......... 23,190 26.36 20,689 25.16 15,245 20.34 14,612 21.19
Adjustable-Rate Loans:
Real estate:
One- to four-family................ 50,039 56.87 48,282 58.73 46,927 62.60 41,823 60.66
Construction and development....... 7,542 8.57 6,316 7.68 6,113 8.15 5,486 7.96
Commercial......................... 5,447 6.19 5,123 6.23 5,437 7.25 5,685 8.25
Multi-family....................... 456 0.52 485 0.59 335 0.45 567 0.82
Land............................... 1,315 1.49 1,322 1.61 904 1.21 776 1.12
-------- ------ ------- ------ ------- ------ -------- -------
Total real estate loans......... 64,799 73.64 61,528 74.84 59,716 79.66 54,337 78.81
-------- ------ -------- ------ ------- ------- ------- -------
Total adjustable-rate loans..... 87,989 100.00% 82,217 100.00% 74,961 100.00% 68,949 100.00%
====== ====== ====== ======
Less:
Loans in process.................... (3,773) (3,508) (2,579) (1,929)
Deferred fees and discounts......... (169) (169) (198) (212)
Allowance for loan losses........... (326) (307) (251) (198)
--------- --------- ------- ---------
Total loans receivable, net...... $83,721 $78,233 $71,933 $66,610
======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1993 1992
-------------------------- -------------------
Amount Percent Amount Percent
-------------------------- -------------------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family................ $12,792 19.54% $15,712 26.24%
Construction and development....... 448 0.68 1,113 1.86
Commercial......................... 494 0.75 656 1.10
Multi-family....................... 57 0.09 325 0.54
Land............................... 26 0.04 48 0.08
------- -------- -------- -------
Total real estate loans......... 13,817 21.10 17,854 29.82
------- ------- -------- -------
Consumer............................ 1,641 2.51 1,810 3.02
Commercial business................. 79 .12 93 .16
-------- --------- -------- -------
Total fixed-rate loans.......... 15,537 23.73 19,757 33.00
Adjustable-Rate Loans:
Real estate:
One- to four-family................ 38,755 59.18 30,367 50.73
Construction and development....... 4,737 7.23 3,385 5.65
Commercial......................... 5,101 7.79 5,070 8.47
Multi-family....................... 567 0.87 530 0.89
Land............................... 784 1.20 757 1.26
------- ------- -------- -------
Total real estate loans......... 49,944 76.27 40,109 67.00
------- ------- -------- -------
Total adjustable-rate loans..... 65,481 100.00% 59,866 100.00%
====== ======
Less:
Loans in process.................... (2,213) (1,575)
Deferred fees and discounts......... (278) (349)
Allowance for loan losses........... (123) (94)
-------- --------
Total loans receivable, net...... $62,867 $57,848
======= =======
</TABLE>
52
<PAGE>
The following schedule presents the loan maturities of the
Association's loan portfolio at October 31, 1996. Mortgages which have
adjustable or renegotiable interest rates are shown as terms to repricing. The
Association is unable to provide this information based on contractual
maturities. The schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------------------
One- to Four-Family and Multi-family,
Construction and Development Commercial and Land Consumer
---------------------------- ---------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------------------------------- ---------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
1 year or less(1).......... $22,834 7.74% $4,693 7.96% $819 9.89%
Over 1 year - 3 years...... 18,623 7.88 1,055 7.94 806 9.79
Over 3 years - 5 years..... 15,191 7.73 894 7.86 883 9.66
Over 5 years -
10 years.................. 3,386 8.45 286 8.56 47 10.34
Over 10 years -
20 years.................. 17,414 7.92 375 8.47 --- ---
Over 20 years.............. 642 8.09 --- --- --- ---
--------- ---- -------- ----- ------ -------
Total.................. $78,090 7.85% $7,303 7.99% $2,555 9.79%
======= ==== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Commercial Business Total
------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------- -----------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1 year or less(1).......... $30 12.50% $28,376 7.84%
Over 1 year - 3 years...... 11 9.49 20,495 7.96
Over 3 years - 5 years..... --- --- 16,968 7.84
Over 5 years -
10 years.................. --- --- 3,719 8.48
Over 10 years -
20 years.................. --- --- 17,789 7.93
Over 20 years.............. --- --- 642 8.09
----- ------ -------- ----
Total.................. $41 11.69% $87,989 7.92%
=== ===== ======= ====
</TABLE>
- ----------
(1) Includes demand loans, loans having no stated maturity and
overdraft loans.
The total amount of loans due after October 31, 1997 which have
predetermined interest rates is $22,185,000, while the total amount of loans due
after such dates which have floating or adjustable interest rates is
$37,428,000.
53
<PAGE>
Under federal law, the aggregate amount of loans that the Association
is permitted to make to any one borrower is generally limited to 15% of
unimpaired capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At
October 31, 1996, based on the above, the Association's regulatory loan-to-one
borrower limit was approximately $1.38 million. On the same date, the
Association had no borrowers with outstanding balances in excess of this amount.
As of October 31, 1996, the largest dollar amount of indebtedness to one
borrower or group of related borrowers was a single loan of $891,000 secured by
commercial property leased to tenants involved in retail businesses. The next
largest loan had an outstanding balance of $349,000 at October 31, 1996 and is
secured by farm real estate and several single family homes. Such loans are
performing in accordance with their terms.
Loan applications are accepted by salaried loan officers at the
Association's office. Loan applications are presented for approval to the
Executive Committee of the Board of Directors or to the full Board of Directors,
depending on loan amount. All loans of $100,000 or more are approved by the full
Board of Directors. Decisions on loan applications are made on the basis of
detailed applications and property valuations (consistent with the Association's
written appraisal policy), by qualified independent appraisers (unless the
Association's exposure will be $25,000 or less). The loan applications are
designed primarily to determine the borrower's ability to repay and include
length of employment, past credit history and the amount of current
indebtedness. Significant items on the application are verified through use of
credit reports, financial statements, tax returns and/or confirmations. The
Association is an equal opportunity lender.
Generally, the Association requires an attorney's title opinion on its
mortgage loans as well as fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Association
also requires flood insurance to protect the property securing its interest when
the property is located in a flood plain.
One- to Four-Family Residential Real Estate Lending
The cornerstone of the Association's lending program has long been the
origination of long-term permanent loans secured by mortgages on owner-occupied
one- to four-family residences. At October 31, 1996, $69.0 million, or 78.4% of
the Association's loan portfolio consisted of permanent loans on one- to
four-family residences. At that date, the average outstanding residential loan
balance was $48,000 and the largest outstanding residential loan had a principal
balance of $314,000. Virtually all of the residential loans originated by
Peoples Federal are secured by properties located in the Association's market
area. See "- Originations, Purchases and Sales of Loans."
Historically, Peoples Federal originated for retention in its own
portfolio 30-year fixed-rate loans secured by one- to four-family residential
real estate. Beginning in 1979, in order to reduce its exposure to changes in
interest rates, Peoples Federal began to originate adjustable rate mortgage
loans ("ARMs"), subject to market conditions and consumer preference. The
Association traditionally has not sold either its ARM nor its fixed-rate loan
production, and as a result of continued consumer demand, particularly during
periods of relatively low interest
54
<PAGE>
rates, for fixed-rate loans, Peoples Federal has continued to originate
fixed-rate residential loans in amounts and at rates which are monitored for
compliance with the Association's asset/liability management policy. Currently,
the Association originates fixed-rate loans with maturities of up to 20 years
for retention in it own portfolio. Limiting the contractual term to 20 years, as
opposed to the more traditional 30 year period, allows for accelerated principal
repayment and equity build up for the borrower. Currently, all such loans are
made on owner-occupied properties. All ARMs originated by the Association are
retained and serviced by it. At October 31, 1996, the Association had $18.9
million of fixed-rate permanent residential loans, constituting 21.5% of the
Association's loan portfolio at such date. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management."
The Association has offered ARM loans at rates, terms and points
determined in accordance with market and competitive factors. The Association's
current one- to four-family residential ARMs are fully amortizing loans with
contractual maturities of up to 30 years. Applicants are qualified using a fully
indexed rate, and no ARMs allow for negative amortization. The interest rates on
the ARMs originated by Peoples Federal are generally subject to adjustment at
one, three, and five-year intervals based on a margin over the analogous
Treasury Securities Constant Maturity Index. Decreases or increases in the
interest rate of the Association's ARMs are generally limited to 6% above or
below the initial interest rate over the life of the loan, and up to 2% per
adjustment period. The Association's ARMs are not convertible into fixed-rate
loans, and do not contain prepayment penalties. ARM loans may be assumed on a
case by case basis with the Association's consent. At October 31, 1996, the
total balance of one- to four-family ARMs was $50.0 million, or 56.9% of the
Association's loan portfolio.
The Association offers several types of ARMs. One new offering is the
"7/1" loan. This product maintains a constant interest rate, and payment, for
the first seven years of the loan. Amortizable for up to 30 years, the loan will
adjust beginning in the eighth year, subject to the rate caps discussed above.
At October 31, 1996, the Association had $190,000 in "7/1" loans. In 1992, the
Association initiated a program specifically tailored to first time buyers.
These loans are made on a five year adjustable basis with a term up to 30 years.
The margin, which is lower than other products currently offered, is 200 basis
points. Additionally, somewhat higher debt-to-income ratios are permitted,
although mandatory escrows for taxes and insurance, an acceptable credit rating
and an employment history of at least one year are required. The maximum loan
amount under this program, which requires that the property be owner-occupied,
is currently $75,000, which can be the lesser of the purchase price or 90% of
appraised value. At October 31, 1996, the Association had approximately $6.5
million of new first-time home buyer loans in its portfolio.
As discussed above, the Association evaluates both the borrower's
ability to make principal, interest and escrow payments and the value of the
property that will secure the loan. Peoples Federal originates residential
mortgage loans with loan-to-value ratios up to 90%. On mortgage loans exceeding
an 90% loan-to-value ratio at the time of origination, Peoples Federal will
generally require private mortgage insurance in an amount intended to reduce the
Association's exposure to less than 90% of the appraised value of the underlying
property.
55
<PAGE>
The Association's residential mortgage loans customarily include
due-on-sale clauses giving the Association the right to declare the loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the property subject to the mortgage and the loan
is not repaid.
Construction and Development Lending
The Association makes construction loans to individuals for the
construction of their primary or secondary residences and loans to builders or
developers for the construction of single-family homes, multi-family units and
commercial real estate projects. Loans to individuals for the construction of
their residences typically run for 12 months. The borrower pays interest only
during the construction period. Residential construction loans are generally
underwritten pursuant to the same guidelines used for originating permanent
residential loans. At October 31, 1996, the Association had 87 construction
loans with outstanding aggregate balances of $9.1 million secured by residential
property. Of such amount, $6.7 million was outstanding directly to borrowers
intending to live in the properties upon completion of construction. At that
same date, the Association had 18 construction loans with outstanding aggregate
balances of $2.2 million secured by one- to four-family residential property
built by builders who have pre-sold their houses to individual purchasers.
The Association makes loans to builders and developers to finance the
construction of residential property. Such loans generally have adjustable
interest rates based upon prime or treasury indexes with terms of from six
months to one year. The proceeds of the loan are advanced during construction
based upon the percentage of completion as determined by an inspection. The loan
amount normally does not exceed 90% of projected completed value for homes that
have been pre-sold to the ultimate occupant. For loans to builders for the
construction of homes not yet presold, which may carry a higher risk, the
loan-to value ratio is generally limited to 80%. Whether the Association is
willing to provide permanent takeout financing to the purchaser of the home is
determined independently of the construction loan by separate underwriting. In
the event that upon completion the house is not sold, the builder is required to
make principal and interest payments until the house is sold. The Association
also makes a limited number of commercial real estate construction loans on
substantially the same terms as loans to builders and developers to finance the
construction of residential property.
Development loans, which include loans to develop vacant or raw land,
are made to various builders and developers with whom the Association has had
long-standing relationships. All of such loans are secured by land zoned for
residential developments and located within the Association's market area.
Proceeds are used for excavation, utility placements and street improvements.
Disbursements related to acquisition and development land loans are typically
based on the construction cost estimate of an independent architect or engineer
who inspects the project in connection with significant disbursement requests.
As lots are sold, a portion of the sale price is applied to the principal of the
outstanding loan. Interest payments are required at regular intervals (quarterly
or semi-annually) and loan terms typically are written for three years. At
October 31, 1996, the Association had $246,000 or 0.28% of gross loans
receivable in this category.
56
<PAGE>
Construction and development lending generally affords the Association
an opportunity to receive interest at rates higher than those obtainable from
residential lending and to receive higher origination and other loan fees. In
addition, such loans are generally made for relatively short terms.
Nevertheless, construction lending to persons other than owner-occupants is
generally considered to involve a higher level of credit risk than one- to
four-family permanent residential lending due to the concentration of principal
in a limited number of loans and borrowers and the effects of general economic
conditions on construction projects, real estate developers and managers. In
addition, the nature of these loans is such that they are more difficult to
evaluate and monitor. The Association's risk of loss on a construction or
development loan is dependent largely upon the accuracy of the initial estimate
of the property's value upon completion of the project and the estimated cost
(including interest) of the project. If the estimate of value proves to be
inaccurate, the Association may be confronted, at or prior to the maturity of
the loan, with a project with a value which is insufficient to assure full
repayment and/or the possibility of having to make substantial investments to
complete and sell the project. Because defaults in repayment may not occur
during the construction period, it may be difficult to identify problem loans at
an early stage. When loan payments become due, the cash flow from the property
may not be adequate to service the debt. In such cases, the Association may be
required to modify the terms of the loan.
Commercial Real Estate Lending
The Association's commercial real estate loan portfolio consists of
loans on a variety of non-residential properties including retail facilities,
small office buildings, farm real estate and churches. At October 31, 1996, the
Association's largest commercial real estate loan totalled $891,000. At that
date, the Association had 60 other commercial real estate loans, all totalling
$5.5 million or 6.2 % of gross loans receivable. As of October 31, 1996,
$304,000 of these loans were non-performing.
The Association has originated both adjustable- and fixed-rate
commercial real estate loans, although most current originations have adjustable
rates. Rates on the Association's adjustable-rate commercial real estate loans
generally adjust in a manner consistent with the Association's one- to
four-family residential ARMs, although five year adjustment periods are not
currently offered. Commercial real estate loans are generally underwritten in
amounts of up to 75% of the appraised value of the underlying property.
Appraisals on properties securing commercial real estate loans
originated by the Association are performed by a qualified independent appraiser
at the time the loan is made. In addition, the Association's underwriting
procedures generally require verification of the borrower's credit history,
income and financial statements, banking relationships, references and income
projections for the property. Personal guarantees are generally obtained for the
Association's commercial real estate loans.
Substantially all of the commercial real estate loans originated by the
Association are secured by properties located within the Association's market
area.
57
<PAGE>
The table below sets forth by type of security property the estimated
number, loan amount and outstanding balance of Peoples Federal's commercial real
estate loans at October 31, 1996.
<TABLE>
<CAPTION>
Outstanding
Number of Original Principal
Loans Loan Amount Balance
---------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Office......................................... 21 $2,244 $1,624
Retail......................................... 2 1,021 989
Farm real estate............................... 37 3,902 2,780
Churches....................................... 1 120 97
--- ------- --------
Total....................................... 61 $7,287 $5,490
== ====== ======
</TABLE>
Commercial real estate loans generally present a higher level of risk
than loans secured by one- to four-family residences. This greater risk is due
to several factors, including the concentration of principal in a limited number
of loans and borrowers, the effects of general economic conditions on income
producing properties and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by commercial
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced (for example,
if leases are not obtained or renewed), the borrower's ability to repay the loan
may be impaired.
Multi-Family Lending
The Association has historically made permanent multi-family loans in
its primary market area. However, the Association has generally decreased this
component as a percentage of its loan portfolio in recent years and the current
amount of such loans is insignificant, totalling $456,000 or .5% of gross loans
receivable. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management."
The Association's multi-family loan portfolio includes loans secured by
five or more unit residential buildings located primarily in the Association's
market area.
Consumer Lending
Management believes that offering consumer loan products helps to
expand the Association's customer base and to create stronger ties to its
existing customer base. In addition, because consumer loans generally have
shorter terms to maturity and carry higher rates of interest than do residential
mortgage loans, they can be valuable asset/liability management tools. The
Association currently originates substantially all of its consumer loans in its
market area. At October 31, 1996, the Association's consumer loans totalled $2.6
million or 2.9% of the Association's gross loan portfolio.
58
<PAGE>
Peoples Federal offers a variety of secured consumer loans, including
automobile loans, loans secured by savings deposits, home equity lines of credit
and home improvement loans. Although the Association primarily originates
consumer loans secured by real estate, deposits or other collateral, the
Association also makes unsecured personal loans.
The largest component of the Association's consumer lending program is
its automobile loans. At October 31, 1996, automobile loans totalled $1.3
million or 1.4% of gross loans receivable. The Association makes loans directly
to the consumer to aid in the purchase of new and used vehicles, which serve as
collateral for the loan. The Association also employs other underwriting
criteria discussed below in deciding whether to extend credit.
The Association otherwise uses the same underwriting standards for
home equity lines of credit as it uses for one- to four-family residential
mortgage loans. The Association's home equity lines of credit are originated in
amounts which, together with the amount of the first mortgage, generally do not
exceed 80% of the appraised value of the property securing the loan.
At October 31, 1996, the Association had $254,000 of home equity lines of
credit and an additional $342,000 of additional funds committed, but undrawn,
under such lines.
The Association also offers a credit card program as an accommodation
to existing customers. At October 31, 1996, approximately 260 credit cards had
been issued, with an aggregate outstanding loan balance of $66,000 and unused
credit available of $305,000. The Association presently charges an annual
membership fee of $10.00 and a fixed annual rate of interest on these credit
cards.
