UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from ______________ to _________________
Commission File Number 0-22223
PEOPLES-SIDNEY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 31-1499862
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
101 E. Court Street, Sidney, Ohio 45365
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (937) 492-6129
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of class)
<PAGE>
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES [ X ] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State the issuer's revenues for its most recent fiscal year: $7,251,866.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on the NASDAQ System as of September 16, 1997, was $24.2
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of September 16, 1997, there were issued and outstanding 1,785,375
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-KSB - Portions of the Annual Report to
Stockholders for the fiscal year ended June 30, 1997.
Part III of Form 10-KSB - Proxy Statement for 1997 Annual Meeting of
Stockholders.
<PAGE>
PART I
Item 1. Description of Business
General
Peoples-Sidney Financial Corporation (the "Company) is a Delaware
corporation which was organized in 1997 by Peoples Federal Savings & Loan
Association of Sidney ("Peoples Federal" or the "Association") for the purpose
of becoming a savings and loan holding company. The Company owns all of the
stock of the Association issued in connection with the completion of the
conversion from the mutual to stock form of organization. Unless the context
otherwise requires, all references herein to the Company include the Company and
the Association on a consolidated basis. The Association, the Company's only
subsidiary, was initially organized in 1886 as an Ohio-chartered mutual
association and converted to a federally chartered association in 1958.
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.
The Association's operations are regulated by the Office of Thrift
Supervision (the "OTS"). The Association is a member of the Federal Home Loan
Bank System ("FHLB System") and a stockholder in the Federal Home Loan Bank
("FHLB") of Cincinnati. The Association is also a member of the Savings
Association Insurance Fund ("SAIF") and its deposit accounts are insured up to
applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
The executive offices of the Company are located at 101 E. Court
Street, Sidney, Ohio 45365 and its telephone number is (937) 492-6129.
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 Company'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 Company's market area.
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. The
Association reserves the right in the future to adjust or discontinue any
product offerings to respond to competitive or economic factors.
<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,
------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family..................... $75,808 82.24% $65,448 79.60% $59,181 78.95%
Construction and development............ 6,551 7.10 7,091 8.63 6,639 8.86
Commercial.............................. 5,843 6.34 5,302 6.45 5,750 7.67
Multi-family............................ 219 0.24 485 0.59 335 0.45
Land.................................... 1,447 1.57 1,342 1.63 909 1.21
------- ------ ------- ------ ------- ------
Total real estate loans............. 89,868 97.49 79,668 96.90 72,814 97.14
------- ------ ------- ------ ------- ------
Other Loans:
Consumer Loans:
Automobile............................. 1,215 1.32 1,274 1.55 1,042 1.39
Deposit account........................ 351 0.38 167 0.20 262 0.35
Other.................................. 719 0.78 1,027 1.25 821 1.09
------- ------ ------- ------ ------- ------
Total consumer loans................ 2,285 2.48 2,468 3.00 2,125 2.83
------- ------ ------- ------ ------- ------
Commercial business loans............... 29 0.03 81 0.10 22 0.03
------- ------ ------- ------ ------- ------
Total loans......................... 92,182 100.00% 82,217 100.00% 74,961 100.00%
------ ====== ===== =====
Less:
Loans in process........................ (2,703) (3,508) (2,579)
Deferred fees and discounts............. (158) (169) (198)
Allowance for losses.................... (397) (307) (251)
------- ------- --------
Total loans receivable, net............. $88,924 $78,233 $71,933
====== ======= =======
<PAGE>
<CAPTION>
June 30,
----------------------------------------------
1994 1993
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family..................... $53,531 77.64% $51,547 78.72%
Construction and development............ 6,254 9.07 5,185 7.92
Commercial.............................. 6,080 8.82 5,595 8.54
Multi-family............................ 579 0.84 624 0.95
Land.................................... 805 1.16 810 1.24
------- ------ ------- ------
Total real estate loans............. 67,249 97.53 63,761 97.37
------- ------ ------- ------
Other Loans:
Consumer Loans:
Automobile............................. 706 1.02 689 1.05
Deposit account........................ 190 0.28 188 0.29
Other.................................. 749 1.09 764 1.17
------- ------ ------- ------
Total consumer loans................ 1,645 2.39 1,641 2.51
------- ------ ------- ------
Commercial business loans............... 55 0.08 79 0.12
------- ------ ------- ------
Total loans......................... 68,949 100.00% 65,481 100.00%
===== =====
Less:
Loans in process........................ (1,929) (2,213)
Deferred fees and discounts............. (212) (278)
Allowance for losses.................... (198) (123)
------- -------
Total loans receivable, net............. $66,610 $62,867
======= =======
</TABLE>
<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,
---------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family................ $21,836 23.69% $17,166 20.88% $12,254 16.35%
Construction and development....... 949 1.03 775 0.94 526 0.70
Commercial......................... 259 0.28 179 0.22 313 0.42
Multi-family....................... --- --- --- --- --- ---
Land............................... 184 0.20 20 0.02 5 0.01
------- ------ ------- ------ ------- ------
Total real estate loans......... 23,228 25.20 18,140 22.06 13,098 17.48
------- ------ ------- ------ ------- ------
Consumer............................ 2,285 2.48 2,468 3.00 2,125 2.83
Commercial business................. 29 .03 81 0.10 22 0.03
------- ------ ------- ------ ------- ------
Total fixed-rate loans.......... 25,542 27.71 20,689 25.16 15,245 20.34
Adjustable-Rate Loans:
Real estate:
One- to four-family................ 53,972 58.55 48,282 58.73 46,927 62.60
Construction and development....... 5,602 6.07 6,316 7.68 6,113 8.15
Commercial......................... 5,584 6.06 5,123 6.23 5,437 7.25
Multi-family....................... 219 0.24 485 0.59 335 0.45
Land............................... 1,263 1.37 1,322 1.61 904 1.21
------- ------ ------- ------ ------- ------
Total adjustable-rate loans..... 66,640 72.29 61,528 74.84 59,716 79.66
------- ------ ------- ------ ------- ------
Total loans..................... 92,182 100.00% 82,217 100.00% 74,961 100.00%
====== ====== ======
Less:
Loans in process.................... (2,703) (3,508) (2,579)
Deferred fees and discounts......... (158) (169) (198)
Allowance for loan losses........... (397) (307) (251)
------- ------- -------
Total loans receivable, net...... $88,924 $78,233 $71,933
======= ======= =======
<PAGE>
<CAPTION>
June 30,
---------------------------------------------
1994 1993
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family................ $11,708 16.98% $12,792 19.54%
Construction and development....... 768 1.11 448 0.68
Commercial......................... 395 0.57 494 0.75
Multi-family....................... 12 0.02 57 0.09
Land............................... 29 0.04 26 0.04
------- ------ ------- ------
Total real estate loans......... 12,912 18.72 13,817 21.10
------- ------ ------- ------
Consumer............................ 1,645 2.39 1,641 2.51
Commercial business................. 55 .08 79 .12
------- ------ ------- ------
Total fixed-rate loans.......... 14,612 21.19 15,537 23.73
Adjustable-Rate Loans:
Real estate:
One- to four-family................ 41,823 60.66 38,755 59.18
Construction and development....... 5,486 7.96 4,737 7.23
Commercial......................... 5,685 8.25 5,101 7.79
Multi-family....................... 567 0.82 567 0.87
Land............................... 776 1.12 784 1.20
------- ------ ------- ------
Total adjustable-rate loans..... 54,337 78.81 49,944 76.27
------- ------ ------- ------
Total loans..................... 68,949 100.00% 65,481 100.00%
====== ======
Less:
Loans in process.................... (1,929) (2,213)
Deferred fees and discounts......... (212) (278)
Allowance for loan losses........... (198) (123)
------- -------
Total loans receivable, net...... $66,610 $62,867
======= =======
</TABLE>
<PAGE>
The following schedule presents the contractual maturities of the
Association's loan portfolio at June 30, 1997. 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).......... $ 67 8.31% $ 131 8.07% $ 560 8.49%
Over 1 year - 3 years...... 442 8.55 85 8.78 873 9.59
Over 3 years - 5 years..... 2,109 8.57 117 8.30 807 9.64
Over 5 years -
10 years.................. 3,876 8.44 1,602 7.55 45 10.33
Over 10 years -
20 years.................. 29,745 7.95 4,020 7.93 --- ---
Over 20 years.............. 46,120 7.84 1,554 8.14 --- ---
------- ---- ------- ---- ------ ----
Total.................. $82,359 7.93% $ 7,509 7.91% $2,285 9.35%
======= ==== ======= ==== ====== ====
<CAPTION>
Commercial Business Total
------------------- -----
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
1 year or less(1).......... $ 22 10.59% $ 780 8.46%
Over 1 year - 3 years...... 7 9.75 1,407 9.21
Over 3 years - 5 years..... --- --- 3,033 8.84
Over 5 years -
10 years.................. --- --- 5,523 8.20
Over 10 years -
20 years.................. --- --- 33,765 7.94
Over 20 years.............. --- --- 47,674 7.85
----- ----- ------- ----
Total.................. $ 29 10.38% $92,182 7.96%
===== ===== ======= ====
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
<PAGE>
The total amount of loans due after June 30, 1998 which have predetermined
interest rates is $24,865,000, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $66,537,000.
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 June
30, 1997 based on the above, the Association's regulatory loan-to-one borrower
limit was approximately $2.56 million. On the same date, the Association had no
borrowers with outstanding balances in excess of this amount. As of June 30,
1997, the largest dollar amount of indebtedness to one borrower or group of
related borrowers was a single loan of $842,000 secured by commercial property
leased to tenants involved in retail businesses. The next largest loan had an
outstanding balance of $750,000 at June 30, 1997 and is secured by land zoned
for residential development. 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 June 30, 1997, $75.8 million, or 82.2% 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
$50,000 and the largest outstanding residential loan had a principal balance of
$324,000. Virtually all of the residential loans originated by Peoples Federal
are secured by properties located in the Association's market area.
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 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 its 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 June 30, 1997,
the Association had $21.8 million of fixed-rate permanent residential loans,
constituting 23.7% of the Association's loan portfolio at such date.
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 June 30, 1997, the total
balance of one- to four-family ARMs was $54.0 million, or 58.6% 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 June 30, 1997, the Association had $269,000 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 June 30, 1997, the Association had approximately $5.9
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.
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.