The terms of other types of consumer loans vary according to the type
of collateral, length of contract and creditworthiness of the borrower. The
underwriting standards employed by the Association for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to meet payments on the proposed loan along
with his existing obligations. In addition to the creditworthiness of the
applicant, the underwriting process also includes a comparison of the value of
the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans.
Land Lending
Peoples Federal makes loans to individuals who purchase and hold land
for various reasons, such as the future construction of a residence. Such loans
are generally originated with
59
<PAGE>
terms of three years and have maximum loan to value ratios of 75%. At October
31, 1996, the Association had $1.4 million or 1.5% of gross loans receivable in
land loans.
Land lending generally affords the Association an opportunity to
receive interest at rates higher than those obtainable from residential lending.
In addition, land loans are limited to a maximum 75% loan-to-value and are made
with fixed and adjustable rates of interest and for relatively short terms.
Nevertheless, land lending is generally considered to involve a higher level of
credit risk due to the fact that funds are advanced upon the security of the
land, which is of uncertain value prior to its development.
Commercial Business Lending
In order to increase the yield and interest rate sensitivity of its
loan portfolio and in order to satisfy the demand for financial services
available to individuals and businesses in its primary market area, the
Association has maintained a very small portfolio of commercial business loans.
Unlike residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are generally of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself (which, in turn, may be dependent upon the
general economic environment). During the past five years, the Association has
made commercial business loans to businesses such as small retail operations,
small manufacturing concerns and professional firms. The Association's
commercial business loans almost always include personal guarantees and are
usually, but not always, secured by business assets, such as accounts
receivable, equipment, inventory and real estate. However, the collateral
securing the loans may depreciate over time, may be difficult to appraise and
may fluctuate in value based on the success of the business.
Most of the Association's commercial business loans have terms ranging
from three months to one year and carry fixed interest rates. The underwriting
process for commercial business loans generally includes consideration of the
borrower's financial statements, tax returns, projections of future business
operations and inspection of the subject collateral, if any. At October 31,
1996, commercial business loans totalled $41,000 or .05% of the Association's
gross loans receivable.
Originations, Purchases and Sales of Loans
The Association originates real estate and other loans through
employees located at the Association's office. Walk-in customers and referrals
from real estate brokers and builders are also important sources of loan
originations. The Association has historically not utilized the services of
mortgage or loan brokers, nor purchased or sold loans from or to other lenders.
While a portfolio lender, the Association may in the future evaluate loan sale
opportunities as they arise and make sales depending on market conditions.
60
<PAGE>
The following table shows the loan origination and repayment activities
of the Association for the periods indicated.
<TABLE>
<CAPTION>
Four Months
Ended
October 31, Year Ended June 30,
1996 1996 1995 1994
--------------------------------------------------
(In Thousands)
Originations by type:
Adjustable rate:
<S> <C> <C> <C> <C>
Real estate - one- to four-family.................. $ 6,648 $15,044 $13,961 $15,175
- commercial......................... 1,030 1,366 747 1,391
- multi-family....................... --- 180 --- 265
Non-real estate - consumer......................... --- --- --- ---
- commercial business........... --- --- --- ---
--------- ---------- ---------- ----------
Total adjustable-rate....................... 7,678 16,590 14,708 16,831
------- -------- ------- --------
Fixed rate:
Real estate - one- to four-family.................. 3,532 9,458 2,964 3,958
- commercial......................... 201 121 25 77
- multi-family....................... --- --- --- ---
Non-real estate - consumer......................... 802 2,087 1,855 1,245
- commercial business........... --- 87 79 135
--------- --------- --------- ---------
Total fixed-rate............................ 4,535 11,753 4,923 5,415
------- ------- -------- --------
Total loans originated...................... 12,213 28,343 19,631 22,246
------- -------- -------- --------
Principal repayments............................... (6,599) (21,939) (14,115) (18,112)
-------- -------- -------- --------
Total reductions............................ (6,599) (21,939) (14,115) (18,112)
Increase (decrease) in other items, net(1)........... (63) (52) (149) (269)
--------- -------- -------- --------
Net increase (decrease)..................... $ 5,551 $ 6,352 $ 5,367 $ 3,865
======== ======= ======= =======
</TABLE>
- --------------
(1) Includes allowance for loan losses, net deferred loan origination fees and
transfers to foreclosed assets.
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Association attempts to cause the delinquency to be cured
by contacting the borrower. A late notice is sent on all loans over 30 days
delinquent. Another late notice is sent 60 days after the due date followed by a
letter from the President of the Association.
If the delinquency is not cured by the 90th day, the customer may be
provided written notice that the account will be referred to counsel for
collection and foreclosure, if necessary. A good faith effort by the borrower at
this time will defer foreclosure for a reasonable length of time depending on
individual circumstances. The Association may agree to accept a deed in lieu of
foreclosure. If it becomes necessary to foreclose, the property is sold at
public sale and the Association may bid on the property to protect its interest.
The decision to foreclose is made by the Senior Loan Officer after discussion
with the members of the Executive Committee or Board of Directors.
Consumer loans are charged off if they remain delinquent for 120 days
unless the borrower and lender agree on a payment plan. If terms of the plan are
not met, they are then
61
<PAGE>
subject to charge off. The Association's procedures for repossession and sale of
consumer collateral are subject to various requirements under Ohio consumer
protection laws.
Real estate acquired by Peoples Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired by foreclosure or deed in lieu of foreclosure,
it is recorded at the lower of cost or estimated fair value, less estimated
selling costs, at the date of acquisition, and any write-down resulting
therefrom is charged to the allowance for loan losses. Subsequent decreases in
the value of the property are charged to operations through the creation of a
valuation allowance. After acquisition, all costs incurred in maintaining the
property are expensed. Costs relating to the development and improvement of the
property, however, are capitalized to the extent of estimated fair value less
estimated costs to sell.
The following table sets forth the Association's loan delinquencies by
type, by amount and by percentage of type at October 31, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
60-89 Days 90 Days and Over Total Delinquent Loans
---------------------------------------------------------------------- --------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
--------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family...... 14 $599 0.87% 29 $ 778 1.13% 43 $1,377 2.00%
Construction and
development............. 1 33 0.36 --- --- --- 1 33 0.36
Commercial............... --- --- --- 5 304 5.54 5 304 5.54
Multi-family............. --- --- --- --- --- --- --- --- ---
Land..................... --- --- --- 1 49 3.61 1 49 3.61
Consumer................... 7 29 1.14 7 22 0.86 14 51 2.00
Commercial business........ --- --- --- --- --- --- --- --- ---
---- ------ ----- -------- ---- -------
Total................. 22 $661 0.75% 42 $1,153 1.31% 64 $1,814 2.06%
==== ==== ==== ====== === ======
</TABLE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the Association will sustain
some loss if the deficiencies are not corrected. Doubtful assets have the
weaknesses of Substandard assets, with the additional characteristics that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified Loss is considered uncollectible and of
such little value that continuance as an asset on the balance sheet of the
institution, without establishment of a specific valuation allowance or
charge-off, is not warranted. Assets classified as Substandard or Doubtful
require the institution to establish prudent general allowances for loan losses.
If an asset or portion thereof is classified as a Loss, the institution may
charge off such amount
62
<PAGE>
against the loan loss allowance. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
District Director of the OTS.
On the basis of management's review of its assets, at October 31, 1996,
the Association had classified a total of $902,000 of its loans, as follows:
<TABLE>
<CAPTION>
One- to Four- Commercial
Family Real Estate Land Consumer Total
---------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Substandard................ $620 $211 $49 $15 $895
Doubtful................... --- --- --- --- ---
Loss....................... --- --- --- 7 7
------ ------ ---- ---- -----
$620 $211 $49 $22 $902
==== ==== === === ====
</TABLE>
Peoples Federal's classified assets consist of the (i) non-performing
loans and (ii) loans and other assets of concern discussed herein. As of the
date hereof, these asset classifications are consistent with those of the OTS
and FDIC.
63
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets. Interest income on loans is accrued over the term of the loans based
upon the principal outstanding except where serious doubt exists as to the
collectibility of a loan, in which case the accrual of interest is discontinued.
For all years presented, the Association has had no troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates). Foreclosed
assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
October 31, -------------------------------------------------------------
1996 1996 1995 1994 1993 1992
------------- ---------- ---------- ---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family........................... $ 620 $ 564 $ 494 $ 711 $ 664 $ 753
Construction and development.................. --- --- --- --- --- ---
Commercial real estate........................ 211 211 --- 17 18 47
Multi-family.................................. --- --- --- --- --- ---
Land.......................................... 49 51 214 192 --- ---
Consumer...................................... --- --- --- --- --- ---
Commercial business........................... --- --- --- --- --- ---
------- ------- ------- ------- ------- -------
Total...................................... 880 826 708 920 682 800
------- ------- ------- ------- ------- -------
Accruing loans delinquent more than 90 days:
One- to four-family........................... 158 326 604 564 1,337 1,221
Construction and development.................. --- --- --- --- --- ---
Commercial real estate........................ 93 58 86 35 105 218
Multi-family.................................. --- --- --- --- --- ---
Land.......................................... --- --- --- --- --- ---
Consumer...................................... 22 11 20 7 --- 12
Commercial business........................... --- --- --- --- 17 ---
------- ------- ------- ------- ------- -------
Total...................................... 273 395 710 606 1,459 1,451
------- ------- ------- ------- ------- -------
Foreclosed assets:
One- to four-family........................... --- --- --- --- --- ---
Construction and development.................. --- --- --- --- --- ---
Commercial real estate........................ --- --- --- --- 218 ---
Multi-family.................................. --- --- --- 74 --- ---
Land.......................................... --- --- --- --- --- ---
Consumer...................................... --- --- --- --- --- ---
Commercial business........................... --- --- --- --- --- ---
------- ------- ------- ------- ------- -------
Total...................................... --- --- --- 74 218 ---
------- ------- ------- ------- ------- -------
Total non-performing assets..................... $1,153 $1,221 $1,418 $1,600 $2,359 $2,251
======= ======= ====== ====== ====== ======
Total as a percentage of total assets........... 1.28% 1.41% 1.80% 2.10% 3.26% 3.09%
==== ==== ==== ==== ==== ====
</TABLE>
For the four months ended October 31, 1996 gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $26,057. The amount that was included in
interest income on such loans was $16,059 for the four months ended October 31,
1996.
64
<PAGE>
Other Assets of Concern. As of October 31, 1996, the Association had no
assets that are not now disclosed because of known information about the
possible credit problems of the borrowers or the cash flows of the security
property which would cause management to have some doubts as to the ability of
the borrowers to comply with present loan repayment terms and which may result
in the future inclusion of such item in the non-performing asset categories.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses charged to earnings based on management's
evaluation of the risk inherent in its entire loan portfolio and changes in the
nature and volume of its loan activity. Such evaluation, which includes a review
of all loans of which full collectibility may not be reasonably assured,
considers the estimated net realizable value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate allowance for loan losses. In
determining the general reserves under these policies, historical charge-offs
and recoveries, changes in the mix and levels of the various types of loans, net
realizable values, the current loan portfolio and current economic conditions
are considered. Management also considers the Association's non-performing
assets in establishing its allowance for loan losses.
As of October 31, 1996, the Association's allowance for loan losses as
a percent of gross loans receivable and as a percent of non-performing loans
amounted to 0.37% and 28.3%, respectively. In light of the level of
non-performing assets to total assets and the nature of these assets, management
believes that the allowance for loan losses is adequate. While management
believes that it uses the best information available to determine the allowance
for loan losses, unforeseen market conditions could result in adjustments to the
allowance for loan losses, and net earnings could be significantly affected, if
circumstances differ substantially from the assumptions used in making the final
determination.
65
<PAGE>
The following table sets forth an analysis of the Association's
allowance for loan losses.
<TABLE>
<CAPTION>
Four Months
Ended Year Ended June 30,
October 31, ------------------------------------------
1996 1996 1995 1994 1993 1992
------------ -------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $307 $251 $198 $123 $ 94 $ 54
Charge-offs:
One- to four-family................................ 2 9 --- 1 --- 3
Construction and development....................... --- --- --- --- --- ---
Commercial real estate............................. --- --- --- --- --- ---
Multi-family....................................... --- --- --- --- --- ---
Consumer........................................... 3 6 4 14 18 14
Commercial business................................ --- --- --- --- --- ---
------ ------ ------ ------ ------ ------
5 15 4 15 18 17
----- ----- ----- ----- ----- -----
Recoveries:
One- to four-family................................ --- 1 --- --- --- ---
Construction and development....................... --- --- --- --- --- ---
Commercial real estate............................. --- --- --- --- --- ---
Multi-family....................................... --- --- --- --- --- ---
Consumer........................................... 4 2 2 7 6 4
Commercial business................................ --- --- --- --- --- ---
------ ------ ------ ------ ------ ------
4 3 2 7 6 4
------ ------ ------ ------ ----- ------
Net charge-offs...................................... 1 12 2 8 12 13
Additions charged to operations...................... 20 68 55 83 41 53
----- ----- ----- ----- ----- ------
Balance at end of period............................. $326 $307 $251 $198 $123 $ 94
==== ==== ==== ==== ==== =====
Ratio of net charge-offs during the period to
average loans outstanding(1) during the period...... ---% 0.02% ---% 0.01% 0.02% 0.02%
===== ==== ==== ==== ==== ====
Ratio of net charge-offs during the period to
non-performing assets at the end of the period...... 0.09% 0.98% 0.14% 0.50% 0.51% 0.58%
==== ==== ==== ==== ==== ====
</TABLE>
- ----------
(1) Calculated net of deferred loan fees, loan discounts, loans in
process, and loss reserves.
66
<PAGE>
The distribution of the Association's allowance for losses on loans at
the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
October 31, -------------------------------------------------------------------------
1996 1996 1995
-------------------------------------------------------------------- ----------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category Amount of
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total Loan Loss
Allowance Category Loans Allowance Category Loans Allowance Category Loans Allowance
--------- -------- ------- --------- -------- ------- --------- -------- ------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... $ 227 $68,969 78.38% $ 211 $65,448 79.60% $ 179 $59,181 78.95% $ 126
Construction and
development........... 7 9,121 10.37 4 7,091 8.63 5 6,639 8.86 3
Commercial real estate.. 36 5,490 6.24 36 5,302 6.45 7 5,750 7.67 2
Multi-family............ 1 456 .52 1 485 .59 --- 335 .45 ---
Land.................... 2 1,357 1.54 2 1,342 1.63 21 909 1.21 29
Consumer................ 53 2,555 2.90 53 2,468 3.00 39 2,125 2.83 38
Commercial business..... --- 41 .05 --- 81 .10 --- 22 .03 ---
Unallocated............. --- --- --- --- --- --- --- --- --- ---
------- ---------- ------ ------- --------- ------ ------- -------- ------ -----
Total.............. $ 326 $87,989 100.00% $ 307 $82,217 100.00% $ 251 $74,961 100.00% $ 198
===== ======= ====== ===== ======= ====== ===== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amounts Category Amount of Amounts Category Amount of Amounts Category
by to total Loan Loss by to Total Loan Loss by to Total
Category Loans Allowance Category Loans Allowance Category Loans
-------- ------- --------- -------- -------- ---------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... $53,531 77.64% $ 85 $51,547 78.72% $ 58 $46,079 76.97%
Construction and
development........... 6,254 9.07 --- 5,185 7.92 --- 4,498 7.51
Commercial real estate.. 6,080 8.82 --- 5,595 8.54 --- 5,726 9.56
Multi-family............ 579 .84 --- 624 .95 --- 855 1.43
Land.................... 805 1.16 --- 810 1.24 --- 805 1.35
Consumer................ 1,645 2.39 38 1,641 2.51 36 1,810 3.02
Commercial business..... 55 .08 --- 79 .12 --- 93 .16
Unallocated............. --- --- --- --- --- --- --- ---
---------- ---- ------- ---------- ---- ------- ------- -------
Total.............. $68,949 100.00% $ 123 $65,481 100.00% $ 94 $59,866 100.00%
======= ====== ===== ======= ====== ===== ======= ======
</TABLE>
67
<PAGE>
Investment Activities
As part of its asset/liability management strategy, the Association
invests in U.S. government and agency obligations to supplement its lending
activities. The Association's investment policy also allows for investments in
overnight funds, mortgage-backed securities and certificates of deposit. The
Association may consider the expansion of investments into other securities if
deemed appropriate. At October 31, 1996, the Association did not own any
securities of a single issuer which exceeded 10% of the Association's retained
earnings, other than U.S. government or federal agency obligations. See Note 2
of the Notes to the Financial Statements for additional information regarding
the Association's investment securities portfolio.
The Association is required by federal regulations to maintain a
minimum amount of liquid assets that may be invested in specified securities and
is also permitted to make certain other securities investments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital." Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is provided. As of
October 31, 1996, the Association's liquidity ratio (liquid assets as a
percentage of net withdrawable savings and current borrowings) was 6.8% as
compared to the OTS requirement of 5.0%.
All of the Association's investment securities are classified as held
to maturity. The Association may elect to classify investment securities
acquired in the future as trading securities or as available for sale, instead
of as held to maturity, but there are no current plans to do so.
68
<PAGE>
The following table sets forth the composition of the Association's
investment securities at the dates indicated.
<TABLE>
<CAPTION>
October 31, June 30,
1996 1996 1995
-------------------------- -------------------------- -----------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
(Dollars in Thousands)
Investment securities:
<S> <C> <C> <C> <C>
U.S. government securities...................... $ --- -- $ --- ---% $ 498 13.39%
Federal agency obligations...................... 2,099 72.93 2,598 59.52 2,600 69.89
Time deposits................................... 100 3.48 1,100 25.20 --- ---
-------- ------ ------ ------ ------- ------
Subtotal..................................... 2,199 76.41 3,698 84.72 3,098 83.28
FHLB stock........................................ 679 23.59 667 15.28 622 16.72
-------- ------ ------ ------ ------- ------
Total investment securities and FHLB stock... $ 2,878 100.00% $4,365 100.00% $ 3,720 100.00%
======= ====== ====== ====== ======= ======
Average remaining life of investment securities
and time deposits............................... 1.52 years 1.21 years 1.89 years
Other interest-earning assets:
Interest-bearing deposits with banks............ $ 1,181 100.00% $1,355 57.54% $ 655 56.71%
Overnight deposits.............................. --- --- 1,000 42.46 500 43.29
-------- ------ ------ ------ ------- ------
Total........................................ $ 1,181 100.00% $2,355 100.00% $1,155 100.00%
======= ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
June 30,
1994
----------------------
Book % of
Value Total
----- -----
(Dollars in Thousands)
<S> <C> <C>
Investment securities:
U.S. government securities...................... $ 496 11.90%
Federal agency obligations...................... 3,100 74.38
Time deposits................................... --- ---
------- -------
Subtotal..................................... 3,596 86.28
FHLB stock........................................ 572 13.72
------- -------
Total investment securities and FHLB stock... $4,168 100.00%
======= =======
Average remaining life of investment securities
and time deposits............................... 1.91 years
Other interest-earning assets:
Interest-bearing deposits with banks............ $1,171 36.93%
Overnight deposits.............................. 2,000 63.07
------ ------
Total........................................ $3,171 100.00%
====== ======
</TABLE>
69
<PAGE>
The composition and maturities of the time deposit and investment
securities portfolios, excluding FHLB stock, are indicated in the following
table.
<TABLE>
<CAPTION>
October 31, 1996
-------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total Investment Securities
1 Year Years Years 10 Years and Time Deposit
-------------------------------------------------------------------------------
Book Value Book Value Book Value Book Value Book Value Fair Value
-------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Time deposits............................... $100 $ --- $ --- $ --- $ 100 $ 100
Federal agency obligations.................. 100 1,999 --- --- 2,099 2,091
---- ------- ------ ------ ------- -------
Total investment securities and time
deposits.................................. $200 $1,999 $ --- $ --- $2,199 $2,191
==== ====== ====== ====== ====== ======
Weighted average yield...................... 4.85% 5.66% ---% ---% 5.59% 5.59%
</TABLE>
Mortgage-Backed Securities. The Association has no mortgage-backed
securities. From time to time, the Association has considered purchasing such
securities to supplement loan production or for other reasons, and reserves the
right to do so in the future, but the Association currently has no plans to
purchase such securities.
Sources of Funds
General. The Association's primary sources of funds are deposits,
amortization and prepayment of loan principal, maturities of investment
securities, short-term investments and funds provided from operations as well as
FHLB advances.
Deposits. Peoples Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Association's deposits consist of
passbook accounts, statement savings, NOW accounts, Christmas Club and money
market and certificate accounts. The Association relies primarily on
advertising, including newspaper and radio, competitive pricing policies and
customer service to attract and retain these deposits. Neither premiums nor
brokered deposits are utilized.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. See "- Competition."
The variety of deposit accounts offered by the Association has allowed
it to be competitive in obtaining funds and to respond with flexibility to
changes in consumer demand. The Association has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The Association manages the pricing of its deposits in keeping
with its asset/liability management, profitability and growth objectives. Based
on its experience, the Association believes that its passbook, demand and NOW
accounts are relatively stable sources of deposits. However, the ability of the
Association to attract and maintain certificate deposits, and the rates paid on
these deposits, has been and will continue to be significantly affected by
market conditions.
70
<PAGE>
The following table sets forth the savings flows at the Association
during the periods indicated.
<TABLE>
<CAPTION>
Four Months
Ended Year Ended June 30,
October 31, ----------------------------------
1996 1996 1995 1994
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Opening balance............................. $77,318 $70,306 $68,367 $65,168
Deposits.................................... 29,506 70,928 63,924 63,469
Withdrawals................................. 27,878 66,928 64,399 62,427
Interest credited........................... 933 3,012 2,414 2,157
------- ------- ------- -------
Ending balance.............................. $79,879 $77,318 $70,306 $68,367
======= ======= ======= =======
Net increase (decrease)..................... $ 2,561 $ 7,012 $ 1,939 $ 3,199
======= ======= ======= =======
Percent increase (decrease) 3.31% 9.97% 2.84% 4.91%
==== ==== ==== ====
</TABLE>
71
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Association at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
October 31, ---------------------------------------------------------------------
1996 1996 1995 1994
--------------------- ---------------------------------------------------------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transactions and Savings Deposits:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand........ $ 142 0.18% $ 118 0.15 $ 158 0.22 $ 94 0.14%
Savings Accounts - 3.05%......... 16,950 21.16 19,039 24.60 18,439 26.19 20,791 30.38
NOW Accounts - 2.42%.............. 3,256 4.07 3,184 4.11 3,257 4.63 3,026 4.42
Money Market Accounts - 2.50%..... 1,053 1.31 1,236 1.60 1,455 2.07 1,889 2.76
------- ------- --------- -------- -------- ------- ------- -------
Total Non-Certificates............ 21,401 26.72 23,577 30.46 23,309 33.11 25,800 37.70
------- ------- -------- ------- -------- ------ ------- ------
Certificates:
0.00 - 1.99%.................... --- --- --- --- --- --- --- ---
2.00 - 3.99%.................... 2 --- 2 --- 35 0.05 8,057 11.77
4.00 - 5.99%.................... 28,681 35.82 32,233 41.64 31,129 44.22 33,781 49.36
6.00 - 7.99%.................... 29,795 37.20 21,506 27.79 15,775 22.41 314 0.46
8.00 - 9.99%.................... --- --- --- --- 58 0.08 415 0.61
10.00% and over................... --- --- --- --- --- --- --- ---
---------- ------- ---------- -------- ---------- -------- --------- -------
Total Certificates................ 58,478 73.02 53,741 69.43 46,997 66.76 42,567 62.20
-------- ------ -------- ------ -------- ------ ------- ------
Accrued Interest.................. 211 0.26 82 0.11 92 0.13 74 0.10
--------- ------- --------- ------- --------- ------- --------- -------
Total Deposits.................... $80,090 100.00% $77,400 100.00% $70,398 100.00% $68,441 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
72
<PAGE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of October 31, 1996.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
-------------------------- -------------------------- ----------
(Dollars in Thousands)
Certificate accounts
maturing
in quarter ending:
<S> <C> <C> <C> <C> <C>
December 31, 1996.............. $ --- $3,956 $ 753 $4,709 8.05%
March 31, 1997................. --- 5,008 2,744 7,752 13.26
June 30, 1997.................. --- 3,855 1,469 5,324 9.10
September 30, 1997............. --- 2,845 3,100 5,945 10.17
December 31, 1997.............. --- 2,664 2,221 4,885 8.35
March 31, 1998................. --- 1,224 4,435 5,659 9.68
June 30, 1998.................. --- 2,008 6,227 8,235 14.08
September 30, 1998............. --- 2,322 2,852 5,174 8.85
December 31, 1998.............. --- 1,604 1,083 2,687 4.60
March 31, 1999................. --- 2,525 470 2,995 5.12
June 30, 1999.................. --- 265 643 908 1.55
September 30, 1999............. --- 42 59 101 .17
Thereafter..................... 2 363 3,739 4,104 7.02
---- --------- -------- --------- -------
Total....................... $ 2 $28,681 $29,795 $ 58,478 100.00%
==== ======= ======= ======== ======
Percent of total............ ---% 49.05% 50.95%
==== ======= =======
</TABLE>
At October 31, 1996 the Association had approximately $4.8 million in
certificate accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Weighted
Maturity Period Amount Average Rate
--------------- ------ ------------
(Dollars in thousands)
<S> <C> <C>
Three months or less.......................................... $ 518 4.92%
Over three through six months................................. 804 5.81
Over six through 12 months.................................... 745 5.59
Over 12 months................................................ 2,743 6.20
-------
Total......................................................... $4,810 5.90
======
</TABLE>
For additional information regarding the composition of the
Association's deposits, see Note 7 of Notes to Financial Statements.
Borrowings. Peoples Federal's other available sources of funds, not
currently utilized, include advances from the FHLB of Cincinnati and other
borrowings. As a member of the FHLB of Cincinnati, the Association is required
to own capital stock in the FHLB of Cincinnati and is authorized to apply for
advances from the FHLB of Cincinnati. Each FHLB credit program has its own
interest rate, which may be fixed or variable, and range of maturities. The
73
<PAGE>
FHLB of Cincinnati may prescribe the acceptable uses for these advances, as well
as limitations on the size of the advances and repayment provisions.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated. The Association did
not have any outstanding borrowings at the periods indicated.
<TABLE>
<CAPTION>
Four Months
Ended Year Ended June 30,
October 31, --------------------------------
1996 1996 1995 1994
----------- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
FHLB advances........................................... $3,500 $ --- $ --- $ ---
Average Balance:
FHLB advances........................................... $1,744 $ --- $ --- $ ---
Weighted Average Rate................................... 5.68% ---% ---% ---%
</TABLE>
Service Corporations
As a federally chartered savings association, Peoples Federal is
permitted by OTS regulations to invest up to 2% of its assets, or $1.8 million
at October 31, 1996, in the stock of, or loans to, service corporation
subsidiaries. As of such date, Peoples Federal had no investment in service
corporations.
Competition
Peoples Federal experiences strong competition both in originating real
estate loans and in attracting deposits. This competition arises from a highly
competitive market area with numerous savings institutions and commercial banks,
as well as credit unions, mortgage bankers and national and local securities
firms. The Association competes for loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers.
The Association attracts all of its deposits through the community in
which its office is located; therefore, competition for those deposits is
principally from other savings institutions, commercial banks, securities firms,
money market and mutual funds and credit unions located in the same community.
The ability of the Association to attract and retain deposits depends on its
ability to provide an investment opportunity that satisfies the requirements of
investors as to rate of return, liquidity, risk, convenient locations and other
factors. The Association competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours and a
customer-oriented staff. At October 31, 1996, Shelby County had six banks with
20 offices and one home-based thrift with one office. The Association estimates
its market share of savings deposits in the Shelby County market area to be
approximately 12%.
74
<PAGE>
Employees
At October 31, 1996, the Association had a total of 16 full-time
employees, 12 of which have been employed by Peoples Federal for at least 10
years, and four part-time employees. None of the Association's employees are
represented by any collective bargaining group. Management considers its
employee relations to be good.
Properties
The following table sets forth information concerning the main office
and a drive-in facility of the Association at October 31, 1996. The Association
believes that its current facilities are adequate. The Association also
maintains a 24-hour ATM at its main office location.
Net Book
Owned Value at
Year or October 31,
Location Opened Leased 1996
-------- ------ ------ -----------
Main Office:
101 East Court Street 1917 Owned $257,000
Sidney, Ohio 45365
Drive-In:
232 S. Ohio Avenue 1971 Owned $192,000
Sidney, Ohio 45365
The Association's depositor and borrower customer files are maintained
by an independent data processing company. The net book value of the data
processing and computer equipment utilized by the Association at October 31,
1996 was approximately $67,000.
Legal Proceedings
From time to time, Peoples Federal is involved as plaintiff or
defendant in various legal proceedings arising in the normal course of its
business. While the ultimate outcome of these various legal proceedings cannot
be predicted with certainty, it is the opinion of management that the resolution
of these legal actions should not have a material effect on Peoples Federal's
financial position or results of operations.
75
<PAGE>
REGULATION
General
Peoples Federal is a federally chartered savings association, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, Peoples Federal is subject to
broad federal regulation and oversight extending to all its operations. Peoples
Federal is a member of the FHLB of Cincinnati and is subject to certain limited
regulation by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). As the savings and loan holding company of Peoples Federal, the
Holding Company also is subject to federal regulation and oversight. The purpose
of the regulation of the Holding Company and other holding companies is to
protect subsidiary savings associations. Peoples Federal is a member of the
SAIF, which together with the BIF are the two deposit insurance funds
administered by the FDIC, and the deposits of Peoples Federal are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over Peoples Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Peoples Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS examination of Peoples Federal was as of
June, 1995. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Association to
provide for higher general or specific loan loss reserves. All savings
associations are subject to a semi-annual assessment, based upon the savings
association's total assets, to fund the operations of the OTS. The Association's
OTS assessment for the fiscal year ended June 30, 1996, was $27,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Peoples Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease- and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Association is prescribed by federal laws and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
76
<PAGE>
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. Peoples Federal is in compliance with the noted
restrictions.
Peoples Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At October 31, 1996, the Association's lending
limit under this restriction was $1.38 million. Assuming the sale of the minimum
number of shares in the Conversion at October 31, 1996, that limit would be
increased to $2.1 million. Peoples Federal is in compliance with the
loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC
Peoples Federal is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members
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to repay amounts borrowed from the United States Treasury or for any other
reason deemed necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally subject
to higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of deposits by the FDIC and the resulting assessment of
$456,000 on the Association was paid in November 1996. This special assessment
significantly increased noninterest expense and adversely affected Peoples
Federal's results of operations for the four months ended October 31, 1996. As a
result of the special assessment, Peoples Federal's deposit insurance premiums
were reduced to .064 basis points based upon its current risk classification and
the new assessment schedule for SAIF insured institutions. These premiums are
subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of September 30, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as Peoples Federal. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as SAIF-
member institutions.
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Regulatory Capital Requirements
Federally insured savings associations, such as Peoples Federal, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At October 31, 1996, the Association did not have any
intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. Peoples Federal does not have any subsidiaries.
At October 31, 1996, Peoples Federal had tangible capital of $9.2
million, or 10.2% of total assets, which is approximately $7.8 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date. On
a pro forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
investment of 50% of the net proceeds in assets not excluded for tangible
capital purposes, Peoples Federal would have had tangible capital equal to
14.5%, 15.3% and 16.0%, respectively, of adjusted total assets at October 31,
1996, which is $12.3 million, $13.2 million and $14.0 million, respectively,
above the requirement.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At October 31, 1996,
Peoples Federal had no intangibles which were subject to these tests.
At October 31, 1996, Peoples Federal had core capital equal to $9.2
million, or 10.2% of adjusted total assets, which is $6.5 million above the
minimum leverage ratio requirement of 3% as in effect on that date. On a pro
forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
investment of 50% of the net proceeds in assets not excluded from core capital,
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Peoples Federal would have had core capital equal to 14.5%, 15.3% and 16.0%,
respectively, of adjusted total assets at October 31, 1996, which is $10.9
million, $11.7 million and $12.5 million, respectively, above the requirement.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At October 31, 1996, Peoples Federal
had $326,000 of general loss reserves, which was less than 1.25% of
risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Peoples Federal had no
such exclusions from capital and assets at October 31, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise. At the present time, the proposal is not expected to
have a material impact on the Association.
On October 31, 1996, Peoples Federal had total capital of $9.5 million
(including $9.2 million in core capital and $326,000 in qualifying supplementary
capital) and risk-weighted assets of $57.8 million; or total capital of 16.5% of
risk-weighted assets. This amount was $4.9 million above the 8% requirement in
effect on that date. On a pro forma basis, after giving effect to the sale of
the minimum, midpoint and maximum number of shares of Common Stock
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offered in the Conversion, the infusion to the Association of 50% of the net
Conversion proceeds and the investment of those proceeds in 20% risk-weighted
government securities, Peoples Federal would have had total capital of 24.0%,
25.3% and 26.7%, respectively, of risk-weighted assets, which is above the
current 8% requirement by $9.4 million, $10.2 million and $11.0 million,
respectively.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-
based capital ratio or an 8% risk-based capital ratio). Any such association
must submit a capital restoration plan and until such plan is approved by the
OTS may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions that
are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Association may have a substantial adverse effect on its operations and
profitability.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be
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reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion. See "The
Conversion--Effects of Conversion to Stock Form on Depositors and Borrowers of
the Association" and "--Restrictions on Repurchase of Stock".
Generally, savings associations, such as the Peoples Federal, that
before and after the proposed distribution meet their capital requirements, may
make capital distributions during any calendar year equal to the greater of 100%
of net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
Peoples Federal may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including Peoples Federal, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what Peoples Federal
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
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In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At October 31, 1996, the Association was in compliance with
both requirements, with an overall liquid asset ratio of 6.8% and a short-term
liquid assets ratio of 4.2%.
Qualified Thrift Lender Test
All savings associations, including Peoples Federal, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. As an alternative, the savings association may maintain 60% of its assets
in those assets specified in Section 7701(a)(19) of the Internal Revenue Code.
Under either test, such assets primarily consist of residential housing related
loans and investments. At October 31, 1996, the Association met the test and has
always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of Peoples
Federal, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a
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branch, by Peoples Federal. An unsatisfactory rating may be used as the basis
for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. The Association was
examined for CRA compliance in 1995 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Peoples Federal include the Holding
Company and any company which is under common control with the Association. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Holding Company will be a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Holding Company and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than Peoples Federal or
any other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If Peoples Federal fails the QTL test, the Holding Company must obtain
the approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those approved
for multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure the Holding Company must
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register as, and will become subject to, the restrictions applicable to bank
holding companies. The activities authorized for a bank holding company are more
limited than are the activities authorized for a unitary or multiple savings and
loan holding company. See "--Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Holding Company will be registered with the SEC under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Holding Company will be subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain noninterest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At October 31, 1996, Peoples Federal was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Association "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Association.