The Association 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 June 30, 1997, the
Association had $261,000 of home equity lines of credit and an additional
$329,000 of additional funds committed, but undrawn, under such lines.
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 June 30, 1997, the Association had 41 construction loans
with outstanding aggregate balances of $5.5 million secured by residential
property. Of this amount, $4.9 million was outstanding directly to borrowers
intending to live in the properties upon completion of construction. At that
same date, the Association had 6 construction loans with outstanding aggregate
balances of $620,000 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 ranging 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 June
30, 1997, the Association had $1.1 million or 1.2% of gross loans receivable in
this category.
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 June 30 1997, the
Association's largest commercial real estate loan totaled $842,000. At that
date, the Association had 60 other commercial real estate loans, totaling $5.8
million or 6.3% of gross loans receivable.
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.
<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 June 30, 1997.
<TABLE>
<CAPTION>
Outstanding
Number of Original Principal
Loans Loan Amount Balance
----- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Office......................................... 16 $1,903 $1,496
Retail......................................... 5 1,049 931
Farm real estate............................... 37 4,007 3,173
Churches....................................... 3 283 243
--- ------ ------
Total....................................... 61 $7,242 $5,843
=== ====== ======
</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, totaling $219,000 or 0.24% of gross loans
receivable.
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.
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 terms of three years and have maximum
loan-to-value ratios of 75%. At June 30, 1997, the Association had $1.4 million
or 1.57% 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.
Consumer Lending
Management believes that offering consumer loan products helps to
expand the Association's customer base and to create stronger ties with 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 June 30, 1997, the Association's consumer loans totaled $2.3
million or 2.48% of the Association's gross loan portfolio.
Peoples Federal offers a variety of secured consumer loans, including
automobile loans, loans secured by savings deposits 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 June 30, 1997, automobile loans totaled $1.2 million or
1.32% 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 also offers a credit card program as an accommodation
to existing customers. At June 30, 1997, approximately 234 credit cards had been
issued, with an aggregate outstanding loan balance of $65,000 and unused credit
available of $293,000. The Association presently charges an annual membership
fee of $15.00 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.
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 June 30, 1997,
commercial business loans totaled $29,000 or 0.03% 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.
<PAGE>
The following table shows the loan origination and repayment activities
of the Association for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1997 1996 1995
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family........................... $14,908 $15,044 $13,961
- commercial.................................... 2,849 1,366 747
- multi-family.................................. 180 180 ---
Non-real estate - consumer.................................. --- --- ---
- commercial business....................... --- --- ---
-------- ------- -------
Total adjustable-rate................................ 17,937 16,590 14,708
Fixed rate:
Real estate - one- to four-family........................... 7,406 9,458 2,964
- commercial.................................... 461 121 25
- multi-family.................................. --- --- ---
Non-real estate - consumer.................................. 2,294 2,087 1,855
- commercial business....................... 11 87 79
-------- ------- -------
Total fixed-rate..................................... 10,172 11,753 4,923
-------- ------- -------
Total loans originated............................... 28,109 28,343 19,631
-------- ------- -------
Principal repayments........................................ (17,149) (21,939) (14,115)
-------- ------- -------
Total reductions..................................... (17,149) (21,939) (14,115)
Increase (decrease) in other items, net(1).................... (134) (52) (149)
-------- ------- -------
Net increase (decrease).............................. $ 10,826 $ 6,352 $ 5,367
======== ======= =======
</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 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 fair value 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.
<PAGE>
The following table sets forth the Association's loan delinquencies by
type, by amount and by percentage of type at June 30, 1997.
<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...... 13 $608 0.80% 23 $785 1.04% 36 $1,393 1.84%
Construction and
development............. --- --- --- --- --- --- --- --- ---
Commercial............... --- --- --- 1 14 0.24 1 14 0.24
Multi-family............. --- --- --- --- --- --- --- --- ---
Land..................... 1 49 3.39 --- --- --- 1 49 3.39
Consumer................... 4 17 0.74 5 5 0.22 9 22 0.96
Commercial business........ --- --- --- --- --- --- --- --- ---
----- ----- ----- ----- ---- -----
Total................. 18 $674 0.73% 29 $804 0.87% 47 $1,478 1.60%
==== ==== ==== ==== === ======
</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 as 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 Loss, the institution may charge
off such amount 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.
<PAGE>
On the basis of management's review of its assets, at June 30, 1997,
the Association had classified a total of $724,000 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................ $705 $14 $ --- $--- $719
Doubtful................... --- --- --- --- ---
Loss....................... --- --- --- 5 5
---- --- ------ ---- ----
$705 $14 $ --- $ 5 $724
==== === ====== ==== ====
</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.
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.
<PAGE>
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ................................... $ 705 $ 564 $ 494 $ 711 $ 664
Construction and development .......................... -- -- -- -- --
Commercial real estate ................................ 14 211 -- 17 18
Multi-family .......................................... -- -- -- -- --
Land .................................................. -- 51 214 192 --
Consumer .............................................. -- -- -- -- --
Commercial business ................................... -- -- -- -- --
------ ------ ------ ------ ------
Total .............................................. 719 826 708 920 682
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days:
One- to four-family ................................... 143 326 604 564 1,337
Construction and development .......................... -- -- -- -- --
Commercial real estate ................................ -- 58 86 35 105
Multi-family .......................................... -- -- -- -- --
Land .................................................. -- -- -- -- --
Consumer .............................................. 5 11 20 7 --
Commercial business ................................... -- -- -- -- 17
------ ------ ------ ------ ------
Total .............................................. 148 395 710 606 1,459
------ ------ ------ ------ ------
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 ............................. $ 867 $1,221 $1,418 $1,600 $2,359
====== ====== ====== ====== ======
Total as a percentage of total assets ................... 0.84% 1.41% 1.80% 2.10% 3.26%
====== ====== ====== ====== ======
</TABLE>
For the year ended June 30, 1997 gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $61,905. The amount that was included in interest
income on such loans was $43,118 for the year ended June 30, 1997.
<PAGE>
Other Assets of Concern. As of June 30, 1997, 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 items in the non-performing asset categories.
Allowance for Loan Losses. Management estimates the allowance balance
required based on past loan loss experience, known and inherent risks in the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged off.
Statement of Financial Accounting Standards (SFAS) No. 114, as amended
by SFAS No. 118, was adopted July 1, 1995. These Standards require recognition
and measurement of impaired loans. Loan impairment is reported when full payment
under the loan terms is not expected. The carrying values of impaired loans are
reduced to the present value of expected future cash flows, or to the fair value
of collateral if the loan is collateral dependent, by allocating a portion of
the allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require an increase, such increase is reported as
bad debt expense. The effect of adopting these standards did not affect the
allowance for loan losses during fiscal 1997 or 1996.
Loan impairment is evaluated in total for smaller-balance loans of
similar nature such as residential first mortgage loans secured by one- to
four-family residences, residential construction loans, credit card, automobile,
home equity and second mortgage loans. Commercial loans and mortgage loans
secured by other properties are evaluated individually for impairment. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when the internal grading system indicates a doubtful classification. The
carrying values of impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows and increases in the present
value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in carrying value, while increases or decreases due to
changes in future payments and due to the passage of time are reported as part
of the provision for loan losses.
As of June 30, 1997, the Association's allowance for loan losses as a
percent of gross loans receivable and as a percent of non-performing loans
amounted to 0.43% and 45.78%, 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.
<PAGE>
The following table sets forth an analysis of the Association's
allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
---- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $307 $ 251 $198 $123 $ 94
Charge-offs:
One- to four-family................................ --- 9 --- 1 ---
Construction and development....................... --- --- --- --- ---
Commercial real estate............................. --- --- --- --- ---
Multi-family....................................... --- --- --- --- ---
Consumer........................................... 22 6 4 14 18
Commercial business................................ --- --- --- --- ---
----- ------ ------ ------ ------
22 15 4 15 18
---- ----- ----- ----- -----
Recoveries:
One- to four-family................................ --- 1 --- --- ---
Construction and development....................... --- --- --- --- ---
Commercial real estate............................. --- --- --- --- ---
Multi-family....................................... --- --- --- --- ---
Consumer........................................... 9 2 2 7 6
Commercial business................................ --- --- --- --- ---
----- ------ ------ ------ ------
9 3 2 7 6
----- ------ ------ ------ -----
Net charge-offs...................................... 13 12 2 8 12
Additions charged to operations...................... 103 68 55 83 41
---- ------ ----- ----- -----
Balance at end of period............................. $397 $ 307 $251 $198 $123
==== ===== ==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding(1) during the period...... 0.02% 0.02% ---% 0.01% 0.02%
==== ==== ==== ==== ====
Ratio of net charge-offs during the period to
non-performing assets at the end of the period...... 1.49% 0.98% 0.14% 0.50% 0.51%
==== ==== ==== ==== ====
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process, and
loss reserves.
<PAGE>
The distribution of the Association's allowance for losses on loans at
the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------
1997 1996
---- ----
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ------ --------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family......................... $316 $75,808 82.24% $ 211 $65,448 79.60%
Construction and
development............................... 14 6,551 7.10 4 7,091 8.63
Commercial real estate...................... 15 5,843 6.34 36 5,302 6.45
Multi-family................................ --- 219 0.24 1 485 0.59
Land........................................ 3 1,447 1.57 2 1,342 1.63
Consumer.................................... 49 2,285 2.48 53 2,468 3.00
Commercial business......................... --- 29 0.03 --- 81 0.10
Unallocated................................. --- --- --- --- --- ---
---- ------- ------ ----- ------- ------
Total.................................. $397 $92,182 100.00% $ 307 $82,217 100.00%
==== ======= ====== ===== ======= ======
<CAPTION>
June 30,
-----------------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
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
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ------- --------- -------- ------- --------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family............ $ 179 $59,181 78.95% $ 126 $53,531 77.64% $ 85 $51,547 78.72%
Construction and
development.................. 5 6,639 8.86 3 6,254 9.07 --- 5,185 7.92
Commercial real estate......... 7 5,750 7.67 2 6,080 8.82 --- 5,595 8.54
Multi-family................... --- 335 0.45 --- 579 0.84 --- 624 0.95
Land........................... 21 909 1.21 29 805 1.16 --- 810 1.24
Consumer....................... 39 2,125 2.83 38 1,645 2.39 38 1,641 2.51
Commercial business............ --- 22 0.03 --- 55 0.08 --- 79 0.12
Unallocated.................... --- --- --- --- --- --- --- --- ---
----- ------- ------ ----- ------- ------ ----- ------- ------
Total..................... $ 251 $74,961 100.00% $ 198 $68,949 100.00% $ 123 $65,481 100.00%
===== ======= ====== ===== ======= ====== ===== ======= ======
</TABLE>
<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 June 30, 1997, 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 3 of the
Notes to the Consolidated Financial Statements for additional information
regarding the Association's 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. Cash flow
projections are regularly reviewed and updated to assure that adequate liquidity
is provided. As of June 30, 1997, the Association's liquidity ratio (liquid
assets as a percentage of net withdrawable savings and current borrowings) was
15.64% as compared to the OTS requirement of 5.0%.