Federal Home Loan Bank System
Peoples Federal is a member of the FHLB of Cincinnati, which is one of
12 regional FHLBs, that administers the home financing credit function of
savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
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Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, Peoples Federal is required to purchase and maintain stock
in the FHLB of Cincinnati. At October 31, 1996, Peoples Federal had $679,000 in
FHLB stock, which was in compliance with this requirement. In past years,
Peoples Federal has received substantial dividends on its FHLB stock. Over the
past five fiscal years such dividends have averaged 5.16% and were 7.03% for
calendar year 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Peoples Federal's FHLB stock may result in a corresponding
reduction in Peoples Federal's capital.
For the year ended June 30, 1996, dividends paid by the FHLB of
Cincinnati to Peoples Federal totaled $45,000, which constitutes a $7,000
increase over the amount of dividends received in fiscal year 1995. The $16,000
dividend for the four months ended October 31, 1996 reflects an annualized rate
of 7.14%, or 0.11% above the rate for fiscal 1996.
Federal and State Taxation
Savings associations such as Peoples Federal that meet certain
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction is computed under the experience
method. Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
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In August 1996, legislation was enacted that repealed the percentage of
taxable income method used by many thrifts, including the Association, to
calculate their bad debt reserve for federal income tax purposes. As a result,
small thrifts such as the Association must recapture that portion of the reserve
that exceeds the amount that could have been taken under the experience method
for tax years beginning after December 31, 1987. The recapture will occur over a
six-year period, the commencement of which will be delayed until the first
taxable year beginning after December 31, 1997, provided the institution meets
certain residential lending requirements. At October 31, 1996, the Association
had approximately $607,000 in bad debt reserves subject to recapture for federal
income tax purposes. The deferred tax liability related to the recapture has
been previously established so there will be no effect on future net income.
In addition to the regular income tax, corporations, including savings
associations such as Peoples Federal, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
A portion of the Association's reserves for losses on loans may not,
without adverse tax consequences, be utilized for the payment of cash dividends
or
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other distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of October 31, 1996, the portion of Peoples Federal's reserves
subject to this treatment for tax purposes totaled approximately $1.7 million.
Peoples Federal files federal income tax returns on a fiscal year basis
using the accrual method of accounting. The Holding Company does not anticipate
filing consolidated federal income tax returns with Peoples Federal. Savings
associations that file federal income tax returns as part of a consolidated
group are required by applicable Treasury regulations to reduce their taxable
income for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members of the
consolidated group that are functionally related to the activities of the
savings association member.
Peoples Federal has been audited by the IRS with respect to federal
income tax returns through December, 1991. With respect to years examined by the
IRS, either all deficiencies have been satisfied or sufficient reserves have
been established to satisfy asserted deficiencies. In the opinion of management,
any examination of still open returns (including returns of subsidiaries and
predecessors of, or entities merged into, Peoples Federal) would not result in a
deficiency which could have a material adverse effect on the financial condition
of Peoples Federal.
Ohio Taxation. The Association conducts its business in Ohio and
consequently is subject to the Ohio corporate franchise tax. A financial
institution subject to the Ohio corporate franchise tax levied in Ohio Revised
Code pays a tax equal to 15 mills (.015) times its apportioned net worth. The
apportionment factor consists of a business done factor, determined by reference
to the total receipts of the financial institution from all sources, and a
property factor, determined by reference to the net book value of all property
owned by the financial institution. The financial institution may claim a credit
equal to the annual assessment paid to the State pursuant to the Ohio Revised
Code.
Delaware Taxation. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
MANAGEMENT OF THE HOLDING COMPANY
Directors and Executive Officers
The Board of Directors of the Holding Company consists of Douglas
Stewart, Richard T. Martin, Robert W. Bertsch, Harry N. Faulkner, James W.
Kerber and John W. Sargeant, all of whom are current members of the Board of
Directors of the Association. See "Management of the Association - Directors."
Each Director of the Holding Company has served as such since the Holding
Company's incorporation in 1997. Directors of the Holding Company will serve
three-year staggered terms so that approximately one-third of the directors will
be elected at each annual meeting of stockholders.
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Mr. Faulkner and Mr. Sargeant will serve for terms to expire in 1997. Mr.
Stewart and Mr. Kerber will serve for terms to expire in 1998. Mr. Martin and
Mr. Bertsch will serve for terms to expire in 1999. The Holding Company intends
to pay directors a fee of $500 per meeting attended which is in addition to any
fees payable to such persons for attendance at meetings of the Board of
Directors of the Association.
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are the same as the executive officers of the
Association. It is not anticipated that the executive officers of the Holding
Company will receive any remuneration in their capacity as Holding Company
executive officers. For information regarding compensation of directors and
executive officers of the Association, see "Management of the Association -
Meetings and Committees of the Board of Directors of the Association" and "-
Executive Compensation."
Indemnification
The Certificate of Incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware against all expenses, liability and loss reasonably incurred
or suffered by such person in connection with his activities as a director or
officer or as a director or officer of another company, if the director or
officer held such position at the request of the Holding Company. Delaware law
requires that such director, officer, employee or agent, in order to be
indemnified, must have acted in good faith and in a manner reasonably believed
to be not opposed to the best interests of the Holding Company, and, with
respect to any criminal action or proceeding, did not have reasonable cause to
believe his conduct was unlawful.
The Certificate of Incorporation and Delaware law also provide that the
indemnification provisions of such Certificate and the statute are not exclusive
of any other right which a person seeking indemnification may have or later
acquire under any statute, provision of the Certificate of Incorporation, Bylaws
of the Holding Company, agreement, vote of stockholders or disinterested
directors or otherwise.
These provisions may have the effect of deterring shareholder
derivative actions, since the Holding Company may ultimately be responsible for
expenses for both parties to the action. A similar effect would not be expected
for third party claims.
In addition, the Certificate of Incorporation and Delaware law also
provide that the Holding Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Holding
Company or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the Holding
Company has the power to indemnify such person against such expense, liability
or loss under the Delaware General Corporation Law. The Holding Company intends
to obtain such insurance.
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MANAGEMENT OF THE ASSOCIATION
Directors
Prior to the Conversion, the direction and control of the Association,
as a mutual savings institution, has been vested in its Board of Directors. Upon
conversion of the Association to stock form, each of the directors of the
Association will continue to serve as a director of the converted Association.
The Board of Directors of the Association currently consists of seven directors.
The directors are divided into three classes. Approximately one-third of the
directors are elected at each annual meeting of members. Because the Holding
Company will own all of the issued and outstanding shares of capital stock of
the Association after the Conversion, the Holding Company, through its
directors, will elect the directors of the Association.
The following table sets forth certain information regarding the
directors of the Association.
<TABLE>
<CAPTION>
Position(s) Held Director Term
With the Association Age(1) Since Expires
--------------------- ------ -------- -------
<S> <C> <C> <C> <C>
Douglas Stewart President, Chief Executive 47 1979 1999
Officer and Director
Richard T. Martin Chairman of the Board 56 1987 1999
Robert W. Bertsch Director 71 1982 1997
Harry N. Faulkner Director 55 1979 1999
George R. Hoellrich Director 79 1963 1998
James W. Kerber Director 55 1990 1997
John W. Sargeant Director 66 1987 1998
</TABLE>
- -------------------
(1) At October 31, 1996.
The business experience of each director is set forth below. All
directors have held their present positions for at least the past five years,
except as otherwise indicated.
Douglas Stewart. Mr. Stewart is the President and Chief Executive
Officer of the Association, a position he has held since 1982. Mr. Stewart
originally joined the Association in 1971 as a teller.
Richard T. Martin. Mr. Martin was appointed as Chairman of the Board in
November 1996. Mr. Martin is a certified public accountant and maintains a
private practice of accounting and tax counseling. He also owns and operates a
family farm.
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Robert W. Bertsch. Mr. Bertsch retired as treasurer of Peoples Federal
in 1990 after 34 years of service.
Harry N. Faulkner. Mr. Faulkner is a partner in the law firm of
Faulkner, Garmhausen, Keister & Shenk LPA. Such firm has acted as counsel to the
Association since 1979.
George R. Hoellrich. Mr. Hoellrich retired as President and Chief
Executive Officer of Peoples Federal in 1982 after 20 years of service.
James W. Kerber. Mr. Kerber is the owner of James W. Kerber CPA, a
private practice accounting firm. He has been in private practice since 1968.
John W. Sargeant. Mr. Sargeant is the part owner of Sidney Tool and Die
Co., and BenSar Development, a warehouse provider.
Executive Officers
Each of the executive officers of the Association will retain his or
her office in the converted Association. Officers are elected annually by the
Board of Directors of the Association. The business experience of each executive
officer who is not also a director is set forth below.
David R. Fogt. Mr. Fogt, age 45, is Vice President of Operations and
Financial Services of the Association. He is responsible for the overall
administration of the Association with direct responsibilities in consumer
lending and asset and liability management. He has been employed by Peoples
Federal since 1983.
Gary N. Fullenkamp. Mr. Fullenkamp, age 41, is Vice President of
Mortgage Loans and Corporate Secretary of the Association. He is responsible for
mortgage lending operations of the Association, including underwriting and
processing of mortgage loan activity. He has been employed by Peoples Federal
since 1979.
Debra A. Geuy. Mrs. Geuy, age 38, is Treasurer of the Association. She
is responsible for overseeing the financial functions of the Association. She
has been employed by Peoples Federal since 1978.
Meetings and Committees of the Board of Directors
The Holding Company. The Holding Company's Board of Directors intends
to meet on a monthly basis. Since the Holding Company was not established in
1996, no meetings were held. The Holding Company intends to pay directors a fee
of $500 per meeting attended which is in addition to any fees payable to such
persons for attendance at meetings of the Board of Directors of the Association.
The Association. The Association's Board of Directors meets bi-monthly.
Additional special meetings may be called by the President or the Board of
Directors. The Board of
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Directors met 24 times during the year ended June 30, 1996. During fiscal year
1996, no director of the Association attended fewer than 75% of the aggregate of
the total number of Board meetings and the total number of meetings held by the
committees of the Board of Directors on which he served. Non-employee directors
are paid an annual retainer of $12,000, plus a fee of $200 per Board of
Directors meeting attended. Directors do not receive any additional compensation
for committee meeting attendance. The Association has standing Executive, Audit,
Investment, Personnel and Benefits, and Nominating Committees.
The Executive Committee is responsible for the review and approval of
mortgage loans, consumer loans and any business arising between regularly
scheduled board meetings. The committee is composed of Directors Kerber, Martin,
Sargeant and Hoellrich, and Officers Stewart, Fogt, Fullenkamp and Goins. During
the fiscal year ended June 30, 1996, 25 meetings of the Executive Committee were
held.
The Audit Committee is comprised of Directors Martin (Chairman), Kerber
and Sargeant. The Audit Committee contracts for the annual audit of the
Association and meets with the audit firm to discuss findings. This committee
met two times during fiscal year 1996.
The Investment Committee is responsible for reviewing and approving
investments of the Association and setting investment strategies. The committee
is composed of Directors Bertsch and Faulkner, and Officers Stewart and Fogt.
The committee met 12 times during fiscal 1996.
The Personnel and Benefits Committee meets to review salaries and the
Association's benefit plans, and analysis and determines discretionary bonuses.
This committee is comprised of Directors Faulkner (Chairman), Kerber and Martin.
This committee met two times during fiscal year 1996.
The Nominating Committee is responsible for making nominations for
members of the Board of Directors and is composed of those non-employee
directors whose term is not expiring. While the committee will consider nominees
nominated by other members in writing at least 10 days prior to the annual
meeting, the committee has not actively solicited nominations nor established
any procedures for this purpose. The committee held one meeting during fiscal
1996.
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Executive Compensation
The following table sets forth information concerning the compensation
paid or granted to the Association and Holding Company's Chief Executive
Officer. No other executive officer of the Company had aggregate cash
compensation exceeding $100,000.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Summary Compensation Table(1)
- ---------------------------------------------------------------------------------------------
Annual
Compensation
- ------------------------------------------------------------------------
All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($)(2)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Douglas Stewart, President and 1996 $70,000 $35,000 $11,500
Chief Executive Officer
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with the transitional provisions applicable to the rules
on executive compensation disclosure adopted by the SEC, summary
compensation information is excluded for the years ended June 30, 1995
and 1994, as the Association was not a public company during such
periods.
(2) Includes pension costs under the Association's defined benefit plan
which was terminated on January 31, 1997.
Employment Agreements and Severance Agreements
The Association intends to enter into employment agreements with
Douglas Stewart, President and Chief Executive Officer; David R. Fogt, Vice
President of Operations and Financial Services; Gary N. Fullenkamp, Vice
President of Mortgage Loans and Corporate Secretary; Debra A. Geuy, Treasurer;
and Steven Goins, Assistant Vice President of Financial Services. The employment
agreements are designed to assist the Association in maintaining a stable and
competent management team after the Conversion. The continued success of the
Association depends to a significant degree on the skills and competence of its
officers. These agreements have been filed with the OTS as part of the
application of the Holding Company for approval to become a savings and loan
holding company. The employment agreements will become effective upon completion
of the Conversion and provide for an annual base salary in an amount not less
than each employee's current salary. The initial term of Mr. Stewart's agreement
will be three years and each of the other officers' agreements will be for one
year. The agreements provide for extensions for a period of one year on each
annual anniversary date, subject to review and approval of the extension by
disinterested members of the Board of Directors of the Association. The
agreements provide for termination upon each employee's death, for cause or in
certain events specified by OTS regulations. The employment agreements are also
terminable by the employee upon 90 days notice to the Association.
The employment agreements provide for payment to each employee of his
salary for the remainder of the term of the agreement, plus up to 299%, in the
case of Mr. Stewart and 100% for each of the other officers, of the employee's
base compensation, in the event there is a
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"change in control" of the Association and employment terminates involuntarily
in connection with such change in control or within twelve months thereafter.
This termination payment may not exceed three times the employee's average
annual compensation over the most recent five year period or be non-deductible
by the Association for federal income tax purposes. For the purposes of the
employment agreements, a "change in control" is defined as (1) an event of a
nature that (i) results in a change in control of the Association or the Holding
Company within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R.
Part 574; or (ii) would be required to be reported in response to Item 1 of the
current report on Form 8-K, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); (2) any person (as the term is used
in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly
of securities of the Association or the Holding Company representing 20% or more
of the Association's or the Holding Company's outstanding securities; (3)
individuals who are members of the board of directors of the Association or the
Holding Company cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the date of the
contract whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board; or (4) a reorganization, merger,
consolidation, sale of all or substantially all of the assets of the Association
or the Holding Company or a similar transaction in which the Association or the
Holding Company is not the resulting entity would require the filing of an
application for acquisition of control or notice of change in control. The
agreements guarantee participation in an equitable manner in employee benefits
applicable to executive personnel.
The Association intends to enter into a change in control severance
agreement with Assistant Vice President of Financial Services, Steven Goins. The
agreement becomes effective upon completion of the Conversion and provides for
an initial term of twelve months. The agreement provides for extensions of one
year, on each anniversary of the effective date of the agreement, subject to a
formal performance evaluation performed by disinterested members of the Board of
Directors of the Association. The agreement provides for termination for cause
or in certain events specified by OTS regulations.
The agreement provides for a lump sum payment to the employee of 100%
of his annual base compensation and the continued payment for the remaining term
of the contract of life and health insurance coverage maintained by the
Association in the event there is a "change in control" of the Association where
employment terminates involuntarily within 12 months of such change in control.
This termination payment is subject to reduction to the extent non-deductible
for federal income tax purposes. For the purposes of the agreements, a "change
in control" is defined as any event which would require the filing of an
application for acquisition of control or notice of change in control pursuant
to 12 C.F.R. ss 574.3 or 4 or any successor regulation. Such events are
generally triggered prior to the acquisition of control of 10% of the Company's
Common Stock. See "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions."
Based on current salaries, if the employment of Messrs. Stewart, Fogt,
Fullenkamp or Goins or Ms. Guey had been terminated as of October 31, 1996,
under
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circumstances entitling him or her to severance pay as described above, he or
she would have been entitled to receive a lump sum cash payment of approximately
$281,000, $50,000, $41,000, $32,500 and $41,000, respectively.
Benefit Plans
General. Peoples Federal currently provides health care benefits to its
employees, including hospitalization, disability and major medical insurance,
subject to certain deductibles and copayments by employees.
Pension Plan. Prior to January 31, 1997, the Association maintained a
defined benefit pension plan for the benefit of its employees. The pension plan
was terminated as of January 31, 1997. The noncontributory pension plan covered
all employees who met certain minimum service requirements. The benefits under
the pension plan were distributed upon termination.
See Note 9 of the Notes to Financial Statements.
Incentive Bonus Plan. The Association intends to establish an incentive
bonus plan which provides for annual cash bonuses to certain officers as a means
of recognizing achievement on the part of such employees. The bonuses will be
determined based on a combination of Peoples Federal's and the individual
employee's performance during the year. No amounts were paid or accrued pursuant
to the incentive plan during fiscal 1996.
401(k) Plan. In connection with the termination of its defined benefit
pension plan, the Association has recently adopted a qualified, tax-exempt
pension plan with a "cash-or-deferred arrangement" qualifying under Section
401(k) of the Internal Revenue Code (the "401(k) Plan"). With certain
exceptions, all employees who have attained age 21 and who have completed one
year of employment, during which they worked at least 1,000 hours, are eligible
to participate in the 401(k) Plan as of the earlier of the first day of the plan
year or the next July 1 or January 1. Eligible employees are permitted to
contribute up to 15% of their compensation to the 401(k) Plan on a pre-tax
basis, up to a maximum of $8,728. The Association matches 50% of the first 3% of
each participant's salary reduction contribution to the 401(k) Plan.
Participant contributions to the 401(k) Plan are fully and immediately
vested. Withdrawals are not permitted before age 62 except in the event of
death, disability, termination of employment or reasons of proven financial
hardship. With certain limitations, participants may make withdrawals from
their accounts while actively employed. Upon termination of employment, the
participant's accounts will be distributed, unless he or she elects to defer
the payment.
The 401(k) Plan may be amended by the Board of Directors, except that
no amendment may be made which would reduce the interest of any participant in
the 401(k) Plan trust fund or divert any of the assets of the 401(k) Plan trust
fund to purposes other than the benefit of participants or their beneficiaries.
No contributions have been made by the Association to the Plan.
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Employee Stock Ownership Plan. The Boards of Directors of Peoples
Federal and the Holding Company have approved the adoption of an ESOP for the
benefit of employees of the Holding Company and its subsidiaries, including
Peoples Federal. The ESOP is designed to meet the requirements of an employee
stock ownership plan as described at Section 4975(e)(7) of the Code and Section
407(d)(6) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). The ESOP may borrow in order to finance purchases of the Holding
Company's Common Stock.
It is anticipated that the ESOP will be funded with a loan from the
Holding Company (not to exceed an amount equal to 8% of the gross conversion
proceeds). The Holding Company intends to apply to the OTS to permit it to lend
funds to the ESOP. In the event the Holding Company is not permitted to lend
funds to the ESOP and the ESOP is unable to obtain financing from an unrelated
lender for its stock purchase, the Holding Company may contribute funds to the
ESOP to enable it purchase up to 3% of the shares of Common Stock in the
Conversion; provided, however that the total contributions of the Holding
Company to the ESOP and RRPs for stock purchases in the Conversion may not
exceed 4% of the Common Stock sold in the Conversion.
GAAP generally requires that any borrowing by the ESOP from an
unaffiliated lender be reflected as a liability in the Holding Company's
consolidated financial statements, whether or not such borrowing is guaranteed
by, or constitutes a legally binding contribution commitment of, the Holding
Company or the Association. The funds used to acquire the ESOP shares are
expected to be borrowed from the Holding Company. If the Holding Company
finances the ESOP debt, the ESOP debt will be eliminated through consolidation
and no liability will be reflected on the Holding Company's consolidated
financial statements. In addition, shares purchased with borrowed funds will, to
the extent of the borrowings, be excluded from stockholders' equity,
representing unearned compensation to employees for future services not yet
performed. Consequently, if the ESOP purchases already-issued shares in the open
market, the Holding Company's consolidated liabilities will increase to the
extent of the ESOP's borrowings, and total and per share stockholders' equity
will be reduced to reflect such borrowings. If the ESOP purchases newly issued
shares from the Holding Company, total stockholders' equity would neither
increase nor decrease, but per share stockholders' equity and per share net
income would decrease because of the increase in the number of outstanding
shares. In either case, as the borrowings used to fund ESOP purchases are
repaid, total stockholders' equity will correspondingly increase.
All employees of the Association are eligible to participate in the
ESOP after they attain age 21 and complete one year of service. Employees will
be credited for years of service to the Association prior to the adoption of the
ESOP for participation and vesting purposes. The Association's contribution to
the ESOP is allocated among participants on the basis of compen sation. Each
participant's account will be credited with cash and shares of Holding Company
Common Stock based upon compensation earned during the year with respect to
which the contribution is made. Contributions credited to a participant's
account are vested on a graduated basis and become fully vested when such
participant completes ten years of service. ESOP participants are entitled to
receive distributions from their ESOP accounts only upon termination of service.
Distributions will be made in cash and in whole shares of the Holding Company's
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Common Stock. Fractional shares will be paid in cash. Participants will not
incur a tax liability until a distribution is made.
Each participating employee is entitled to instruct the trustee of the
ESOP as to how to vote the shares allocated to his or her account. The trustee
will not be affiliated with the Holding Company or Peoples Federal.
The ESOP may be amended by the Board of Directors, except that no
amendment may be made which would reduce the interest of any participant in the
ESOP trust fund or divert any of the assets of the ESOP trust fund to purposes
other than the benefit of participants or their beneficiaries.
Other Stock Benefit Plans. In addition to the above-described benefit
plan, in the future, the Holding Company may consider the implementation of a
stock option plan and RRP. It is not anticipated, however, that such plan or
plans will be adopted until, at the earliest, the first anniversary after the
completion of the Conversion. If a determination is made to implement a stock
option plan or RRP, it is anticipated that any such plans will be submitted to
stockholders for their consideration at which time stockholders would be
provided with detailed information regarding such plan. If such plans are
approved, they will have a dilutive effect on the Holding Company's stockholders
as well as effect the Holding Company's net income and stockholders' equity;
although such effects cannot be determined until such plans are implemented. See
"Summary - Benefits of Stock Conversion to Directors and Executive Officers."
Certain Transactions
The Association has followed a policy of granting loans to eligible
directors, officers, employees and members of their immediate families for the
financing of their personal residences and for consumer purposes. Under the
Association's current policy, all such loans to directors and senior officers
are required to be made in the ordinary course of business and on the same
terms, including collateral and interest rates, as those prevailing at the time
for comparable transactions and do not involve more than the normal risk of
collectibility. However, prior to August 1989, the Association waived loan
origination fees on loans to directors and employees. At October 31, 1996, the
Association's loans to directors, officers and employees totalled approximately
$1,406,000 or 10.2%, 9.6%, 9.1% and 8.6% of pro forma stockholders' equity based
on the sale of the dollar amount of shares aggregating the minimum, midpoint,
maximum and 15% above the Estimated Valuation Range, respectively.
THE CONVERSION
The Board of Directors of the Association and the OTS have approved the
Plan of Conversion. OTS approval does not constitute a recommendation or
endorsement of the Plan of Conversion. Certain terms used in the following
summary of the material terms of the Conversion are defined in the Plan of
Conversion, a copy of which may be obtained by contacting Peoples Federal.
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General
The Board of Directors of the Association has adopted the Plan, subject
to approval by the OTS and the members of the Association. Pursuant to the Plan,
the Association is to be converted from a federally chartered mutual savings
association to a federally chartered stock savings association, with the
concurrent formation of a holding company. The OTS has approved the Plan,
subject to its approval by the affirmative vote of the members of the
Association holding not less than a majority of the total number of votes
eligible to be cast at a special meeting called for that purpose (the "Special
Meeting"), to be held on April 22, 1997.
The Conversion will be accomplished through amendment of the
Association's federal charter to authorize capital stock, at which time the
Association will become a wholly owned subsidiary of the Holding Company. The
Conversion will be accounted for as a pooling of interests.
Subscription Rights have been granted to Eligible Account Holders as of
October 31, 1995, the Tax-Qualified Employee Plans of the Association and
Holding Company, Supplemental Eligible Account Holders as of December 31, 1996,
other members, and officers, directors and employees of the Association.
Additionally, members of the general public are being afforded the opportunity
to subscribe for Holding Company Common Stock in a direct Community Offering,
with a preference to natural persons who reside in Shelby County, Ohio. See "-
Offering of Holding Company Common Stock." Depending upon market conditions, any
shares not initially subscribed for in the Subscription and Community Offering
may be offered for sale on a best efforts basis by a selling group of
broker-dealers. Subscriptions for shares will be subject to the maximum and
minimum purchase limitations set forth in the Plan of Conversion.
Business Purposes
Peoples Federal has several business purposes for the Conversion. The
sale of Holding Company Common Stock will have the immediate result of providing
the Association with additional equity capital in order to support the
Association's existing operating strategies, subject to applicable regulatory
restrictions. The sale of the Common Stock is the most effective means of
increasing the Association's permanent capital and does not involve the high
interest cost and repayment obligation of subordinated debt. In addition,
investment of that part of the net Conversion proceeds paid by the Holding
Company to the Association is expected to provide additional operating income to
further increase the Association's capital on a continuing basis.
The Board of Directors of the Association believes that a holding
company structure could facilitate the acquisition of other savings institutions
in the future as well as other companies. If a multiple holding company
structure is utilized in a future acquisition, the acquired savings institution
would be able to operate on a more autonomous basis as a wholly owned subsidiary
of the Holding Company rather than as a division of the Association. For
example, the acquired savings institution could retain its own directors,
officers and corporate name as well as having representation on the Board of
Directors of the Holding Company. As of the date hereof, there are no plans or
understandings regarding the acquisition of any other institutions.
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The Board of Directors of the Association also believes that a holding
company structure can facilitate the diversification of the Association's
business activities. While the potential for diversification will be maximized
if a unitary holding company structure is utilized because the types of business
activities permitted to a unitary holding company are broader than those of a
multiple holding company, either type of holding company may engage in a broader
range of activities than may a thrift institution directly. Currently, there are
no plans that the Holding Company engage in any material activities apart from
holding the shares of the Association and investing the remaining net proceeds
from the sale of Common Stock in the Conversion.
The preferred stock and additional common stock of the Holding Company
being authorized in the Conversion will be available for future acquisitions and
for issuance and sale to raise additional equity capital, generally without
stockholder approval, but subject to market conditions. Although the Holding
Company currently has no plans with respect to future issuances of equity
securities, the more flexible operating structure provided by the Holding
Company and the stock form of ownership is expected to assist the Association in
competing more aggressively with other financial institutions in its principal
market area.
The Conversion will structure the Association in the stock form used in
the United States by all commercial banks, most major business corporations and
an increasing number of savings institutions. The Conversion will permit the
Association's members to become stockholders of the Holding Company, thereby
allowing members to own stock in the financial organization in which they
maintain deposit accounts or with which they have a borrowing relationship. Such
ownership should encourage members to promote the Association to others, thereby
further contributing to the Association's earnings potential.
The Association is also expected to benefit from its management and
employees owning stock, because stock ownership is viewed as an effective
performance incentive and a means of attracting, retaining and compensating
personnel.
Effects of Conversion to Stock Form on Depositors and Borrowers
of the Association
Voting Rights. Deposit account holders will have no voting rights in
the converted Association or the Holding Company and will therefore not be able
to elect directors of either entity or to control their affairs. These rights
are currently accorded to deposit account holders with regard to the
Association. Subsequent to Conversion, voting rights will be vested exclusively
in the Holding Company as the sole stockholder of the Association. Voting rights
as to the Holding Company will be held exclusively by its stockholders. Each
purchaser of Holding Company Common Stock shall be entitled to vote on any
matters to be considered by the Holding Company stockholders. A stockholder will
be entitled to one vote for each share of Common Stock owned, subject to certain
limitations applicable to holders of 10% or more of the shares of the Common
Stock. See "Description of Capital Stock."
Deposit Accounts and Loans. The general terms of the Association's
deposit accounts, the balances of the individual accounts and the existing FDIC
insurance coverage will not be affected by the Conversion. Furthermore, the
Conversion will not affect the loan accounts, the balances of these accounts, or
the obligations of the borrowers under their individual contractual arrangements
with the Association.
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Tax Effects. The Association has received an opinion from Silver,
Freedman & Taff, L.L.P. with regard to federal income taxation, and an opinion
from Crowe, Chizek and Company LLP with regard to Ohio taxation, to the effect
that the adoption and implementation of the Plan of Conversion set forth herein
will not be taxable for federal or Ohio tax purposes to the Association or the
Holding Company. See "- Income Tax Consequences."
Liquidation Rights. The Association has no plans to liquidate, either
before or subsequent to the completion of the Conversion. However, if there
should ever be a complete liquidation, either before or after Conversion,
deposit account holders would receive the protection of insurance by the FDIC up
to applicable limits. Subject thereto, liquidation rights before and after
Conversion would be as follows:
Liquidation Rights in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of a complete
liquidation of the Association, each holder of a deposit account in the
Association in its present mutual form would receive his or her pro rata share
of any assets of the Association remaining after payment of claims of all
creditors (including the claims of all depositors in the amount of the
withdrawal value of their accounts). Such holder's pro rata share of such
remaining assets, if any, would be in the same proportion of such assets as the
balance in his or her deposit account was to the aggregate balance in all
deposit accounts in the Association at the time of liquidation.
Liquidation Rights in Proposed Converted Institution. After Conversion,
each deposit account holder, in the event of a complete liquidation of the
Association, would have a claim of the same general priority as the claims of
all other general creditors of the Association in addition to the protection of
FDIC insurance up to applicable limits. Therefore, except as described below,
the deposit account holder's claim would be solely in the amount of the balance
in his or her deposit account plus accrued interest. The holder would have no
interest in the assets of the Association above that amount.
The Plan of Conversion provides that there shall be established, upon
the completion of the Conversion, a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders
(i.e., depositors at October 31, 1995 and December 31, 1996) in an amount equal
to the net worth of the Association as of the date of its latest statement of
financial condition contained in the final prospectus relating to the sales of
shares of Holding Company Common Stock in the Conversion. Each Eligible Account
Holder and Supplemental Eligible Account Holder would have an initial interest
in such liquidation account for each deposit account held in the Association on
the applicable record date. A deposit account holder's interest as to each
deposit account would be in the same proportion of the total liquidation account
as the balance in his or her account on the applicable record date, was to the
aggregate balance in all deposit accounts of Eligible Account Holders and/or
Supplemental Eligible Account Holders on such dates. For deposit accounts in
existence on both dates separate subaccounts shall be determined on the basis of
the qualifying deposits in such deposit accounts on such record dates. However,
if the amount in the deposit account on any annual closing date of the
Association is less than the lowest amount in such account on October 31, 1995
or December 31, 1996 and on any subsequent closing date (each October 31st and
December 31st), then the account holder's interest in this special liquidation
account would be
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reduced by an amount proportionate to any such reduction, and the account
holder's interest would cease to exist if such deposit account were closed.
In addition, the interest in the special liquidation account would
never be increased despite any increase in the balance of the account holders'
related accounts after Conversion, and could only decrease.
Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were satisfied would
be distributed to the Holding Company as the sole stockholder of the
Association.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether the
Association, as converted, or another SAIF-insured institution is the surviving
institution, is deemed to be a complete liquidation for purposes of distribution
of the liquidation account and, in any such transaction, the liquidation account
would be assumed to the full extent authorized by regulations of the OTS as then
in effect. The OTS has stated that the consummation of a transaction of the type
described in the preceding sentence in which the surviving entity is not a
SAIF-insured institution would be reviewed on a case-by-case basis to determine
whether the transaction should constitute a "complete liquidation" requiring
distribution of any then remaining balance in the liquidation account. While the
Association believes that such a transaction should not constitute a complete
liquidation, there can be no assurance that the OTS will not adopt a contrary
position.
Common Stock. For information as to the characteristics of the Common
Stock to be issued under the Plan of Conversion, see "Dividends" and
"Description of Capital Stock." Common Stock issued under the Plan of Conversion
cannot, and will not, be insured by the FDIC or any other governmental agency.
The Association will continue, immediately after completion of the
Conversion, to provide its services to depositors and borrowers pursuant to its
existing policies and will maintain the existing management and employees of the
Association. Other than for payment of expenses incident to the Conversion, no
assets of the Association will be distributed in the Conversion. Peoples Federal
will continue to be a member of the FHLB System, and its deposit accounts will
continue to be insured by the FDIC. The affairs of Peoples Federal will continue
to be directed by the existing Board of Directors and management.
Offering of Holding Company Common Stock
Under the Plan of Conversion, 1,552,500 shares of Holding Company
Common Stock will be offered for sale, subject to certain restrictions described
below, initially through a Subscription Offering. Federal conversion regulations
require, with certain exceptions, that at least the minimum number of shares
offered in a conversion be sold in order for the conversion to become effective.
The Subscription and Community Offering will expire at 5:00 p.m.,
Sidney, Ohio time, on April 15, 1997 (the "Subscription Expiration Date") unless
extended by the
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Association and the Holding Company. Regulations of the OTS require that all
shares to be offered in the Conversion be sold within a period ending not more
than 45 days after the Subscription Expiration Date (or such longer period as
may be approved by the OTS) or, despite approval of the Plan of Conversion by
members, the Conversion will not be effected and Peoples Federal will remain in
mutual form. This period expires on May 30, 1997, unless extended with the
approval of the OTS. If the Subscription and Community Offering is extended
beyond May 30, 1997, all subscribers will have the right to modify or rescind
their subscriptions and to have their subscription funds returned promptly with
interest. In the event that the Conversion is not effected, all funds submitted
and not previously refunded pursuant to the Subscription and Community Offering
will be promptly refunded to subscribers with interest at the Association's
current passbook rate, and all withdrawal authorizations will be terminated.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities of a thrift institution sold in connection with its conversion must
be based on an appraised aggregate market value of the institution as converted
(i.e., taking into account the expected receipt of proceeds from the sale of the
securities in the conversion), as determined by an independent valuation.
Keller, which is experienced in the valuation and appraisal of business
entities, including thrift institutions involved in the conversion process, was
retained by the Association to prepare an appraisal of the estimated pro forma
market value of the Association and the Holding Company upon Conversion.
Keller will receive a fee of approximately $17,000 for its appraisal.
The Association has agreed to indemnify Keller under certain circumstances
against liabilities and expenses (including legal fees) arising out of, related
to, or based upon the Conversion.
Keller has prepared an appraisal of the estimated pro forma market value of
the Association as converted. The Keller appraisal concluded that, at March 4,
1997, an appropriate range for the estimated pro forma market value of the
Association and the Holding Company was from a minimum of $11,475,000 to a
maximum of $15,525,000 with a midpoint of $13,500,000. Assuming that the shares
are sold at $10.00 per share in the Conversion, the estimated number of shares
to be issued in the Conversion is expected to be between 1,147,500 and
1,552,500. The Purchase Price of $10.00 was determined by discussion among the
Boards of Directors of the Association, the Holding Company and Keller, taking
into account, among other factors, (i) the requirement under OTS regulation that
the Common Stock be offered in a manner that would achieve the widest
distribution of shares and (ii) liquidity in the Common Stock subsequent to the
Conversion.