As of June 30, 1997 the Association had securities totaling $2.0
million classified as available for sale. The balance of the Association's
security portfolio is classified as held to maturity. As future securities are
acquired the Association may elect to classify them as available for sale rather
than held to maturity.
<PAGE>
The following table sets forth the composition of the Association's
investments in securities and time deposits at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
1997 1996
---- ----
Carrying % of Carrying % of
Value Total Value Total
------- ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Securities:
U.S. government securities......................... $ --- ---% $ --- ---%
Federal agency obligations held to maturity........ 1,999 20.45 2,598 59.52
Federal agency obligations available for sale...... 2,013 20.59 --- ---
Time deposits...................................... 5,000 51.15 1,100 25.20
------- ------ ------ ------
Subtotal........................................ 9,012 92.19 3,698 84.72
FHLB stock........................................... 763 7.81 667 15.28
------- ------ ------ ------
Total securities and FHLB stock................. $ 9,775 100.00% $4,365 100.00%
======= ====== ====== ======
Average remaining life of securities
and time deposits.................................. 1.04 years 1.21 years
Other interest-earning assets:
Interest-bearing deposits with banks............... $ 1,498 59.97% $1,355 57.54%
Overnight deposits................................. 1,000 40.03 1,000 42.46
------- ------ ------ ------
Total........................................... $ 2,498 100.00% $2,355 100.00%
======= ====== ====== ======
<PAGE>
<CAPTION>
June 30,
-------------------------------------------------
1995 1994
---- ----
Carrying % of Carrying % of
Value Total Value Total
------- ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Securities:
U.S. government securities......................... $ 498 13.39% $ 496 11.90%
Federal agency obligations held to maturity........ 2,600 69.89 3,100 74.38
Federal agency obligations available for sale...... --- --- --- ---
Time deposits...................................... --- --- --- ---
------- ------ ------ ------
Subtotal........................................ 3,098 83.28 3,596 86.28
FHLB stock........................................... 622 16.72 572 13.72
------- ------ ------ ------
Total securities and FHLB stock................. $ 3,720 100.00% $4,168 100.00%
======= ====== ====== ======
Average remaining life of securities
and time deposits.................................. 1.89 years 1.91 years
Other interest-earning assets:
Interest-bearing deposits with banks............... $ 655 56.71% $1,171 36.93%
Overnight deposits................................. 500 43.29 2,000 63.07
------- ------ ------ ------
Total........................................... $ 1,155 100.00% $3,171 100.00%
======= ====== ====== ======
</TABLE>
<PAGE>
The composition and maturities of the time deposit and security
portfolios, excluding FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total Securities
1 Year Years Years 10 Years and Time Deposits
--------- --------- --------- --------- -----------------------
Amortized Amortized Amortized Amortized Amortized
Cost Cost Cost Cost Cost Fair Value
---- ---- ---- ---- ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Time deposit .................................... $5,000 $ -- $ -- $ -- $5,000 $5,000
Federal agency obligations held to
maturity ........................................ 999 1,000 -- -- 1,999 1,997
Federal agency obligations
available for sale .............................. -- 1,999 -- -- 1,999 2,013
------ ------ ------- ------ ------ ------
Total securities and time deposit ............... $5,999 $2,999 $ -- $ -- $8,998 $9,010
====== ====== ======= ====== ====== ======
Weighted average yield .......................... 5.58% 6.54% ---% ---% 5.90% 5.90%
</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 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, 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.
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.
<PAGE>
The following table sets forth the savings flows at the Association
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ................... $ 77,318 $ 70,306 $ 68,367
Deposits .......................... 111,312(1) 70,928 63,924
Withdrawals ....................... 114,882(1) 66,928 64,399
Interest credited ................. 3,297 3,012 2,414
--------- --------- ---------
Ending balance .................... $ 77,045 $ 77,318 $ 70,306
========= ========= =========
Net increase (decrease) ........... $ (273) $ 7,012 $ 1,939
========= ========= =========
Percent increase (decrease) ....... (0.35)% 9.97% 2.84%
========= ========= =========
</TABLE>
(1) Includes stock subscription deposit activity which was included in
savings accounts in conjunction with the Association's mutual to stock
conversion.
<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,
------------------------------------------------------------------
1997 1996
---- ----
Weighted
Average
Rate at Percent Percent
June 30, 1997 Amount of Total Amount of Total
------------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Noninterest Bearing Demand.......................... $ 150 0.19% $ 118 0.15%
Savings Accounts.................................... 3.05% 17,685 22.94 19,039 24.60
NOW Accounts........................................ 2.42 3,469 4.50 3,184 4.11
Money Market Accounts............................... 2.50 777 1.01 1,236 1.60
------- ------ ------- ------
Total Non-Certificates.............................. 22,081 28.64 23,577 30.46
------- ------ ------- ------
Certificates:
0.00 - 1.99%...................................... --- --- --- ---
2.00 - 3.99%...................................... --- --- 2 ---
4.00 - 5.99%...................................... 28,959 37.57 32,233 41.64
6.00 - 7.99%...................................... 26,005 33.74 21,506 27.79
8.00 - 9.99%...................................... --- --- --- ---
10.00% and over..................................... --- --- --- ---
------- ------ ------- ------
Total Certificates.................................. 6.02 54,964 71.31 53,741 69.43
------- ------ ------- ------
Accrued Interest.................................... 36 0.05 82 0.11
------- ------ ------- ------
Total Deposits...................................... 5.11% $77,081 100.00% $77,400 100.00%
======= ====== ======= ======
<CAPTION>
June 30,
----------------------------------------------------
1995 1994
---- ----
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Transactions and Savings Deposits:
Noninterest Bearing Demand.......................... $ 158 0.22% $ 94 0.14%
Savings Accounts.................................... 18,439 26.19 20,791 30.38
NOW Accounts........................................ 3,257 4.63 3,026 4.42
Money Market Accounts............................... 1,455 2.07 1,889 2.76
------- ------ ------- ------
Total Non-Certificates.............................. 23,309 33.11 25,800 37.70
------- ------ ------- ------
Certificates:
0.00 - 1.99%...................................... --- --- --- ---
2.00 - 3.99%...................................... 35 0.05 8,057 11.77
4.00 - 5.99%...................................... 31,129 44.22 33,781 49.36
6.00 - 7.99%...................................... 15,775 22.41 314 0.46
8.00 - 9.99%...................................... 58 0.08 415 0.61
10.00% and over..................................... --- --- --- ---
------- ------ ------- ------
Total Certificates.................................. 46,997 66.76 42,567 62.20
------- ------ ------- ------
Accrued Interest.................................... 92 0.13 74 0.10
------- ------ ------- ------
Total Deposits...................................... $70,398 100.00% $68,441 100.00%
======= ====== ======= ======
</TABLE>
<PAGE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of June 30, 1997.
<TABLE>
<CAPTION>
4.00- 6.00- Percent
5.99% 7.99% Total of Total
----- ----- ----- --------
(Dollars in Thousands)
Certificate accounts
maturing
in quarter ending:
- ------------------
<S> <C> <C> <C> <C>
September 30, 1997............. $ 4,595 $ 2,993 $ 7,588 13.80%
December 31, 1997.............. 5,332 2,150 7,482 13.61
March 31, 1998................. 2,977 4,413 7,390 13.45
June 30, 1998.................. 3,320 6,182 9,502 17.29
September 30, 1998............. 3,772 2,782 6,554 11.92
December 31, 1998.............. 2,890 1,095 3,985 7.25
March 31, 1999................. 2,699 384 3,083 5.61
June 30, 1999.................. 1,186 879 2,065 3.76
September 30, 1999............. 1,005 61 1,066 1.94
December 31, 1999.............. 695 1,357 2,052 3.73
March 31, 2000................. 120 77 197 0.36
June 30, 2000.................. 95 884 979 1.78
September 30, 2000............. 44 838 882 1.60
December 31, 2000.............. --- 927 927 1.69
March 31, 2001................. 150 91 241 0.44
June 30, 2001.................. 69 106 175 0.32
September 30, 2001............. 10 56 66 0.12
December 31, 2001.............. --- 374 374 0.68
March 31, 2002................. --- 103 103 0.19
June 30, 2002.................. --- 253 253 0.46
------- ------- ------- ------
Total....................... $28,959 $26,005 $54,964 100.00%
======= ======= ======= ======
Percent of total........... 52.69% 47.31%
===== =====
</TABLE>
At June 30, 1997 the Association had approximately $4.2 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.......................................... $ 339 5.46%
Over three through six months................................. 765 5.96
Over six through 12 months.................................... 1,567 6.23
Over 12 months................................................ 1,548 5.87
------
Total......................................................... $4,219 5.99%
======
</TABLE>
For additional information regarding the composition of the
Association's deposits, see Note 8 of Notes to Consolidated Financial
Statements.
<PAGE>
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 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 end of any periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Maximum balance at any month end during the period:
FHLB advances........................................... $3,500 $ --- $ --- $ ---
Average balance for the period:
FHLB advances........................................... $1,163 $ --- $ --- $ ---
Weighted average rate................................... 5.59% ---% ---% ---%
</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 $2.1 million
at June 30, 1997, in the stock of, or loans to, service corporation
subsidiaries. As of such date, Peoples Federal had no investment in service
corporations.
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 Bank Insurance Fund (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
December, 1996. 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, 1997 was $29,000.
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
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 June 30, 1997, the Association's lending
limit under this restriction was $2.56 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 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 0.23% to 0.31% 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 0.04% to 0.31% 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
0.27%. 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 0.657% 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 year ended June 30, 1997. As a result of
the special assessment, Peoples Federal's deposit insurance premiums were
reduced to 0.064% of deposits 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.