The appraisal involved a comparative evaluation of the operating and
financial statistics of the Association with those of other thrift institutions.
The appraisal also took into account such other factors as the market for thrift
institution stocks generally, prevailing economic conditions, both nationally
and in Ohio which affect the operations of thrift institutions, the competitive
environment within which the Association operates and the effect of the
Association becoming a subsidiary of the Holding Company. No detailed individual
analysis of the separate components of the Holding Company's and the
Association's assets and liabilities was performed
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in connection with the evaluation. The Plan of Conversion requires that all of
the shares subscribed for in the Subscription and Community Offering be sold at
the same price per share. The Board of Directors reviewed and discussed with
Keller the appraisal, including the methodology and the appropriateness of the
assumptions utilized and determined that in its opinion the Appraisal was not
unreasonable. The Estimated Valuation Range may be amended with the approval of
the OTS in connection with changes in the financial condition or operating
results of the Association or market conditions generally. As described below,
an amendment to the Estimated Valuation Range would not be made without a
resolicitation of subscriptions and/or proxies except in limited circumstances.
If, upon completion of the Subscription and Community Offering, at
least the minimum number of shares are subscribed for, Keller, after taking into
account factors similar to those involved in its prior Appraisal, will determine
its estimate of the pro forma market value of the Association and the Holding
Company upon Conversion, as of the close of the Subscription and Community
Offering.
If, based on the estimate of Keller, the aggregate pro forma market
value is not within the Estimated Valuation Range, Keller, upon the consent of
the OTS, will determine a new Estimated Valuation Range ("Amended Valuation
Range"). If the aggregate pro forma market value of the Association as converted
and the Holding Company has increased in the Amended Valuation Range to an
amount that does not exceed $17,853,750 (i.e., 15% above the maximum of the
Estimated Valuation Range), then the number of shares to be issued may be
increased to accommodate such increase in value without a resolicitation of
subscriptions and/or proxies. In such event the Association and the Holding
Company do not intend to resolicit subscriptions and/or proxies unless the
Association and the Holding Company then determine, after consultation with the
OTS, that circumstances otherwise require such a resolicitation. If, however,
the aggregate pro forma market value of the Holding Company and the Association,
as converted, at that time is less than $11,475,000 or more than $17,853,750, a
resolicitation of subscribers and/or proxies may be made, the Plan of Conversion
may be terminated or such other actions as the OTS may permit may be taken. In
the event that upon completion of the Subscription and Community Offering, the
pro forma market value of the Holding Company and Association, as converted, is
below $11,475,000 or above $17,853,750 (15% above the maximum of the Estimated
Valuation Range), the Holding Company intends to file the revised appraisal with
the SEC by post-effective amendment to its Registration Statement on Form S-1.
See "Additional Information." If the Plan of Conversion is terminated, all funds
would be returned promptly with interest at the rate of the Association's
current passbook rate, and holds on funds authorized for withdrawal from deposit
accounts would be released. If there is a resolicitation of subscriptions,
subscribers will be given the opportunity to cancel or change their
subscriptions and to the extent subscriptions are so canceled or reduced, funds
will be returned with interest at the Association's current passbook savings
rate, and holds on funds authorized for withdrawal from deposit accounts will be
released or reduced. Unless there is a resolicitation, stock subscriptions
received by the Holding Company and the Association may not be withdrawn by the
subscriber and, if accepted by the Holding Company and the Association, are
final. If the Conversion is not completed prior to April 22, 1999 (two years
after the date of the Special Meeting), the Plan of Conversion will
automatically terminate.
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Any increase in the total number of shares of Common Stock to be
offered in the Conversion will dilute a subscriber's percentage ownership
interest and will reduce the pro forma net income and net worth on a per share
basis. A decrease in the number of shares to be issued in the Conversion will
increase a subscriber's proportionate ownership interest and will increase both
pro forma net income and net worth on a per share basis while decreasing that
amount on an aggregate basis.
No sale of the shares will take place unless, prior thereto, Keller
confirms to the OTS that, to the best of Keller's knowledge and judgment,
nothing of a material nature has occurred which would cause Keller to conclude
that the actual Purchase Price on an aggregate basis is incompatible with its
estimate of the aggregate pro forma market value of the Holding Company and the
Association as converted at the time of the sale. If, however, the facts do not
justify such a statement, the Subscription and Community Offering or other sale
may be canceled, or a new Estimated Valuation Range set and a new offering held.
In preparing its valuation of the pro forma market value of the
Association and the Holding Company upon Conversion, Keller relied upon and
assumed the accuracy and completeness of all financial and statistical
information provided by the Association and the Holding Company. Keller also
considered information based upon other publicly available sources which it
believes are reliable. However, Keller does not guarantee the accuracy and
completeness of such information and did not independently verify the financial
statements and other data provided by the Association and the Holding Company or
independently value the assets or liabilities of the Association and the Holding
Company. The appraisal is not intended to be, and must not be interpreted as, a
recommendation of any kind as to the advisability of voting to approve the
Conversion or of purchasing shares of Common Stock. The appraisal considers
Peoples Federal and the Holding Company only as going concerns and should not be
considered as any indication of the liquidation value of Peoples Federal or the
Holding Company. Moreover, the appraisal is necessarily based on many factors
which change from time to time. There can be no assurance that persons who
purchase shares in the Conversion will be able to sell such shares at prices at
or above the Purchase Price.
Subscription Offering
In accordance with OTS regulations, nontransferable Subscription Rights
have been granted under the Plan of Conversion to the following persons in the
following order of priority: (1) Eligible Account Holders (deposit account
holders of the Association as of October 31, 1995; (2) Tax-Qualified Employee
Plans; (3) Supplemental Eligible Account Holders (deposit account holders of the
Association as of December 31, 1996; (4) Other Members (depositors of the
Association, other than Eligible Account Holders or Supplemental Eligible
Account Holders at the close of business on March 10, 1997, the voting record
date for the Special Meeting); and (5) officers, directors and employees of the
Association. All subscriptions received will be subject to the availability of
Holding Company Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering, and to the maximum and
minimum purchase limitations set forth in the Plan of Conversion. The preference
categories are more fully described below.
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Category No. 1 is reserved for the Association's Eligible Account
Holders. Subscription Rights to purchase shares under this category will be
allocated among Eligible Account Holders to permit each such depositor to
purchase shares in an amount equal to the greater of $100,000 of Common Stock or
one-tenth of one percent (.10%) of the total shares offered in the Subscription
and Community Offering, or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the qualifying
deposits of the Eligible Account Holder and the denominator is the total amount
of the qualifying deposits of all Eligible Account Holders in the Association,
in each case on the Eligibility Record Date, subject to the overall purchase
limitation and exclusive of shares issued pursuant to an increase in the
Estimated Valuation Range of up to 15% after satisfying the subscriptions of
Tax-Qualified Employee Plans. To the extent shares are oversubscribed in this
category, shares shall be allocated among subscribing Eligible Account Holders
to permit each such depositor, to the extent possible, to purchase a number of
shares sufficient to make his total allocations equal 100 shares. Any shares not
so allocated shall be allocated among the subscribing Eligible Account Holders
pro rata in the same proportion that each such subscriber's Qualifying Deposit,
as defined in the Plan of Conversion, bears to the total Qualifying Deposits of
all subscribing Eligible Account Holders whose subscriptions remain unsatisfied.
Category No. 2 provides for the issuance of Subscription Rights to
Tax-Qualified Employee Plans to purchase up to 10% of the total amount of shares
of Common Stock issued in the Subscription and Community Offering on a second
priority basis. However, such plans shall not, in the aggregate, purchase more
than 10% of the Holding Company Common Stock issued. The ESOP intends to
purchase a total of 8% of the Common Stock issued in the Conversion under this
category. Subscription Rights received pursuant to this category shall be
subordinated to all rights received by Eligible Account Holders to purchase
shares pursuant to Category No. 1; provided, however, that notwithstanding any
provision of the Plan of Conversion to the contrary, the Tax-Qualified Employee
Plans shall have first priority Subscription Rights to the extent that the total
number of shares of Common Stock sold in the Conversion exceeds the maximum of
the Estimated Valuation Range.
Category No. 3 is reserved for the Association's Supplemental Eligible
Account Holders. Subscription Rights to purchase shares under this category will
be allocated among Supplemental Eligible Account Holders to permit each such
depositor to purchase shares in an amount equal to the greater of $100,000,
one-tenth of one percent (.10%) of the total shares of Common Stock offered
in the Conversion, or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock
to be issued by a fraction of which the numerator is the amount of the
qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the qualifying deposit of the Supplemental
Eligible Account Holders in the converting Association in each case on
December 31, 1996 (the "Supplemental Eligibility Record Date"), subject to
the overall purchase limitation after satisfying the subscriptions of Eligible
Account Holders and Tax Qualified Employee Plans. In the event of an
oversubscription for shares, the shares available shall be allocated first to
permit each subscribing Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
(including the number of shares, if any, allocated in accordance with Category
No. 1) equal to 100 shares, and thereafter among each subscribing Supplemental
Eligible Account Holder pro rata in the same proportion
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that his Qualifying Deposit bears to the total Qualifying Deposits of all
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied.
Category No. 4 provides, to the extent that shares are then available
after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account Holders, for the issuance of
Subscription Rights to Other Members to purchase shares equal to the greater of
$100,000 of Common Stock or one-tenth of one percent (.10%) of the total amount
of shares of Common Stock offered in the Subscription and Community Offering. In
the event of an oversubscription, the available shares will be allocated on a
pro rata basis in the same proportion as a subscriber's total votes on the
Voting Record Date for the Special Meeting bears to the total votes of all
subscribing Other Members on such date.
Each depositor (including IRA and Keogh account beneficiaries) is
entitled at the Special Meeting to cast one vote for each $100, or fraction
thereof, of the aggregate withdrawal value of all of such depositor's savings
accounts in the Association as of the applicable voting record date, up to a
maximum of 1,000 votes. Each borrower member of the Association as of the Voting
Record Date will be entitled to cast one vote as a borrower member.
Category No. 5 provides for the issuance of Subscription Rights to
officers, directors and employees of the Association, to purchase up to $100,000
of Common Stock to the extent that shares are available after satisfying the
subscriptions of eligible subscribers in preference Categories 1, 2, 3 and 4.
The total number of shares which may be purchased under this Category may not
exceed 24% of the total number of shares sold in the Conversion. In the event of
an oversubscription, the available shares will be allocated on a pro rata basis
in the same proportion that orders of each person bear to the total orders of
all subscribers in this Category.
Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscriptions received and accepted in the Subscription
Offering, the Association has determined to offer shares pursuant to the Plan to
certain members of the general public in the Community Offering with a
preference given to natural persons residing in Shelby County, Ohio. Any excess
of shares available will be available for purchase by the general public in such
a manner as to promote a wide distribution of the Common Stock. Finally,
depending on market conditions, the Association may offer shares to the general
public in a Syndicated Community Offering on a best efforts basis through a
selected dealer arrangement.
The opportunity to subscribe for shares of Common Stock in the
Community Offering (including a Syndicated Community Offering, if any) is
subject to the right of the Association and the Holding Company, in their sole
discretion, to accept or reject any such orders in whole or in part either at
the time of receipt of an order or as soon as practicable following the
Subscription Expiration Date. Regulations of the OTS require that all shares to
be offered in the Conversion be sold within a period ending not more than 45
days after the Subscription Expiration Date (or such longer period as may be
approved by the OTS). This period expires on May 30, 1997 unless extended
with the approval of the OTS. In addition, if the Subscription and Community
Offering is extended beyond May 30,
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1997 all subscribers will be resolicited and notified of their rights to
confirm, modify or rescind their subscriptions and to have their subscription
funds returned promptly with interest. No person, together with associates of
and persons acting in concert with such person, may purchase more than $100,000
of Common Stock in the Community Offering. Subject to the foregoing, in the
event of an oversubscription in the Community Offering, shares will be allocated
first to cover orders of natural persons residing in Shelby County, next to
cover orders of other persons (whose order is accepted by the Association) so
that such person may receive up to 1,000 shares and thereafter, to the extent
shares remain available, on a pro rata basis in the same proportion that
unfilled orders of each person bears to the total unfilled orders of all
persons.
Additional Purchase Restrictions
In addition to the purchase limitations for each priority category
described above under "Subscription Offering" and for purchases in the Public
Offering, the Plan also provides for certain additional limitations to be placed
upon the aggregate purchase of shares in the Conversion. Specifically, no person
(other than a Tax-Qualified Employee Plan or certain large depositors) by
himself or herself or with an associate, and no group of persons acting in
concert, may subscribe for or purchase more than $200,000 of Common Stock
offered in the Conversion based on the Estimated Valuation Range, without regard
to an increase in the number of shares to be issued. For purposes of this
limitation, an associate of a person does not include a Tax- Qualified Employee
Plan or Non-Tax Qualified Employee Plan in which the person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary capacity.
Moreover, for purposes of this paragraph, shares held by one or more Tax
Qualified or Non-Tax Qualified Employee Plans attributed to a person shall not
be aggregated with shares purchased directly by or otherwise attributable to
that person except for that portion of a plan which is self-directed by a
person. See "-Stock Pricing and Number of Shares to be Issued" regarding
potential changes in Subscription Rights in the event of a decrease in the
number of shares to be issued in the Conversion. Officers and directors and
their associates may not purchase, in the aggregate, more than 34% of the shares
to be sold in the Conversion. For purposes of the Plan, the members of the Board
of Directors are not deemed to be acting in concert solely by reason of their
Board membership. For purposes of this limitation, an associate of an officer or
director does not include a Tax-Qualified Employee Plan. Moreover, any shares
attributable to the officers and directors and their associates, but held by a
Tax-Qualified Employee Plan (other than that portion of a plan which is
self-directed) shall not be included in calculating the number of shares which
may be purchased under the limitations in this paragraph. Shares purchased by
employees who are not officers or directors of the Association, or their
associates, are not subject to this limitation. The term "associate" is used
above to indicate any of the following relationships with a person: (i) any
corporation or organization (other than the Holding Company or the Association
or a majority-owned subsidiary of the Holding Company or the Association) of
which a person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity security; (ii) any trust
or other estate in which such person has a substantial beneficial interest or as
to which such person serves as trustee or in a similar fiduciary capacity; and
(iii) any relative or spouse of such person or any relative of such spouse who
has the same home as such person or who is a director or officer of the Holding
Company or the Association or any subsidiary of the Holding Company or the
Association.
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The Boards of Directors of the Holding Company and the Association, in
their sole discretion, may increase the maximum purchase limitations referred to
above up to 9.99% of the total shares sold in the Subscription and Community
Offering, provided that the percentage by which each such order exceeds 5% of
the shares being offered in the Subscription and Community Offering shall not
exceed, in the aggregate, 10% of the shares being offered in the Subscription
and Community Offering. Requests to purchase additional shares of Holding
Company Common Stock under this provision will be allocated by the Boards of
Directors on a pro rata basis giving priority in accordance with the priority
rights set forth above. Depending on market and financial conditions, the Boards
of Directors of the Holding Company and the Association, with the approval of
the OTS and without further approval of the members, may increase any of the
above purchase limitations or decrease the maximum purchase limitation to as low
as 1% of the shares of Common Stock offered in the Conversion.
To the extent that shares are available, each subscriber must subscribe
for a minimum of 25 shares. In computing the number of shares to be allocated,
all numbers will be rounded down to the next whole number.
Common Stock purchased in the Conversion will be freely transferable
except for shares purchased by executive officers and directors of the
Association or the Holding Company. See "- Restrictions on Transfer of
Subscription Rights and Shares."
Marketing and Underwriting Arrangements
The Association has retained the services of Webb to consult with and
to advise the Association and the Holding Company, and to assist the
Association, on a best efforts basis, in the distribution of shares in the
Subscription and Community Offering. Webb is an SEC-registered firm and is a
member of the National Association of Securities Dealers, Inc. (the "NASD"). Its
telephone number is (614) 766-8400. Webb will render services to the Association
and the Holding Company including: 1) assistance in structuring the offering and
analysis of the depositor base and community served by the Association; 2)
providing its employees on site to staff the Stock Information Center to
maintain records of all stock subscriptions; 3) training the Association's
personnel regarding the mechanics and regulatory requirements of the Conversion
process; 4) conducting information meetings for subscribers and other potential
purchasers; and 5) assistance in obtaining proxies from the Association's
members with respect to the special meeting.
For its services, Webb will receive a management fee and estimated
expenses of $35,000, and will be paid a commission of 1.5% of the aggregate
Purchase Price of Common Stock sold in the Subscription and Community Offering,
excluding Common Stock purchased by directors, officers and employees of the
Association, or members of their immediate families and ESOP purchases. The
Holding Company will also pay a fee of 5.5% of the aggregate Purchase Price
of shares of Common Stock sold in the Subscription and Community Offering
through a syndicate of a broker dealers should such brokers or registered
representatives be engaged. The Association has agreed to reimburse Webb for
its out-of-pocket expenses and its legal fees and expenses and to indemnify
Webb against certain claims or liabilities, including certain liabilities
under the Securities Act of 1933, as amended.
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Directors and executive officers of the Holding Company and the
Association may, to a limited extent, participate in the soliciation of offers
to purchase Common Stock. Sales will be made from a Stock Information Center
located away from the publicly accessible areas (including teller windows) of
the Association's office. Other employees of the Association may participate in
the Offering in administrative capacities, providing clerical work in effecting
a sales transaction or answering questions of a potential purchaser provided
that the content of the employee's responses is limited to information contained
in this Prospectus or other offering document. Other questions of prospective
purchasers will be directed to executive officers or registered representatives
of Webb. Such other employees have been instructed not to solicit offers to
purchase Common Stock or provide advice regarding the purchase of Common Stock.
To the extent permitted under applicable law, directors and executive officers
of the Holding Company and the Association may participate in the solicitation
of offers to purchase Common Stock.
A conversion center will be established at the Association's office, in
an area separated from the Association's banking operations. No sales activities
will be conducted in the public areas of the Association's offices, but persons
will be able to obtain a Prospectus and sales information at such places, and
employees will inform prospective purchasers to direct their questions to the
conversion center. Completed stock orders will be accepted at such places, and
will be promptly forwarded to the conversion center for processing.
Sales of Common Stock will be made primarily by registered
representatives affiliated with Webb or by the broker-dealers managed by Webb. A
Stock Information Center will be established at the main office of the
Association. The Holding Company will rely on Rule 3a4-1 under the Exchange Act
and sales of Common Stock will be conducted within the requirements of Rule
3a4-1, so as to permit officers, directors and employees to participate in the
sale of Common Stock. No officer, director or employee of the Holding Company or
the Association will be compensated in connection with his participation by the
payment of commissions or other remuneration based either directly or indirectly
on the transactions in the Common Stock. In addition, directors and executive
officers of the Association may participate in the solicitation of offers to
purchase Common Stock and other employees of the Association may participate in
the Subscription and Community Offering in ministerial capacities.
Method of Payment for Subscriptions
To purchase shares in the Subscription and Community Offering, an
executed original Order Form, including the certification form (facsimile and
photocopies will not be accepted) with the required payment for each share
subscribed for, or with appropriate authorization for withdrawal from the
subscriber's deposit account at the Association (which may be given by
completing the appropriate blanks in the order form), must be received by the
Holding Company at an office of the Association by 5:00 p.m., Sidney, Ohio time
on April 15, 1997, the Subscription Expiration Date. Order Forms which are not
received by such time or are executed defectively or are received without full
payment (or appropriate withdrawal instructions) are not required to be
accepted.
Payment for subscriptions may be made (i) in cash if delivered in
person at the office of the Association, (ii) by check, bank draft or money
order or (iii) by authorization of withdrawal
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from deposit accounts maintained with the Association. Interest will be paid on
payments made by cash, check, bank draft or money order, whether or not the
Conversion is completed or terminated, at the regular passbook rate of 3.05% per
annum from the date payment is received until the completion or termination of
the Conversion. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion.
If a subscriber authorizes the Association to withdraw the amount of
the purchase price from his certificate account, the Association will do so as
of the effective date of Conversion. The Association will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the rate paid on the remaining balance of the
certificate account will earn interest at the then-current passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Conversion, provided that there
is in force from the time of its subscription until such time a loan commitment
to lend to the ESOP, at such time, the aggregate Purchase Price of the shares
for which it subscribed.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Holding Company, or to such other address as may be specified in
properly completed order forms, as soon as practicable following consummation of
the sale of all shares of Common Stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
order form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order forms will only be distributed with a prospectus. The Holding Company will
accept for processing only orders submitted on original order forms with the
form of certification. Photocopies or facsimile copies of order forms or
certifications will not be accepted. Payment by cash, check, money order, bank
draft or debit authorization to an existing account at the Association must
accompany the order form. No wire transfers will be accepted.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members receive their stock purchase priorities,
depositors as of the Eligibility Record Date (October 31, 1995), the
Supplemental Eligibility Record Date (December 31, 1996) and/or the Voting
Record Date (March 10, 1997) must list all accounts on the stock order form
giving all names on each account and the account number as of the applicable
record date.
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In addition to the foregoing, if shares are offered through selected
dealers in the Community Offering, a purchaser may pay for his shares with funds
held by or deposited with a selected dealer. If an order form is executed and
forwarded to the selected dealer or if the selected dealer is authorized to
execute the order form on behalf of a purchaser, the selected dealer is required
to forward the order form and funds to the Holding Company for deposit in a
segregated account at the Association on or before noon of the business day
following receipt of the order form or execution of the order form by the
selected dealer. Alternatively, selected dealers may solicit indications of
interest from their customers and thereafter seek their confirmation as to their
intent to purchase. Those indicating an intent to purchase shall forward
executed order forms and certifications to their selected dealer or authorize
the selected dealer to execute such forms. The selected dealer will acknowledge
receipt of the order to its customer in writing on the following business day
and will debit such customer's account on the third business day after the
customer has confirmed his intent to purchase (the "debit date") and on
or before noon of the next business day following the debit date will send order
forms and funds to the Holding Company for deposit in a segregated account at
the Association. If such alternative procedure is employed, purchasers' funds
are not required to be in their accounts with selected dealers until the debit
date.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with Subscription Rights, including the
Tax-Qualified Employee Plans, Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members of the Association, from transferring or
entering into any agreement or understanding to transfer the legal or beneficial
ownership of the Subscription Rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Such rights may be executed only
by the person to whom they are granted and only for his account. Each person
exercising Subscription Rights will be required to certify that he is purchasing
shares solely for his own account and that he has no agreement or understanding
regarding the sale or transfer of such shares. The regulations also prohibit any
person from offering or making an announcement of an offer or intent to make an
offer to purchase Subscription Rights or shares of Common Stock prior to the
completion of the Conversion.
The Association and the Holding Company may pursue any and all legal
and equitable remedies in the event they become aware of the transfer of
Subscription Rights and will not honor orders known by them to involve the
transfer of such rights.
Except as to directors and executive officers of the Association and
the Holding Company, the shares of Common Stock sold in the Conversion will be
freely transferable. Shares purchased by directors, executive officers or their
associates in the Conversion shall be subject to the restrictions that said
shares shall not be sold during the period of one year following the date of
purchase, except in the event of the death of the stockholder. Accordingly,
stock certificates issued by the Holding Company to directors, executive
officers and associates shall bear a legend giving appropriate notice of such
restriction and, in addition, the Holding Company will give appropriate
instructions to the transfer agent for the Holding Company's Common Stock with
respect to the applicable restriction upon transfer of any restricted shares.
Any shares issued at a later date as a stock dividend, stock split or otherwise,
to holders of restricted stock, shall be subject to the same restrictions that
may apply to such restricted stock. Holding Company Common Stock (like the stock
of most companies) is subject to the
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requirements of the Securities Act of 1933, as amended (the "Securities Act").
Accordingly, the Holding Company's Common Stock may be offered and sold only in
compliance with registration requirements or pursuant to an applicable exemption
from registration.
Holding Company's Common Stock received in the Conversion by persons
who are not "affiliates" of the Holding Company may be resold without
registration. Shares received by affiliates of the Holding Company (primarily
the directors, officers and principal stockholders of the Holding Company) will
be subject to the resale restrictions of Rule 144 under the Securities Act. Rule
144 generally requires that there be publicly available certain information
concerning the Holding Company, and that sales thereunder be made in routine
brokerage transactions or through a market maker. If the conditions of Rule 144
are satisfied, each affiliate (or group of persons acting in concert with one or
more affiliates) is entitled to sell in the public market, without registration,
in any three-month period, a number of shares which does not exceed the greater
of (i) 1% of the number of outstanding shares of Holding Company stock, or (ii)
if the stock is admitted to trading on a national securities exchange or
reported through the automated quotation system of a registered securities bank,
the average weekly reported volume of trading during the four weeks preceding
the sale.
Participation by the Board and Executive Officers
The directors and executive officers of Peoples Federal have indicated
their intention to purchase in the Conversion an aggregate of $1,745,000 of
Common Stock, equal to 15.2%, 12.9%, 11.2% or 9.8% of the number of shares to be
issued in the Subscription and Community Offering, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. The following table sets forth information regarding Subscription
Rights to Common Stock intended to be exercised by each of the directors of the
Association, including members of their immediate family and their IRAs, and by
all directors and executive officers as a group. The following table assumes
that 1,350,000 shares, the midpoint of the Estimated Valuation Range, of Common
Stock are issued at the Purchase Price of $10.00 per share and that sufficient
shares will be available to satisfy the subscriptions indicated. The table does
not include shares to be purchased through the ESOP (8% of shares issued in the
Conversion).
<TABLE>
<CAPTION>
Number of
Aggregate Shares at Percent of
Purchase $10.00 Shares at
Name Title Price per Share Midpoint
---- ----- --------- --------- ---------
<S> <C> <C> <C> <C>
Douglas Stewart President, Chief Executive $ 200,000 20,000 1.5%
Officer and Director
Richard T. Martin Chairman of the Board 200,000 20,000 1.5
Harry N. Faulkner Director 200,000 20,000 1.5
George R. Hoellrich Director 20,000 2,000 0.1
James W. Kerber Director 200,000 20,000 1.5
Robert W. Bertsch Director 200,000 20,000 1.5
John W. Sargeant Director 200,000 20,000 1.5
All directors and officers as a $1,745,000 174,500 12.9%
group (11 persons)
</TABLE>
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Risk of Delayed Offering
The completion of the sale of all unsubscribed shares in the
Subscription and Community Offering will be dependent, in part, upon the
Association's operating results and market conditions at the time of the
Subscription and Community Offering. Under the Plan of Conversion, all shares
offered in the Conversion must be sold within a period ending 24 months from the
date of the Special Meeting. While the Association and the Holding Company
anticipate completing the sale of shares offered in the Conversion within this
period, if the Board of Directors of the Association and the Holding Company are
of the opinion that economic conditions generally or the market for publicly
traded thrift institution stocks make undesirable a sale of the Holding
Company's Common Stock, then the Subscription and Community Offering may be
delayed until such conditions improve.
A material delay in the completion of the sale of all unsubscribed
shares in the Subscription and Community Offering may result in a significant
increase in the costs of completing the Conversion. Significant changes in the
Association's operations and financial condition, the aggregate market value of
the shares to be issued in the Conversion and general market conditions may
occur during such material delay. In the event the Conversion is not consummated
within 24 months after the date of the Special Meeting of Members, the
Association would charge accrued Conversion costs to then current period
operations.
Approval, Interpretation, Amendment and Termination
All interpretations of the Plan of Conversion, as well as the
completeness and validity of order forms and stock order and account withdrawal
authorizations, will be made by the Association and the Holding Company and will
be final, subject to the authority of the OTS and the requirements of applicable
law. The Plan of Conversion provides that, if deemed necessary or desirable by
the Boards of Directors of the Association and the Holding Company, the Plan of
Conversion may be substantively amended (including an amendment to eliminate the
formation of the Holding Company as part of the Conversion) by the Boards of
Directors of the Association and the Holding Company, as a result of comments
from regulatory authorities or otherwise, at any time with the concurrence of
the OTS. In the event the Plan of Conversion is substantially amended, other
than a change in the maximum purchase limits set forth herein, the Holding
Company intends to notify subscribers of the change and to permit subscribers to
modify or cancel their subscriptions. The Plan of Conversion will terminate if
the sale of all shares is not completed within 24 months after the date of the
Special Meeting of Members. The Plan of Conversion may be terminated by the
Boards of Directors of the Holding Company and the Association with the
concurrence of the OTS, at any time. A specific resolution approved by a
two-thirds vote of the Boards of Directors of the Holding Company and the
Association would be required to terminate the Plan of Conversion prior to the
end of such 24-month period.
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Restrictions on Repurchase of Stock
For a period of three years following Conversion, the Holding Company
may not repurchase any shares of its capital stock, except in the case of an
offer to repurchase on a pro rata basis made to all holders of capital stock of
the Holding Company. Any such offer shall be subject to the prior approval of
the OTS. Furthermore, the Holding Company may not repurchase any of its stock
(i) if the result thereof would be to reduce the regulatory capital of the
Association below the amount required for the liquidation account to be
established pursuant to OTS regulations and (ii) except in compliance with the
requirements of the OTS' capital distribution rule.
The above limitations are subject to the OTS conversion rules which
generally provide that the Holding Company may repurchase its capital stock
provided (i) no repurchases occur within one year following the Conversion
(subject to certain exceptions), (ii) repurchases during the second and third
year after conversion are part of an open market stock repurchase program that
does not allow for a repurchase of more than 5% of the Holding Company's
outstanding capital stock during a 12-month period, (iii) the repurchases do not
cause the Association to become undercapitalized, and (iv) the Holding Company
provides notice to the OTS at lease 10 days prior to the commencement of a
repurchase program and the OTS does not object to such regulations. In addition,
the above limitations do not preclude repurchases of capital stock by the
Holding Company in the event applicable federal regulatory limitations are
subsequently liberalized.
Income Tax Consequences
Consummation of the Conversion is expressly conditioned upon prior
receipt by the Association of either a ruling from the IRS or an opinion of
Silver, Freedman & Taff, L.L.P. with respect to federal taxation, and an opinion
of Crowe, Chizek and Company LLP with respect to Ohio taxation, to the effect
that consummation of the Conversion will not be taxable to the converted
Association or the Holding Company. The full text of the Silver, Freedman &
Taff, L.L.P. opinion, the Keller opinion and the Crowe, Chizek and Company LLP
opinion, which opinions are summarized herein, were filed with the SEC as
exhibits to the Holding Company's Registration Statement on Form S-1. See
"Additional Information."
An opinion which is summarized below has been received from Silver,
Freedman & Taff, L.L.P. with respect to the proposed Conversion of the
Association to the stock form. The Silver, Freedman Taff, L.L.P. opinion states
that (i) the Conversion will qualify as a reorganization under Section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, and no gain or
loss will be recognized to the Association in either its mutual form or its
stock form by reason of the proposed Conversion, (ii) no gain or loss will be
recognized to the Association in its stock form upon the receipt of money and
other property, if any, from the Holding Company for the stock of the
Association; and no gain or loss will be recognized to the Holding Company upon
the receipt of money for Common Stock of the Holding Company; (iii) the assets
of the Association in either its mutual or its stock form will have the same
basis before and after the Conversion; (iv) the holding period of the assets of
the Association in its stock form will include the period during which the
assets were held by the Association in its mutual form prior to Conversion; (v)
gain, if any, will be realized by the depositors of the Association upon the
constructive issuance to them of withdrawable deposit accounts of the
Association in its stock form, nontransferable subscription rights to purchase
Holding Company
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Common Stock and/or interests in the Liquidation Account (any such gain will be
recognized by such depositors, but only in an amount not in excess of the fair
market value of the subscription rights and Liquidation Account interests
received); (vi) the basis of the account holder's savings accounts in the
Association after the Conversion will be the same as the basis of his or her
savings accounts in the Association prior to the Conversion; (vii) the basis of
each account holder's interest in the Liquidation Account is assumed to be zero;
(viii) based on the Keller Letter, as hereinafter defined, the basis of the
subscription rights will be zero; (ix) the basis of the Holding Company Common
Stock to its stockholders will be the purchase price thereof; (x) a
stockholder's holding period for Holding Company Common Stock acquired through
the exercise of subscription rights shall begin on the date on which the
subscription rights are exercised and the holding period for the Conversion
Stock purchased in the Subscription and Community Offering will commence on the
date following the date on which such stock is purchased; (xi) the Association
in its stock form will succeed to and take into account the earnings and profits
or deficit in earnings and profits, of the Association, in its mutual form, as
of the date of Conversion; (xii) the Association, immediately after Conversion,
will succeed to and take into account the bad debt reserve accounts of the
Association, in mutual form, and the bad debt reserves will have the same
character in the hands of the Association after Conversion as if no Conversion
had occurred; and (xiii) the creation of the Liquidation Account will have no
effect on the Association's taxable income, deductions or addition to reserve
for bad debts either in its mutual or stock form.
The opinion from Silver, Freedman & Taff, L.L.P. is based, among other
things, on certain assumptions, including the assumptions that the exercise
price of the Subscription Rights to purchase Holding Company Common Stock will
be approximately equal to the fair market value of that stock at the time of the
completion of the proposed Conversion. With respect to the Subscription Rights,
the Association will receive a letter from Keller (the "Keller Letter") which,
based on certain assumptions, will conclude that the Subscription Rights to be
received by Eligible Account Holders, Supplemental Eligible Account Holders and
other eligible subscribers do not have any economic value at the time of
distribution or at the time the Subscription Rights are exercised, whether or
not a Public Offering takes place.
The Association has also received an opinion of Silver, Freedman &
Taff, L.L.P. to the effect that, based in part on the Keller Letter: (i) no
taxable income will be realized by depositors as a result of the exercise of
non-transferable Subscription Rights to purchase shares of Holding Company
Common Stock at fair market value; (ii) no taxable income will be recognized by
borrowers, directors, officers and employees of the Association on the receipt
or exercise of Subscription Rights to purchase shares of Holding Company Common
Stock at fair market value; and (iii) no taxable income will be realized by the
Association or Holding Company on the issuance of Subscription Rights to
eligible subscribers to purchase shares of Holding Company Common Stock at fair
market value.
Notwithstanding the Keller Letter, if the Subscription Rights are
subsequently found to have a fair market value and are deemed a distribution of
property, it is Silver, Freedman & Taff, L.L.P.'s opinion that gain or income
will be recognized by various recipients of the Subscription Rights (in certain
cases, whether or not the rights are exercised) and the Association and/or the
Holding Company may be taxable on the distribution of the Subscription Rights.
In
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any event, all recipients are encouraged to consult with their own tax advisors
as to the tax consequences which may result.
With respect to Ohio taxation, the Association has received an opinion
from Crowe, Chizek and Company LLP to the effect that the Ohio tax consequences
to the Association, in its mutual or stock form, the Holding Company, eligible
account holders, parties receiving subscription rights, parties purchasing
conversion stock, and other parties participating in the Conversion will be the
same as the federal income tax consequences described above.