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 June 30, 1997, 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 June 30, 1997, Peoples Federal had tangible capital of $17.1
million, or 16.6% of total assets, which is approximately $15.5 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
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 June 30, 1997, Peoples
Federal had no intangibles which were subject to these tests.
At June 30, 1997, Peoples Federal had core capital equal to $17.1
million, or 16.6% of adjusted total assets, which is $14.0 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
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 June 30, 1997, Peoples Federal
had $393,000 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 June 30, 1997.
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 June 30, 1997, Peoples Federal had total capital of $17.5 million
(including $17.1 million in core capital and $393,000 in qualifying
supplementary capital) and risk-weighted assets of $65.1 million; or total
capital of 26.9% of risk-weighted assets. This amount was $12.3 million above
the 8% requirement in effect on that date.
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 reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
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"
in the 1997 Annual Report to Stockholders as attached hereto as Exhibit B and
incorporated by reference herein. 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%.
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 June 30, 1997, the Association was in compliance with both
requirements, with an overall liquid asset ratio of 15.64% and a short-term
liquid assets ratio of 12.07%.
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 June 30, 1997, 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 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 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 June 30, 1997, 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
Bank "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 Bank.
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
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 June 30, 1997, Peoples Federal had $763,000 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 7.02% for
fiscal 1997.
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, 1997, dividends paid by the FHLB of
Cincinnati to Peoples Federal totaled $49,000, which constitutes a $4,000
increase over the amount of dividends received in fiscal year 1996. The $13,000
dividend for the quarter ended June 30, 1997 reflects an annualized rate of
7.19%, or 0.17% above the rate for fiscal 1997.
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.
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 June 30, 1997, the Association had
approximately $581,000 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 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 June 30, 1997, 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.
Impact of New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," was issued by the Financial Accounting Standards Board ("FASB")
in 1996. It revises the accounting for transfers of financial assets, such as
loans and securities, and for distinguishing between sales and secured
borrowings. It was originally effective for some transactions in 1997 and others
in 1998. SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125" was issued in December 1996. SFAS No. 127 defers for one
year the effective date of provisions related to securities lending, repurchase
agreements and other similar transactions. The remaining portions of SFAS 125
became effective January 1, 1997. SFAS No. 125 did not have a material impact on
the Corporation's financial statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which is effective for periods ending after December 15, 1997, including interim
periods. SFAS No. 128 simplifies the calculation of earnings per share ("EPS")
by replacing primary EPS with basic EPS. It also requires dual presentation of
basic EPS and diluted EPS for entities with complex capital structures. Basic
EPS includes no dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share in
earnings such as stock options, warrants or other common stock equivalents. All
prior period EPS data will be restated to conform with the new presentation.
In February 1997, the FASB issued SFAS No. 129, "Disclosures of
Information about Capital Structure." SFAS No. 129 consolidated existing
accounting guidance relating to disclosure about a company's capital structure.
Public companies generally have always been required to make disclosures now
required by SFAS No. 129 and, therefore, SFAS No. 129 should have no impact on
the Corporation. SFAS No. 129 is effective for financial statements for periods
ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This Statement significantly changes
the way the public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial and descriptive
information about an enterprise's reportable operating segments which is based
on reporting information the way that management organizes the segments within
the enterprise for making operating decisions and assessing performance. For
many enterprises, the management approach will likely result in more segments
being reported. In addition, the Statement requires significantly more
information to be disclosed for each reportable segment than is presently being
reported in annual financial statements. The Statement also requires that
selected information be reported in interim financial statements. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997.
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 June 30, 1997, Shelby County had 7 banks with 19
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%.
Employees
At June 30, 1997, 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 4 part-time employees. None of the Association's employees are
represented by any collective bargaining group. Management considers its
employee relations to be good.
Executive Officers of the Registrant Who Are Not Directors
The following information as to the business experience during the past
five years is supplied with respect to the executive officers of the Company and
the Association who do not serve on the Company's Board of Directors. Executive
officers of the Company are elected annually to serve until their successors are
elected or until they resign or are removed by the Board of Directors. There are
no arrangements or understandings between the persons named and any other person
pursuant to which such officers were elected.
David R. Fogt. Mr. Fogt, age 46, 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 39, 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.
<PAGE>
Item 2. Properties
The following table sets forth information concerning the main office
and a drive-in facility of the Association at June 30, 1997. 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 June 30,
Location Opened Leased 1997
- -------- ------ -------- -----
Main Office:
101 East Court Street 1917 Owned $250,000
Sidney, Ohio 45365
Drive-In:
232 S. Ohio Avenue 1971 Owned $186,000
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 June 30, 1997
was approximately $69,000.
Item 3. Legal Proceedings
From time to time, the Association 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 the Association's
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 4 of the Company's 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 8 through 19 of the Company's 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 7. Financial Statements
Pages 20 through 45 of the Company's 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Executive Officers
Information concerning the executive officers of the Company who are
not directors is incorporated by reference from Part I of this Form 10-KSB under
the caption "Executive Officers of the Registrant Who Are Not Directors."
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 1997, the
Registrant complied with all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference to
Prior Filing
or Exhibit
Regulation Number
S-B Exhibit Attached
Number Document Hereto
------ -------- ------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(i) Certificate of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of holders, including *
indentures
9 Voting trust agreement None
10.1 Employee Stock Ownership Plan *
10.2 Form of Employment Agreement with Douglas Stewart *
10.3 Form of Employment Agreement with David R. Fogt, *
Gary N. Fullenkamp, Debra A. Geuy and Steven Goins
10.4 401k Plan *
10.5 Incentive Bonus Plan *
11 Statement re: computation of per share earnings None
13 Annual report to security holders 13
16 Letter on change in certifying accountant None
18 Letter on change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote None
23 Consents of experts and counsel Not required
24 Power of attorney Not required
27 Financial data schedule 27
99 Additional exhibits Not required
</TABLE>
* Filed as exhibits to the Registrant's Form S-1 registration statement (File
No. 333-20461) and incorporated herein by reference.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K for the three month period
ended June 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PEOPLES-SIDNEY FINANCIAL CORPORATION
By: /s/Douglas Stewart
-------------------
Douglas Stewart
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/Douglas Stewart /s/James W. Kerber
- ---------------------------------- --------------------------
Douglas Stewart James W. Kerber
President, Chief Executive Officer Director
and Director
(Principal Executive Officer)
Date: September 29, 1997 Date: September 29, 1997
/s/Richard T. Martin /s/John W. Sargeant
- ---------------------------------- --------------------------
Richard T. Martin John W. Sargeant
Chairman of the Board Director
Date: September 29, 1997 Date: September 29, 1997
<PAGE>
/s/Robert W. Bertsch /s/Debra A. Geuy
- ---------------------------------- --------------------------
Robert W. Bertsch Debra A. Geuy
Director Treasurer
(Principal Financial and
Accounting Officer)
Date: September 29, 1997 Date: September 29, 1997
/s/Harry N. Faulkner
- ----------------------------------
Harry N. Faulkner
Director
Date: September 29, 1997
<PAGE>
INDEX TO EXHIBITS
Number
------
13 Portions of Annual Report to Security Holders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
PEOPLES-SIDNEY FINANCIAL CORPORATION
Sidney, Ohio
ANNUAL REPORT
June 30, 1997
<PAGE>
- --------------------------------------------------------------------------------
PEOPLES-SIDNEY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Sidney, Ohio
ANNUAL REPORT
June 30, 1997
CONTENTS
TO OUR SHAREHOLDERS......................................................... 2
DIRECTORS OF THE BOARD...................................................... 3
BUSINESS OF PEOPLES-SIDNEY FINANCIAL CORPORATION............................ 4
MARKET PRICE OF THE CORPORATION'S COMMON SHARES
AND RELATED SHAREHOLDER MATTERS........................................... 4
SELECTED CONSOLIDATED FINANCIAL INFORMATION
AND OTHER DATA............................................................ 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................... 8
REPORT OF INDEPENDENT AUDITORS ............................................. 20
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets .......................................... 21
Consolidated Statements Of Income .................................... 22
Consolidated Statements Of Shareholders' Equity ...................... 23
Consolidated Statements Of Cash Flows ................................ 24
Notes To Consolidated Financial Statements ........................... 26
SHAREHOLDER INFORMATION..................................................... 46
CORPORATE INFORMATION....................................................... 47
<PAGE>
[PHOTO]
To Our Shareholders:
On behalf of your directors, officers and employees, it is my pleasure to
present our first annual report as a public company. To say that 1997 was a very
important year for our Association would be an understatement. It was a
redefining year and one of transition as we converted from a federally chartered
mutual savings and loan association to a federally chartered stock savings and
loan association. In connection with the conversion on April 25, 1997,
Peoples-Sidney Financial Corporation was organized to become the holding company
for Peoples Federal Savings and Loan Association and sold 1,785,375 shares at
$10 in the subscription offering. This influx of capital gives our Association
new positioning for growth, profitability and shareholder enhancements.
During 1997, operations of the Association surpassed those of 1996 in many
areas. Growth in assets and loan originations contributed to a successful year.
Assets grew to $103,000,000 or a 19% increase and loan originations totaled
$10,826,000 for the fiscal year end, an increase of 14% over the past year.
Our focus during the year was not totally centered on the conversion. Congress
continued to pass legislation which affected the financial industry and its
future. The Savings Association Insurance Fund Deposit Recapitalization
Assessment caused a $301,000 net after-tax charge to income during the year. Due
to the payment of this assessment, net earnings for the year were $564,000,
compared with $852,000 for the previous year. Absent the Savings Association
Insurance Fund Assessment, earnings for the year would have been $865,000. This
represents the first of several changes in the government's attempt to modernize
our industry over the next few years. Our legislators are considering a merger
of the bank and savings association deposit insurance funds as well as requiring
a change in our corporate charter. Our management team is carefully evaluating
these proceedings as they move forward.
The success of our Company continues to be driven by a dedicated staff of
officers and employees as well as our commitment to participate and support
numerous community events and charities. We take considerable pride that our
staff members participate in many community organizations. Everyone at Peoples
Federal is committed to supporting those organizations and individuals whose
purpose is to improve the quality of life for all of the citizens in the
communities we serve.
We appreciate your continued support and look forward to serving you in the
future. Your questions and comments are always welcome.
Sincerely,
Douglas Stewart
President
2
<PAGE>
[PHOTOS -- DIRECTORS OF THE BOARD]
3
<PAGE>
BUSINESS OF PEOPLES-SIDNEY
FINANCIAL CORPORATION
Peoples-Sidney Financial Corporation, a unitary thrift holding company
incorporated under the laws of the State of Delaware (the "Corporation"), owns
all issued and outstanding common stock of Peoples Federal Savings and Loan
Association, a savings and loan association chartered under the laws of the
United States (the "Association"). On April 25, 1997, the Corporation acquired
all of the common stock issued by the Association upon its conversion from a
mutual savings and loan association to a stock savings and loan association (the
"Conversion"). The Corporation's activities have been limited primarily to
holding the common shares of the Association.
Serving the Sidney, Ohio area since 1886, the Association conducts business from
its office at 101 East Court Street, Sidney, Ohio. The Association'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 and contiguous counties in Ohio. The Association also invests in
securities consisting primarily of U.S. government obligations and various types
of short-term liquid assets.
As a savings and loan holding company, the Corporation is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury (the "OTS"). As a savings and loan association
chartered under the laws of the United States, the Association is subject to
regulation, supervision and examination by the OTS and the Federal Deposit
Insurance Corporation (the "FDIC"). Deposits in the Association are insured up
to applicable limits by the FDIC. The Association is also a member of the
Federal Home Loan Bank of Cincinnati (the "FHLB").
MARKET PRICE OF THE CORPORATION'S
COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
The Corporation had 1,785,375 common shares outstanding on August 8, 1997, held
of record by approximately 990 shareholders. Price information with respect to
the Corporation's common shares is quoted on The Nasdaq National Market System.
Since the Conversion and formation of the Corporation on April 25, 1997, the
trading price for the common shares of the Corporation, as quoted by The Nasdaq
Stock Market, Inc., have ranged from $12.88 to $14.06 through June 30, 1997.
No dividends were paid during the year ended June 30, 1997. On July 25, 1997,
the Board of Directors of the Corporation declared a dividend of $.05 per common
share which was paid on August 6, 1997 to shareholders of record on July 31,
1997.
In addition to certain federal income tax considerations, OTS regulations impose
limitations on the payment of dividends and other capital distributions by
savings associations. Under OTS regulations applicable to converted savings
associations, the Association is not permitted to pay a cash dividend on its
common shares if its regulatory capital would, as a result of payment of
4
<PAGE>
such dividend, be reduced below the amount required for the Liquidation Account
(the account established for the purpose of granting a limited priority claim on
the assets of the Association in the event of complete liquidation to those
members of the Association before the Conversion who maintain a savings account
at the Association after the Conversion), or applicable regulatory capital
requirements prescribed by the OTS.
OTS regulations applicable to all savings and loan associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half that which its total capital to assets
ratio exceeded its required capital to assets ratio at the beginning of the
calendar year, or (2) 75% of its net earnings for the most recent four-quarter
period. Savings associations with total capital in excess of the capital
requirements that have been notified by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends. A savings
association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.
The Association currently meets all of its capital requirements and, because the
OTS has not determined that the Association is an institution requiring more
than normal supervision, the Association may pay dividends in accordance with
the foregoing provisions of OTS regulations.
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the consolidated
financial condition, earnings and other data regarding the Corporation at the
dates and for the periods indicated. As the conversion was completed on April
25, 1997, information prior to the year ended June 30, 1997 is for the
Association.
<TABLE>
<CAPTION>
Selected Financial Condition At June 30,
and Other Data: 1997 1996 1995 1994 1993
-------------- ------------ ------------- ----------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $ 103,142 $ 86,882 $ 78,976 $ 76,134 $ 72,276
Time deposits with other
financial institutions 5,000 1,100
Securities available for sale 2,013
Securities held to maturity 1,999 2,598 3,098 3,596 4,434
FHLB stock 763 667 622 572 545
Loans receivable - net(1) 88,924 78,233 71,933 66,610 62,867
Deposits 77,045 77,318 70,306 68,367 65,168
Shareholders' equity(2) 25,712 9,213 8,361 7,526 6,940
<CAPTION>
Year ended June 30,
Selected Operations Data: 1997 1996 1995 1994 1993
- ------------------------ ------------ ------------- ----------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income $ 7,189 $ 6,513 $ 5,725 $ 5,071 $ 5,357
Interest expense 4,051 3,706 2,968 2,637 2,898
------------ ------------- ------------ ------------ ------------
Net interest income 3,138 2,807 2,757 2,434 2,459
Provision for loan losses 103 68 55 83 41
------------ ------------- ------------ ------------ ------------
Net interest income after
provision for loan losses 3,035 2,739 2,702 2,351 2,418
Service fees and other charges 63 57 60 65 91
Other noninterest income(3) 95
------------ ------------- ------------ ------------ ------------
Total noninterest income 63 57 60 65 186
Noninterest expense 2,222 1,504 1,495 1,427 1,394
------------ ------------- ------------ ------------ ------------
Income before income tax and
accounting change 876 1,292 1,267 989 1,210
Provision for income tax 312 440 432 334 435
Cumulative effect of change in
accounting for income taxes (69)
------------ ------------- ------------ ------------ ------------
Net income $ 564 $ 852 $ 835 $ 586 $ 775
============ ============= ============ ============ ============
Earnings per share(4) $ 0.09
============
Dividends declared per share(4) $
============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
At or for the year ended June 30,
Selected Financial Ratios and 1997 1996 1995 1994 1993
- ----------------------------- ------------ ------------- ----------- ------------ --------
Other Data:
----------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net
income to average total assets) 0.60% 1.01% 1.07% 0.79% 1.07%
Return on equity (ratio of net
income to average equity)(2) 4.70 9.70 10.55 8.10 11.84
Interest rate spread(5):
Average during period 2.81 2.97 3.30 3.05 3.19
End of period 2.62 2.74 3.08 2.99 3.12
Net interest margin(6) 3.45 3.41 3.66 3.35 3.49
Ratio of operating expense to
average total assets 2.38 1.78 1.93 1.91 1.92
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.14x 1.10x 1.09x 1.08x 1.07x
Quality Ratios:
Nonperforming assets to total
assets at end of period(7) 0.84% 1.41% 1.80% 2.10% 3.26%
Allowance for loan losses to
nonperforming loans 45.78 25.14 17.70 12.98 5.79
Allowance for loan losses to
gross loans receivable(8) 0.43 0.37 0.33 0.29 0.19
Capital Ratios:
Shareholders equity to total
assets at end of period(2) 24.93 10.60 10.59 9.88 9.60
Average equity to average
assets(2) 12.87 10.43 10.24 9.70 9.03
Other Data:
Number of full service offices 1 1 1 1 1
</TABLE>
<PAGE>
- -----------------------------------
(1) Loans receivable are shown net of loans in process, net deferred loan
origination fees and the allowance for loan losses.
(2) Retained earnings only prior to June 30, 1997.
(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. 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.
(4) Earnings and dividends per share and is not applicable for any of the
periods presented prior to June 30, 1997 due to its mutual form of
ownership prior to April 25, 1997. Earnings per share for the period ended
June 30, 1997 was computed based on net income of the Corporation since
April 25, 1997.
(5) 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.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) Nonperforming assets consist of nonperforming loans and foreclosed assets.
Nonperforming loans consist of all accruing loans 90 days or more past due
and all nonaccrual loans.
(8) Gross loans receivable are stated at unpaid principal balances.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following is management's analysis of the Corporation's financial condition
and results of operations as of and for the year ended June 30, 1997, compared
to prior years. 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 consolidated financial statements and related
footnotes and the selected financial data included elsewhere in this report.
On November 8, 1996, the Board of Directors of the Peoples Federal Savings and
Loan Association (the "Association") unanimously adopted a Plan of Conversion to
convert from a federally chartered mutual savings and loan association to a
federally chartered stock savings and loan association with the concurrent
formation of a holding company, Peoples-Sidney Financial Corporation (the
"Corporation"). The conversion was consummated on April 25, 1997 by amending the
Association's charter and the sale of the holding company's common stock in an
amount equal to the market value of the Association after giving effect to the
conversion. A total of 1,785,375 common shares of the Corporation were sold at
$10.00 per share and net proceeds from the sale were $17,217,944 after deducting
the costs of conversion.
The Corporation retained 50% of the net proceeds from the sale of common shares.
The remainder of the net proceeds were invested in the capital stock issued by
the Association to the Corporation as a result of the conversion.
The Corporation 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 in Shelby, Logan, Auglaize, Miami, Darke and Champaign, Counties, Ohio.
The Corporation also originates, to a lesser extent, loans for the construction
of one- to four-family residential real estate, loans secured by multi-family
residential 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
Total assets at June 30, 1997 were $103.1 million compared to $86.9 million at
June 30, 1996, an increase of $16.2 million, or 18.6%. The increase in total
assets was primarily due to growth in net loans receivable of $10.7 million
combined with increases in securities of $1.4 million and time deposits with
other financial institutions of $3.9 million. The increase in loans receivable
was largely in one- to four-family residential real estate, increasing $10.4
million, which is reflective of a strong local economy coupled with attractive
rates and products compared to the local competition. Consumer loan balances
experienced a slight decrease of $235,000. The increase in securities and time
deposits with other financial institutions was the result of the investment of
excess funds provided from the conversion from a mutual to stock form of
8
<PAGE>
ownership. Funds were invested in shorter term time deposits and securities
classified as available for sale to provide the Corporation the flexibility to
redirect such funds to loans as needed.
Total liabilities remained relatively stable with only a slight decrease from
$77.7 million at June 30, 1996 to $77.4 million at June 30, 1997. The decrease
was primarily due to a $272,000 net decrease in deposits. Significant deposit
growth experienced early in the year was negated by subsequent deposit decline
as many depositors used such funds to purchase common stock of the Corporation
during the conversion. In addition, the makeup of the deposit portfolio was
shifted by the movement of funds from savings and demand accounts to
certificates of deposit as a result of several special promotions on
certificates of deposits conducted during the year. Changes in accrued expenses
and other liabilities were not significant.
Results of Operations
The operating results of the Corporation are affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate financial institutions. The
Corporation'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 Corporation'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.
Comparison of Results of Operations for the Year Ended June 30, 1997
and June 30, 1996
Net Income. The Corporation experienced net income of $564,000 for the year
ended June 30, 1997, compared to net income of $852,000 for the year ended June
30, 1996. The decrease in net income was primarily the result of a special
deposit insurance assessment, as more fully discussed below.