Unlike a private letter ruling, the opinions of Silver, Freedman &
Taff, L.L.P. and Crowe, Chizek and Company LLP, as well as the Keller Opinion,
have no binding effect or official status, and no assurance can be given that
the conclusions reached in any of those opinions would be sustained by a court
if contested by the IRS or the Ohio State tax authorities.
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Boards of Directors of the Association and the Holding
Company are not aware of any effort that might be made to obtain control of the
Holding Company after Conversion, the Board of Directors, as discussed below,
believes that it is appropriate to include certain provisions as part of the
Holding Company's certificate of incorporation to protect the interests of the
Holding Company and its stockholders from takeovers which the Board of Directors
of the Holding Company might conclude are not in the best interests of the
Association, the Holding Company or the Holding Company's stockholders.
The following discussion is a general summary of material provisions of
the Holding Company's certificate of incorporation and bylaws and certain other
regulatory provisions which may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in the Holding Company's certificate of
incorporation and bylaws and the Association's proposed federal stock charter
and bylaws, reference should be made in each case to the document in question,
each of which is part of the Association's Conversion Application filed with the
OTS and the Holding Company's Registration Statement filed with the SEC. See
"Additional Information."
Provisions of the Holding Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions of the Holding Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's certificate of incorporation provides that the
Board of Directors of the Holding Company will be divided into three classes,
with directors in each class elected for three-year staggered terms except for
the initial directors. Thus, assuming a Board of six directors, it would take
two annual elections to replace a majority of the Holding Company's Board. The
Holding Company's bylaws provide that the size of the Board of Directors may be
increased or decreased only by a majority vote of the whole Board or by a vote
of 80% of the shares eligible to be voted at a duly constituted meeting of
stockholders called for such purpose. The bylaws
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also provide that any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled for
the remainder of the unexpired term by a majority vote of the directors then in
office. Finally, the bylaws impose certain notice and information requirements
in connection with the nomination by stockholders of candidates for election to
the Board of Directors or the proposal by stockholders of business to be acted
upon at an annual meeting of stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Restrictions on Call of Special Meetings. The certificate of
incorporation of the Holding Company provides that a special meeting of
stockholders may be called only pursuant to a resolution of the Board of
Directors and for only such business as directed by the Board. Stockholders
are not authorized to call a special meeting.
Absence of Cumulative Voting. The Holding Company's certificate of
incorporation does not provide for cumulative voting rights in the election of
directors.
Authorization of Preferred Stock. The certificate of incorporation of
the Holding Company authorizes 500,000 shares of serial preferred stock, $.01
par value. The Holding Company is authorized to issue preferred stock from time
to time in one or more series subject to applicable provisions of law, and the
Board of Directors is authorized to fix the designations, powers, preferences
and relative participating, optional and other special rights of such shares,
including voting rights (which could be multiple or as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of the Holding Company that the Board of Directors does
not approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. If the Holding Company issues any
preferred stock which disparately reduces the voting rights of the Common Stock
within the meaning of Rule 19c-4 under the Exchange Act, the Common Stock could
be required to be delisted from the Nasdaq System. An effect of the possible
issuance of preferred stock, therefore, may be to deter a future takeover
attempt. The Board of Directors has no present plans or understandings for the
issuance of any preferred stock and does not intend to issue any preferred stock
except on terms which the Board deems to be in the best interests of the Holding
Company and its stockholders.
Limitation on Voting Rights. The certificate of incorporation of the
Holding Company provides that in no event shall any record owner of any
outstanding Common Stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares
of Common Stock (the "Limit"), be entitled or permitted to have any vote in
respect of the shares held in excess of the Limit. This limitation would not
inhibit any person from soliciting (or voting) proxies from other beneficial
owners for more than 10% of the Common Stock or from voting such proxies.
Beneficial ownership is to be determined pursuant to Rule 13d-3 of the General
Rules and Regulations of the Exchange Act, and in any event includes shares
beneficially owned by any affiliate of such person, shares which such person or
his affiliates (as defined in the certificate of incorporation) have the right
to acquire upon the exercise of conversion rights or options and shares as to
which such person and his
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affiliates have or share investment or voting power. Directors and officers of
the Holding Company by reason of their acting in such capacity, shall not be
deemed to beneficially own any shares owned by any other director or officer.
This provision will be enforced by the Board of Directors to limit the voting
rights of persons beneficially owning more than 10% of the stock and thus could
be utilized in a proxy contest or other solicitation to defeat a proposal that
is desired by a majority of the stockholders.
Procedures for Certain Business Combinations. The Holding Company's
certificate of incorporation requires that certain business combinations
(including transactions initiated by management) between the Holding Company (or
any majority-owned subsidiary thereof) and a 10% or more stockholder either (i)
be approved by at least 80% of the total number of outstanding voting shares,
voting as a single class, of the Holding Company, (ii) be approved by two-thirds
of the continuing Board of Directors (i.e., persons serving prior to the 10%
stockholder becoming such) or (iii) involve consideration per share generally
equal to that paid by such 10% stockholder when it acquired its block of stock.
It should be noted that since the Board and executive officers intend
to purchase approximately $1,745,000 of the shares offered in the Conversion and
may control the voting of additional shares through the ESOP, the Board and
management may be able to block the approval of combinations requiring an 80%
vote even where a majority of the stockholders vote to approve such
combinations.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's certificate of incorporation must be approved by the Holding
Company's Board of Directors and also by a majority of the outstanding shares of
the Holding Company's voting stock, provided, however, that approval by at least
80% of the outstanding voting stock is generally required for certain provisions
(i.e., provisions relating to number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; offers to
acquire and acquisitions of control; director liability; certain business
combinations; power of indemnification; and amendments to provisions relating to
the foregoing in the certificate of incorporation).
The bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of at least 80% of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of the
Association believes that the provisions described above are prudent and will
reduce the Holding Company's vulnerability to takeover attempts and certain
other transactions which have not been negotiated with and approved by its Board
of Directors. These provisions will also assist the Association in the orderly
deployment of the Conversion proceeds into productive assets during the initial
period after the Conversion. The Board of Directors believes these provisions
are in the best interest of the Association and of the Holding Company and its
stockholders. In the judgment of the Board of Directors, the Holding Company's
Board will be in the best position to determine the true value of the Holding
Company and to negotiate more effectively for what may be in the best interests
of its stockholders. Accordingly, the Board of Directors believes that it is in
the best
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interests of the Holding Company and its stockholders to encourage potential
acquirors to negotiate directly with the Board of Directors of the Holding
Company and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at prices reflective of the true value of the
Holding Company and which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Holding
Company and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market price, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of the benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners becomes less
than the 300 required for Exchange Act registration.
Despite the belief of the Association and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's
certificate of incorporation and bylaws, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
the Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Board will enforce the voting limitation provisions of the charter in proxy
solicitations and accordingly could utilize these provisions to defeat proposals
that are favored by a majority of the stockholders. The Boards of Directors of
the Association and the Holding Company, however, have concluded that the
potential benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted to a Delaware corporation. The Holding Company and the Association
do not presently intend to propose the adoption of further restrictions on the
acquisition of the Holding Company's equity securities.
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Other Restrictions on Acquisitions of Stock
Delaware Anti-Takeover Statute. The Delaware General Corporation Law
(the "DGCL") provides that buyers who acquire more than 15% of the outstanding
stock of a Delaware corporation, such as the Holding Company, are prohibited
from completing a hostile takeover of such corporation for three years. However,
the takeover can be completed if (i) the buyer, while acquiring the 15%
interest, acquires at least 85% of the corporation's outstanding stock (the 85%
requirement excludes shares held by directors who are also officers and certain
shares held under employee stock plans), or (ii) the takeover is approved by the
target corporation's board of directors and two-thirds of the shares of
outstanding stock of the corporation (excluding shares held by the bidder).
However, these provisions of the DGCL do not apply to Delaware
corporations with less than 2,000 stockholders or which do not have voting stock
listed on a national exchange or listed for quotation with a registered national
securities association. The Holding Company's common stock has been approved for
listing on the Nasdaq National Stock Market. Peoples Federal may exempt itself
from the requirements of the statute by adopting an amendment to its Certificate
of Incorporation or Bylaws electing not to be governed by this provision. At the
present time, the Board of Directors does not intend to propose any such
amendment.
Federal Regulation. A federal regulation prohibits any person prior to
the completion of a conversion from transferring, or entering into any agreement
or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, this regulation prohibits any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire more
than 10% of the stock of any converted savings institution if such person is, or
after consummation of such acquisition would be, the beneficial owner of more
than 10% of such stock. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person in
excess of 10% may not be counted as shares entitled to vote and may not be voted
by any person or counted as voting shares in connection with any matter
submitted to a vote of stockholders. Like the charter provisions outlined above,
these federal regulations can make a change in control more difficult, even if
desired by the holders of the majority of the shares of the stock. The Board of
Directors reserves the right to ask the OTS or other federal regulators to
enforce these restrictions against persons seeking to obtain control of the
Company, whether in a proxy solicitation or otherwise. The policy of the Board
is that these legal restrictions must be observed in every case, including
instances in which an acquisition of control of the Company is favored by a
majority of the stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition,
federal regulations require that, prior to obtaining control of a savings
association, a person, other than a company, must give 60 days' prior notice to
the OTS and have received no OTS objection to such acquisition of control. Any
company that acquires such
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control becomes a "savings and loan holding company" subject to registration,
examination and regulation as a savings and loan holding company. Under federal
law (as well as the regulations referred to below) the term "savings
association" includes state and federally chartered SAIF-insured institutions
and federally chartered savings banks whose accounts are insured by the SAIF and
holding companies thereof.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of a
savings association's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of any class of a savings association's voting stock, if the
acquiror also is subject to any one of eight "control factors," constitutes a
rebuttable determination of control under the regulations. Such control factors
include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the OTS, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to
such determination, of a statement setting forth facts and circumstances which
would support a finding that no control relationship will exist and containing
certain undertakings. The regulations provide that persons or companies which
acquire beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the OTS a certification that the holder is
not in control of such institution, is not subject to a rebuttable determination
of control and will take no action which would result in a determination or
rebuttable determination of control without prior notice to or approval of the
OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
Holding Company Capital Stock
The 4.0 million shares of capital stock authorized by the Holding
Company certificate of incorporation are divided into two classes, consisting of
3.5 million shares of Common Stock (par value $.01 per share) and 500,000 shares
of serial preferred stock (par value $.01 per share). The Holding Company
currently expects to issue between 1,147,500 and 1,552,500 shares of Common
Stock in the Conversion and no shares of serial preferred stock. The aggregate
par value of the issued shares will constitute the capital account of the
Holding Company on a consolidated basis. Upon payment of the Purchase Price, all
shares issued in the Conversion will be duly authorized, fully paid and
nonassessable. The balance of the Purchase Price of Common Stock, less expenses
of Conversion, will be reflected as paid-in capital on a consolidated basis. See
"Capitalization."
Each share of the Common Stock will have the same relative rights and
will be identical in all respects with each other share of the Common Stock. The
Common Stock of the Holding Company will represent non-withdrawable capital,
will not be of an insurable type and will not be insured by the FDIC.
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Under Delaware law, the holders of the Common Stock will possess
exclusive voting power in the Holding Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
subject to the limitation discussed under "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions - Provisions of the Holding Company's
Certificate of Incorporation and Bylaws - Limitation on Voting Rights." If the
Holding Company issues preferred stock subsequent to the Conversion, holders of
the preferred stock may also possess voting powers.
Liquidation or Dissolution. In the event of any liquidation,
dissolution or winding up of the Association, the Holding Company, as the sole
holder of the Association's capital stock would be entitled to receive, after
payment or provision for payment of all debts and liabilities of the Association
(including all deposit accounts and accrued interest thereon) and after
distribution of the balance in the special liquidation account to Eligible and
Supplemental Eligible Account Holders, all assets of the Association available
for distribution. In the event of liquidation, dissolution or winding up of the
Holding Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of the Holding Company available for distribution. See "The
Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of
the Association." If preferred stock is issued subsequent to the Conversion, the
holders thereof may have a priority over the holders of Common Stock in the
event of liquidation or dissolution.
No Preemptive Rights. Holders of the Common Stock will not be entitled
to preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Holding Company of the full Purchase Price therefor, each share of the Common
Stock will be fully paid and nonassessable.
Preferred Stock. After Conversion, the Board of Directors of the
Holding Company will be authorized to issue preferred stock in series and to fix
and state the voting powers, designations, preferences and relative,
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof. Preferred
stock may rank prior to the Common Stock as to dividend rights, liquidation
preferences, or both, and may have full or limited voting rights. The holders of
preferred stock will be entitled to vote as a separate class or series under
certain circumstances, regardless of any other voting rights which such holders
may have.
Except as discussed above, the Holding Company has no present plans for
the issuance of the additional authorized shares of Common Stock or for the
issuance of any shares of preferred stock. In the future, the authorized but
unissued and unreserved shares of Common Stock will be available for general
corporate purposes, including but not limited to possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, in a future underwritten or other
public offering, or under a stock based employee plan. The authorized but
unissued shares of preferred stock will similarly be available for issuance in
future mergers or acquisitions, in a future underwritten public offering or
private placement or for other general corporate purposes. Except as described
above or as otherwise required to approve the transaction in which the
additional authorized shares of common stock or authorized shares of preferred
stock would be issued, no stockholder approval will be required for the issuance
of these shares. Accordingly, the Board
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of Directors of the Holding Company, without stockholder approval, can issue
preferred stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock.
Restrictions on Acquisitions. See "Restrictions on Acquisitions of
Stock and Related Takeover Defensive Provisions" for a description of certain
provisions of the Holding Company's certificate of incorporation and bylaws
which may affect the ability of the Holding Company's stockholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company.
Dividends. The Holding Company's Board of Directors may consider a
policy of paying cash dividends on the Common Stock in the future. No decision
has been made, however, as to the amount or timing of such dividends, if any.
The declaration and payment of dividends are subject to, among other things, the
Holding Company's then current and projected consolidated operating results,
financial condition, regulatory restrictions, future growth plans and other
factors the Board deems relevant. Therefore, no assurance can be given that any
dividends will be declared.
The ability of the Holding Company to pay cash dividends to its
stockholders will be dependent, in part, upon the ability of the Association to
pay dividends to the Holding Company. OTS regulations do not permit the
Association to declare or pay a cash dividend on its stock or repurchase shares
of its stock if the effect thereof would be to cause its regulatory capital to
be reduced below the amount required for the liquidation account or to meet
applicable regulatory capital requirements.
Delaware law generally limits dividends of the Holding Company to an
amount equal to the excess of its net assets over its paid-in capital or, if
there is no such excess, to its net earnings for the current and immediately
preceding fiscal year. In addition, as the Holding Company does not anticipate,
for the immediate future, engaging in activities other than (i) investing in
cash, short-term securities and investment and mortgage-backed securities
similar to those invested in by the Association and (ii) holding the stock of
Peoples Federal, the Holding Company's ability to pay dividends will be limited,
in part, by the Association's ability to pay dividends, as set forth above.
Earnings appropriated to the Association's "Excess" bad debt reserves
and deducted for federal income tax purposes cannot be used by the Association
to pay cash dividends to the Holding Company without adverse tax consequences.
See "Regulation - Federal and State Taxation."
LEGAL MATTERS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for Peoples Federal by the
firm of Silver, Freedman & Taff, L.L.P. (a limited liability partnership
including professional corporations), 1100 New York Avenue, N.W., Washington,
D.C. 20005. Silver, Freedman & Taff, L.L.P. has consented to
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the references herein to its opinions. The Ohio tax consequences of the
Conversion will be passed upon by Crowe, Chizek and Company LLP. Crowe, Chizek
and Company LLP has consented to references herein to its opinion. Charles Webb
& Company, a Division of Keefe, Bruyette & Woods, Inc. has been represented in
the Conversion by Barnes and Thornburg, Indianapolis, Indiana.
EXPERTS
The financial statements of Peoples Federal as of June 30, 1995 and
1996 and for each of the three years in the period ended June 30, 1996,
appearing in this Prospectus and Registration Statement have been audited by
Crowe, Chizek and Company LLP, independent auditors, as set forth in their
report appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such report given upon the authority of said firm as
experts in accounting and auditing.
Keller has consented to the inclusion herein of the summary of its
appraisal report to the Association setting forth its opinion as to the
estimated pro forma market value of the Holding Company and the Association as
converted and to the reference to its opinion that Subscription Rights do not
have any economic value.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a registration statement
under the Securities Act of 1933, as amended, with respect to the Common Stock
offered hereby. As permitted by the rules and regulations of the SEC, this
Prospectus does not contain all the information set forth in the registration
statement. Such information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. The statements contained herein as to the contents of any
contract or other document filed as an exhibit to the registration statement
are, of necessity, brief descriptions thereof of the material aspects of such
contract or other document; each such statement is qualified by reference to
such contract or document.
The Association has filed an Application for Conversion with the OTS
with respect to the Conversion. Pursuant to the rules and regulations of the
OTS, this Prospectus omits certain information contained in that Application.
The Application may be examined at the principal offices of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and at the Chicago District Office of the
OTS, 200 West Madison Street, Suite 1300, Chicago, Illinois 60606, without
charge.
In connection with the Conversion, the Holding Company will register
the Common Stock with the SEC under Section 12(g) of the Exchange Act, and, upon
such registration, the Holding Company and the holders of its Common Stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and
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certain other requirements of the Exchange Act. Under the Plan, the Holding
Company has undertaken that it will not terminate such registration for a period
of at least three years following the Conversion.
A copy of the Certificate of Incorporation and Bylaws of the Holding
Company are available without charge from the Association.
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