Net Interest Income. Net interest income totaled $3,138,000 for the year ended
June 30, 1997, as compared to $2,807,000 for the year ended June 30, 1996, an
increase of $331,000, or 11.8%. 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 on an increased volume of
interest-bearing liabilities. The increase in the cost of funds was attributable
to 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."
9
<PAGE>
Interest and fees on loans increased $757,000, or 12.5%, from $6,048,000 for the
year ended June 30, 1996 to $6,805,000 the year ended June 30, 1997. The
increase in interest income was due to higher average loans receivable,
partially offset by a decline in the average yield earned on loans from 8.17%
for the year ended June 30, 1996 to 8.06% for the year ended June 30, 1997.
Interest earned on securities totaled $141,000 for the year ended June 30, 1997,
as compared to $150,000 for the year ended June 30, 1996. The decrease was a
result of lower average balances of securities partially offset by an increase
in the average yield earned.
Interest on interest-bearing deposits and overnight deposits decreased $76,000
for the year ended June 30, 1997, as compared to the year ended June 30, 1996.
The decline was the result of lower average balances of interest-bearing
deposits and overnight funds, offset by slightly higher rates earned.
Dividends on FHLB stock increased slightly for the year ended June 30, 1997,
compared to the year ended June 30, 1996, primarily due to an increase in the
number of shares of FHLB stock owned.
Interest paid on deposits increased $279,000 for the year ended June 30, 1997,
as compared to the year ended June 30, 1996. 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 4.94% for the
year ended June 30, 1996, to 5.09% for the year ended June 30, 1997. 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 69.5% of total
deposits at June 30, 1996 to 71.3% of total deposits at June 30, 1997. The yield
on certificates of deposits was 5.84% for the year ended June 30, 1996, compared
to 5.93% for the year ended June 30, 1997, while the average yield on savings
and demand deposit accounts increased from 2.91% for the year ended June 30,
1996 to 2.96% for the year ended June 30, 1997.
The Corporation borrowed funds for the first time from the Federal Home Loan
Bank of Cincinnati (FHLB) during the year ended June 30, 1997. The borrowings
were used as a source of short-term liquidity to provide funding for loan demand
and were repaid prior to year-end. Interest on the borrowings totaled $65,000
for the year ended June 30, 1997. The average yield paid on the borrowings was
5.59%.
Provision for Loan Losses. The Corporation 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 Corporation'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
10
<PAGE>
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 year ended June 30, 1997 totaled $103,000
compared to $68,000 for the year ended June 30, 1996, an increase of $35,000, or
51.5%. The allowance for loan losses totaled $397,000, or .43% of total loans
receivable and 45.8% of total nonperforming loans at June 30, 1997, compared
with $307,000, or .37% of total loans receivable and 25.1% of total
nonperforming loans at June 30, 1996. The increase in the provision for loan
losses was attributable to an increase in the total loan portfolio. Despite a
decrease in the volume of nonperforming loans, management believes it is
prudent, as total loans increase, to increase the level of the allowance for
loan losses through regular provisions.
Noninterest income. Noninterest income for the year ended June 30, 1997 was
$63,000 compared to $57,000 for the year ended June 30, 1996, an increase of
$6,000, or 10.5%. The increase was primarily a result of an increase in various
service fees collected and miscellaneous operating income.
Noninterest expense. Noninterest expense was $2,222,000 for the year ended June
30, 1997 compared to $1,503,000 for the year ended June 30, 1996, an increase of
$719,000, or 47.8%. The increase was primarily a result of a $456,000 special
deposit insurance assessment resulting from legislation discussed below. Other
significant components of the increase include an increase in compensation and
benefits expense by $208,000, or 31.2%, and an increase in other expenses by
$77,000, or 26.7%. Compensation and benefits expense increased primarily due to
the added expense from the implementation of an employee stock ownership plan
combined with normal, annual merit increases. The increase in other expenses was
a result of an increase in directors compensation combined with increases in
other miscellaneous expenses arising from the process of converting to mutual to
stock ownership.
On September 30, 1996 legislation was enacted into law to recapitalize the
Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance
Corporation (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 estimated at $0.657 for each $100 in deposits
held as of March 31, 1995. As a result of the recapitalization of the SAIF, the
disparity between bank and thrift insurance assessments was reduced. Thrifts had
been paying assessments of $.23 per $100 of deposits, which, for most thrifts,
was reduced to $.064 per $100 in deposits in January 1997 and will be reduced 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
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.
11
<PAGE>
Income Tax Expense. The change in income tax expense is primarily attributable
to the change in income before income taxes. The provision for income taxes
totaled $312,000 for the year ended June 30, 1997 compared to $441,000 for the
year ended June 30, 1996, a decrease of $129,000, or 29.3%. The decrease was
largely due to the tax effect of $(155,000) for the special assessment discussed
above. The effective tax rates were 35.6% and 34.1% for the years ended June 30,
1997 and 1996, 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 June 30, 1997, the Association had
approximately $581,000 in bad debt reserves subject to recapture for federal
income tax purposes. The deferred tax liability related to the recapture has
been previously established.
Comparison of Results of Operations for the Years Ended June 30, 1996
and June 30, 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 $51,000, or 1.9%, from
$2,756,000 for the year ended June 30, 1995 compared to $2,807,000 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 $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 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.
12
<PAGE>
Interest earned on 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 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 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 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% 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 .37% of total loans receivable and 25.1% of total nonperforming loans at June
30, 1996, compared with $251,000, or .33% of total loans receivable and 17.7% of
total nonperforming loans at June 30, 1995. The amount of the provision and
allowance for estimated losses on loans is influenced by 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.
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 .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.
13
<PAGE>
Yields Earned and Rates Paid. The following table sets forth certain information
relating to the Corporation'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>
Year ended June 30,
1997 1996 1995
---------------------------- ---------------------------- ---------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning
deposits $ 3,467 $ 194 5.60% $ 4,849 $ 270 5.57% $ 2,293 $ 121 5.28%
Securities available
for sale(1) 308 21 6.84 -- -- -- -- -- --
Securities held to
maturity 2,138 120 5.61 2,752 150 5.45 3,020 161 5.33
Loans receivable(2) 84,421 6,805 8.06 74,071 6,048 8.17 69,453 5,404 7.78
Federal Home Loan
Bank stock 698 49 7.02 640 45 7.03 591 38 6.43
-------- -------- -------- -------- -------- --------
Total interest-
earning assets $ 91,032 7,189 7.90 $ 82,312 6,513 7.91 $ 75,357 5,724 7.60
======== -------- ======== -------- ======== --------
Interest-bearing
liabilities:
Savings deposits $ 17,973 555 3.09 $ 18,484 563 3.05 $ 19,491 602 3.09
Demand and NOW
deposits 4,313 105 2.43 4,580 108 2.36 4,819 118 2.45
Certificate accounts 56,085 3,326 5.93 52,012 3,035 5.84 44,760 2,248 5.02
-------- -------- -------- -------- -------- --------
Total deposits 78,371 3,986 5.09 75,076 3,706 4.94 69,070 2,968 4.30
Borrowings 1,163 65 5.59 -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total interest-
bearing
liabilities $ 79,534 4,051 5.09 $ 75,076 3,706 4.94 $ 69,070 2,968 4.30
========== -------- ========== -------- ============ ========
<PAGE>
<CAPTION>
Year ended June 30,
1997 1996 1995
---------------------------- ---------------------------- ---------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income;
interest rate spread(3) $ 3,138 2.81% $ 2,807 2.97% $ 2,756 3.30%
======== ==== ======== ==== ========= ====
Net earning assets $ 11,498 $ 7,236 $ 6,287
======== ======== ========
Net interest margin(4) 3.45% 3.41% 3.66%
====== ====== ======
Average interest-earning
assets to interest-
bearing liabilities 1.14x 1.10x 1.09x
==== ==== ====
</TABLE>
- ------------------------
(1) Average balance includes unrealized gains and losses while yield is based
on amortized cost.
(2) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses and includes nonperforming loans.
(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.
14
<PAGE>
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Corporation's interest income and expense during the years
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (1) changes in
volume (multiplied by prior year rate), (2) changes in rate (multiplied by prior
year volume) and (3) total changes in rate and volume. The combined effects of
changes in both volume and rate, that are not separately identified, have been
allocated proportionately to the change due to volume and change due to rate:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------------
1996 vs. 1997 1995 vs. 1996
------------------------------- ------------------------------
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-earning deposits $ (77) $ 1 $ (76) $ 142 $ 7 $ 149
Securities available for sale 21 -- 21 -- -- --
Securities held to maturity (34) 4 (30) (15) 4 (11)
Loans receivable 835 (78) 757 371 273 644
Federal Home Loan Bank stock 4 -- 4 3 4 7
--------- -------- --------- ------- -------- -------
Total interest-earning assets $ 749 $ (73) 676 $ 501 $ 288 789
========= ======== --------- ======= ======== -------
Interest expense attributable to:
Savings deposits (16) 8 (8) (31) (8) (39)
Demand and NOW deposits (6) 3 (3) (6) (4) (10)
Certificates accounts 241 50 291 393 394 787
Borrowings 65 -- 65 -- -- --
--------- -------- --------- ------- -------- -------
Total interest-bearing liabilities $ 284 $ 61 345 $ 356 $ 382 738
========= ======== --------- ======= ======== -------
Net interest income $ 331 $ 51
========= =======
</TABLE>
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 adopted by the OTS 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.
15
<PAGE>
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 March 31, 1997, the most recent available date, 2% of the present value of
the Association's assets was $1,875,000. Because the interest rate risk of a 200
basis point decrease in market interest rates (which was greater than the
interest rate risk of a 200 basis point increase) was $1,406,000 at March 31,
1997, 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 March 31, 1997, 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.
<PAGE>
<TABLE>
<CAPTION>
NPV as % of Target Limit
Portfolio Value Under
Net Portfolio Value of Assets Asset/Liability
Change ---------------------------------------------- -------------------------------- Management
in Rates $ Amount $ Change % Change NPV Ratio % Change Policy
-------- -------- -------- -------- --------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
+400 $6,498 ($2,781) (30.0)% 6.93% (30.0)% (75)%
+300 7,651 (1,628) (17.6)% 8.16% (17.6)% (45)%
+200 8,697 (582) (6.3)% 9.28% (6.3)% (20)%
+100 9,360 80 0.9% 9.99% 0.9% (10)%
Static 9,279 0 0.0% 9.90% 0.0% 0%
(100) 8,851 (429) (4.6)% 9.44% (4.6)% (10)%
(200) 7,873 (1,406) (15.2)% 8.40% (15.2)% (20)%
(300) 6,933 (2,346) (25.3)% 7.40% (25.3)% (45)%
(400) 6,885 (2,394) (25.8)% 7.35% (25.8)% (75)%
</TABLE>
16
<PAGE>
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.
Liquidity and Capital Resources
The Corporation's liquidity, primarily represented by cash equivalents, is a
result of its operating, investing and financing activities. These activities
are summarized below for the years ended June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income $ 564 $ 852 $ 835
Adjustments to reconcile net income to net
cash from operating activities 134 (15) (2)
------------- ------------ ------------
Net cash from operating activities 698 837 833
Net cash from investing activities (16,140) (6,968) (4,887)
Net cash from financing activities 15,517 7,012 1,939
------------- ------------ ------------
Net change in cash and cash equivalents 75 881 (2,115)
Cash and cash equivalents at beginning of period 2,721 1,840 3,955
------------- ------------ ------------
Cash and cash equivalents at end of period $ 2,796 $ 2,721 $ 1,840
============= ============ ============
</TABLE>
The Corporation's principal sources of funds are deposits, loan repayments,
maturities of securities and other funds provided by operations. The Corporation
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 Corporation 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 Corporation'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 Corporation may rely, if necessary, to fund deposit
withdrawals or other short-term funding needs. At June 30, 1997, the Association
had commitments to originate fixed-rate commercial and residential loans
totaling $156,000, and variable rate commercial and residential real estate
mortgage loans totaling $876,000. 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.
17
<PAGE>
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 June 30, 1997.
<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 $ 17,088 16.6% $ 1,547 1.5% $ 15,541 15.1% $ 103,128
Core Capital 17,088 16.6 3,094 3.0 13,994 13.6 103,128
Risk-based Capital 17,481 26.9 5,208 8.0 12,273 18.9 65,095
</TABLE>
At June 30, 1997, the Association had no material commitments for capital
expenditures.
Impact of New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
was issued by the Financial Accounting Standards Board ("FASB") in 1996. It
revises the accounting for transfers of financial assets, such as loans and
securities, and for distinguishing between sales and secured borrowings. It was
originally effective for some transactions in 1997 and others in 1998. SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125" was issued in December 1996. SFAS No. 127 defers for one year the effective
date of provisions related to securities lending, repurchase agreements and
other similar transactions. The remaining portions of SFAS 125 became effective
January 1, 1997. SFAS No. 125 did not have a material impact on the
Corporation's financial statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which is
effective for periods ending after December 15, 1997, including interim periods.
SFAS No. 128 simplifies the calculation of earnings per share ("EPS") by
replacing primary EPS with basic EPS. It also requires dual presentation of
basic EPS and diluted EPS for entities with complex capital structures. Basic
EPS includes no dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share in
earnings such as stock options, warrants or other common stock equivalents. All
prior period EPS data will be restated to conform with the new presentation.
18
<PAGE>
In February 1997, the FASB issued SFAS No. 129, "Disclosures of Information
about Capital Structure." SFAS No. 129 consolidated existing accounting guidance
relating to disclosure about a company's capital structure. Public companies
generally have always been required to make disclosures now required by SFAS No.
129 and, therefore, SFAS No. 129 should have no impact on the Corporation. SFAS
No. 129 is effective for financial statements for periods ending after December
15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement significantly changes the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about reportable segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
uses a "management approach" to disclose financial and descriptive information
about an enterprise's reportable operating segments which is based on reporting
information the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance. For many enterprises,
the management approach will likely result in more segments being reported. In
addition, the Statement requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements. The Statement also requires that selected information be reported in
interim financial statements. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes included herein have been
prepared in accordance with generally accepted accounting principles ("GAAP").
Presently, GAAP requires the Corporation 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.
19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Peoples-Sidney Financial Corporation
Sidney, Ohio
We have audited the accompanying consolidated balance sheets of Peoples-Sidney
Financial Corporation as of June 30, 1997 and 1996 and the related statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended June 30, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples-Sidney
Financial Corporation as of June 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Corporation changed its
method of accounting for impaired loans in 1996.
Crowe, Chizek and Company LLP
Columbus, Ohio
July 11, 1997
20
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
- -------------------------------------------------------------------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository
institutions $ 297,722 $ 365,614
Interest-bearing deposits in other banks 1,498,104 1,355,195
Overnight deposits 1,000,000 1,000,000
----------------- ----------------
Total cash and cash equivalents 2,795,826 2,720,809
Time deposits with other financial institutions 5,000,000 1,100,000
Securities available for sale 2,012,802
Securities held to maturity (Estimated
fair value of $1,996,795 and $2,575,990
at June 30, 1997
and June 30, 1996, respectively) 1,999,375 2,598,404
Loans receivable, net 88,924,339 78,232,660
Accrued interest receivable 735,462 622,962
Premises and equipment, net 755,286 797,671
Federal Home Loan Bank stock available for sale 762,500 667,000
Other assets 156,772 142,469
----------------- ----------------
Total assets $ 103,142,362 $ 86,881,975
================= ================
LIABILITIES
Deposits $ 77,045,430 $ 77,317,506
Accrued expense and other liabilities 385,219 351,932
----------------- ----------------
Total liabilities 77,430,649 77,669,438
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares
authorized, none issued and outstanding
Common stock, $.01 par value, 3,500,000 shares
authorized, 1,785,375 shares issued and outstanding 17,854
Additional paid-in capital 17,234,087
Retained earnings 9,776,982 9,212,537
Unearned employee stock ownership plan shares (1,326,280)
Unrealized gain on securities available for sale 9,070
-----------------
Total shareholders' equity 25,711,713 9,212,537
----------------- ----------------
Total liabilities and shareholders' equity $ 103,142,362 $ 86,881,975
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1997, 1996 and 1995
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans, including fees $ 6,804,933 $ 6,048,141 $ 5,404,797
Securities 140,604 150,483 160,846
Interest-bearing deposits and overnight
deposits 194,226 269,849 121,059
Dividends on Federal Home Loan
Bank stock 49,055 44,781 37,730
-------------- -------------- ---------------
Total interest income 7,188,818 6,513,254 5,724,432
Interest expense
Deposits 3,985,995 3,706,608 2,968,012
Other borrowings 64,640
-------------- -------------- ---------------
Total interest expense 4,050,635 3,706,608 2,968,012
-------------- -------------- ---------------
Net interest income 3,138,183 2,806,646 2,756,420
Provision for loan losses 102,743 68,447 54,734
-------------- -------------- ---------------
Net interest income after
provision for loan losses 3,035,440 2,738,199 2,701,686
-------------- -------------- ---------------
Noninterest income
Service fees and other charges 63,048 57,473 59,941
-------------- -------------- ---------------
Noninterest expense
Compensation and benefits 873,749 665,728 675,126
Occupancy and equipment 137,027 123,922 127,580
Computer processing expense 152,318 138,926 143,495
FDIC deposit insurance premiums 559,660 165,917 156,672
State franchise taxes 133,639 120,222 108,594
Other 365,709 288,720 283,295
-------------- -------------- ---------------
Total noninterest expense 2,222,102 1,503,435 1,494,762
-------------- -------------- ---------------
Income before income taxes 876,386 1,292,237 1,266,865
Income tax expense 311,941 440,511 431,686
-------------- -------------- ---------------
Net income $ 564,445 $ 851,726 $ 835,179
============== ============== ===============
Earnings per common share $ .09
==============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended June 30, 1997, 1996 and 1995
- -------------------------------------------------------------------------------------------------------------------
Unrealized
Gain on
Additional Unearned Securities
Common Paid-In Retained ESOP Available
Stock Capital Earnings Shares for Sale Total
----- ------- -------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994 $ 7,525,632 $ 7,525,632
Net income for the year
ended June 30, 1995 835,179 835,179
------------ --------------
Balance, June 30, 1995 8,360,811 8,360,811
Net income for the year
ended June 30, 1996 851,726 851,726
------------ --------------
Balance, June 30, 1996 9,212,537 9,212,537
Net income for the year
ended June 30, 1997 564,445 564,445
Sale of 1,785,375 shares of
$.01 par common stock,
net of conversion costs $ 17,854 $ 17,200,090 17,217,944
142,830 shares purchased
under employee
stock ownership plan $ (1,428,300) (1,428,300)
Commitment to release
10,202 employee stock
ownership plan shares 33,997 102,020 136,017
Change in unrealized gain on
securities available for sale $ 9,070 9,070
--------- ------------- ------------ ------------ --------- --------------
Balance, June 30, 1997 $ 17,854 $ 17,234,087 $ 9,776,982 $ (1,326,280) $ 9,070 $ 25,711,713
========= ============= ============ ============ ========= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997, 1996 and 1995
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 564,445 $ 851,726 $ 835,179
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 53,973 55,445 52,460
Provision for loan losses 102,743 68,447 54,734
FHLB stock dividends (48,900) (44,600) (37,600)
Deferred taxes (12,778) 44,507 55,961
Gain on sale of real estate owned (394)
(Gain)/loss on sale or disposal of
premises and equipment (8,890) 5,891
Compensation expense related to
ESOP shares 136,017
Change in
Accrued interest receivable and
other assets (127,860) (99,015) (134,780)
Accrued expense and other liabilities 41,393 (2,259) 11,960
Deferred loan fees (11,400) (28,282) (10,746)
--------------- ------------- ------------
Net cash from operating activities 697,633 837,079 832,665
Cash flows from investing activities
Purchase of securities available for sale (1,998,974)
Proceeds from maturities of securities
held to maturity 600,000 3,000,000 1,500,000
Purchase of securities held to maturity (2,498,047) (1,000,000)
Proceeds from maturities of time deposits
in other financial institutions 1,100,000
Purchase of time deposits in
other financial institutions (5,000,000) (1,100,000)
Purchase of Federal Home Loan Bank stock (46,600) (12,900)
Net increase in loans (10,825,674) (6,352,041) (5,366,558)
Premises and equipment expenditures (11,588) (39,844) (81,561)
Proceeds from sale of premises and
equipment 10,000 125
Capital improvement expenditures
on real estate owned (30,899)
Proceeds from sale of real estate owned 42,652 11,938 105,000
--------------- ------------- ------------
Net cash from investing activities (16,140,184) (6,967,994) (4,886,793)
</TABLE>
(Continued)
24
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 30, 1997, 1996 and 1995
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits $ (272,076) $ 7,011,556 $ 1,939,089
Proceeds from issuance of common stock,
net of conversion costs 17,217,944
Cash provided to ESOP (1,428,300)
Net cash from financing activities 15,517,568 7,011,556 1,939,089
Net change in cash and cash equivalents 75,017 880,641 (2,115,039)
Cash and cash equivalents at beginning
of period 2,720,809 1,840,168 3,955,207
--------------- -------------- ---------------
Cash and cash equivalents at end of period $ 2,795,826 $ 2,720,809 $ 1,840,168
=============== ============== ===============
Supplemental disclosures of
cash flow information
Cash paid during the year for
Interest $ 4,096,411 $ 3,716,477 $ 2,950,679
Income taxes 240,000 406,444 378,955
Noncash transactions
Transfer from loans to
real estate owned 42,652 11,938 101,204
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the
preparation of the accompanying financial statements.
Principles of Consolidation: The consolidated financial statements include the
accounts of Peoples-Sidney Financial Corporation (the "Corporation") and its
wholly-owned subsidiary, Peoples Federal Savings and Loan Association (the
"Association"), a federal stock savings and loan association. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Nature of Operations: The Corporation and the Association's revenues, operating
income and assets are primarily from the financial institution industry. The
Association is engaged primarily in the business of making residential real
estate loans and accepting deposits. Its operations are conducted solely through
its main office located in Sidney, Ohio. The Association's market area consists
of Shelby and surrounding counties.
Use of Estimates in the Preparation of Financial Statements: To prepare
financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The collectibility of loans, fair values of financial instruments, and
status of contingencies are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents are defined as cash on hand,
deposits with financial institutions, overnight deposits and time deposits with
an original maturity of 90 days or less. Overnight deposits are sold for one-day
periods. The Corporation reports net cash flows for customer loan and deposit
transactions, as well as short-term borrowings under its cash management line of
credit with the Federal Home Loan Bank of Cincinnati.
Securities: Securities are classified into held-to-maturity and
available-for-sale categories. Securities are classified as held to maturity and
carried at amortized cost when management has the positive intent and the
ability to hold them to maturity. Securities are classified as available for
sale when they might be sold before maturity. Available-for-sale securities are
carried at fair value, with unrealized gains or losses included as a separate
component of equity, net of tax.
Realized gains and losses on sales of securities are determined using the
amortized cost of the specific security sold. Amortization of premiums and
accretion of discounts are recorded as interest income from securities.
26
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable: Loans are reported at the principal balance outstanding, net
of deferred loan fees and costs, the allowance for loan losses and charge-offs.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged off.
Statement of Financial Accounting Standards (SFAS) No. 114, as amended by SFAS
No. 118, was adopted July 1, 1995. These Standards require recognition and
measurement of impaired loans. Loan impairment is reported when full payment
under the loan terms is not expected. The carrying values of impaired loans are
reduced to the present value of expected future cash flows, or to the fair value
of collateral if the loan is collateral dependent, by allocating a portion of
the allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require an increase, such increase is reported as
bad debt expense. The effect of adopting these Standards did not affect the
allowance for loan losses during fiscal 1997 or 1996.
Loan impairment is evaluated in total for smaller-balance loans of similar
nature such as residential first mortgage loans secured by one- to four-family
residences, residential construction loans, credit card, automobile, home equity
and second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. Loans are evaluated for
impairment when payments are delayed, typically 90 days or more, or when the
internal grading system indicates a doubtful classification. The carrying values
of impaired loans are periodically adjusted to reflect cash payments, revised
estimates of future cash flows and increases in the present value of expected
cash flows due to the passage of time. Cash payments representing interest
income are reported as such. Other cash payments are reported as reductions in
carrying value, while increases or decreases due to changes in future payments
and due to the passage of time are reported as part of the provision for loan
losses.
27
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Expenses, gains and losses on disposition, and changes
in the valuation allowance are reported in net gain or loss on other real
estate. The Corporation had no real estate owned at year-end 1997 or 1996.
Premises and Equipment: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated using the straight-line method based on the
estimated useful lives of the assets. These assets are reviewed for impairment
when events indicate the carrying amount may not be recoverable. Maintenance and
repairs are charged to expense as incurred and improvements are capitalized.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Concentration of Credit Risk: The Corporation's loan portfolio consists
principally of long-term conventional loans secured by first mortgage deeds on
single family residences located in its primary lending area of Shelby County,
Ohio. Mortgage loans comprise approximately 97% of the Corporation's loan
portfolio at June 30, 1997 and 1996. The remaining 3% of the portfolio consists
of consumer loans secured by automobiles, deposit balances at the Association
and various other assets.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance sheet
financial instruments do not include the value of anticipated future business or
the values of assets and liabilities not considered financial instruments.
28
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per Common Share: Earnings per common share is computed by dividing net
income by the weighted average number of shares outstanding during the year. As
more fully discussed in Note 2, the Association converted from mutual to stock
ownership with the concurrent formation of a holding company effective April 25,
1997. Accordingly, earnings per share for the period ended June 30, 1997 was
computed based on net income of the Corporation since April 25, 1997. The
weighted average number of shares outstanding during the period ended June 30,
1997 was 1,644,981. Unreleased ESOP shares are not considered to be outstanding
shares for the purpose of determining the weighted average number of shares used
in the earnings per common share calculation. No earnings per common share is
shown for the years ended June 30, 1996 and 1995, as prior to April 25, 1997,
the Association was a mutual company. The financial information for the year
ended June 30, 1996 and 1995 reflects the Association prior to the conversion.
Reclassification: Reclassification of certain amounts in the 1996 and 1995
consolidated financial statements have been made to conform to the 1997
presentation.
NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS
AND LOAN ASSOCIATION WITH THE CONCURRENT FORMATION OF
A HOLDING COMPANY
On November 8, 1996, the Board of Directors of the Association unanimously
adopted a Plan of Conversion to convert from a federally chartered mutual
savings and loan association to a federally chartered stock savings and loan
association with the concurrent formation of a holding company, Peoples-Sidney
Financial Corporation. The conversion was consummated on April 25, 1997 by
amending the Association's charter and the sale of the holding company's common
stock in an amount equal to the market value of the Association after giving
effect to the conversion. A total of 1,785,375 common shares of the Corporation
were sold at $10.00 per share and net proceeds from the sale were $17,217,944
after deducting the costs of conversion.
The Corporation retained 50% of the net proceeds from the sale of common shares.
The remainder of the net proceeds were invested in the capital stock issued by
the Association to the Corporation as a result of the conversion.
At the time of conversion, the Association established a liquidation account
which was equal to its regulatory capital as of the latest practicable date
prior to the conversion. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for the accounts then held.
29
<PAGE>
NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS
AND LOAN ASSOCIATION WITH THE CONCURRENT FORMATION OF
A HOLDING COMPANY (Continued)
Under Office of Thrift Supervision ("OTS") regulations, limitations have been
imposed on all "capital distributions" by savings institutions, including cash
dividends. The regulation establishes a three-tiered system of restrictions,
with the greatest flexibility afforded to thrifts which are both
well-capitalized and given favorable qualitative examination ratings by the OTS.
NOTE 3 - SECURITIES
The amortized cost and estimated fair values of securities at June 30, 1997 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1997
- ----
Securities available for sale
U.S. Government agencies $ 1,999,060 $ 13,742 $ 2,012,802
=============== ========== ==============
Securities held to maturity
U.S. Government agencies $ 1,999,375 $ 2,580 $ 1,996,795
=============== =========== ==============
1996
Securities held to maturity
U.S. Government agencies $ 2,598,404 $ 600 $ 23,014 $ 2,575,990
=============== ========== =========== ==============
</TABLE>
30
<PAGE>
NOTE 3 - SECURITIES (Continued)
The amortized cost and estimated fair value of securities at year-end 1997, by
contractual maturity, are shown below. Actual maturities could differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Securities available for sale
Due after one year through five years $ 1,999,060 $ 2,012,802
============== ===============
Securities held to maturity
Due in one year or less $ 999,375 $ 997,965
Due after one year through five years 1,000,000 998,830
-------------- ---------------
$ 1,999,375 $ 1,996,795
============== ===============
</TABLE>
No securities were pledged as collateral at year-end 1997 or 1996. No securities
were sold during the years ended June 30, 1997, 1996 and 1995.
NOTE 4 - LOANS RECEIVABLE
Year-end loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Mortgage loans:
1-4 family residential $ 75,808,323 $ 65,448,109
Multi-family residential 219,153 485,379
Commercial real estate 5,842,476 5,301,864
Real estate construction and
development 6,551,430 7,090,779
Land 1,446,838 1,342,146
Total mortgage loans 89,868,220 79,668,277
Consumer and other loans 2,314,263 2,549,131
--------------- ----------------
Total loans receivable 92,182,483 82,217,408
Less:
Allowance for loan losses (397,159) (307,308)
Loans in process (2,702,795) (3,507,850)
Deferred loan fees (158,190) (169,590)
--------------- ----------------
$ 88,924,339 $ 78,232,660
=============== ================
</TABLE>
31
<PAGE>
NOTE 4 - LOANS RECEIVABLE (Continued)
Activity in the allowance for loan losses for years ended June 30 is summarized
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 307,308 $ 250,880 $ 197,800
Provision for losses 102,743 68,447 54,734
Charge-offs (21,645) (14,748) (3,733)
Recoveries 8,753 2,729 2,079
------------ ------------ ------------
Balance at end of year $ 397,159 $ 307,308 $ 250,880
============ ============ ============
</TABLE>
As of and for the years ended June 30, 1997 and 1996, no loans were required to
be evaluated for impairment on an individual loan basis within the scope of SFAS
No. 114. Loans on nonaccrual status totaled approximately $719,000 and $826,000
at June 30, 1997 and 1996.
In the ordinary course of business, the Corporation has and expects to continue
to have transactions, including borrowings, with its officers, directors and
their affiliates. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and did
not involve more than a normal risk of collectibility or present any other
unfavorable features to the Corporation. A summary of activity on loans with
executive officers, directors and companies with which they are affiliated
aggregating $60,000 or more to any one related party for the year ended June 30,
1997 is as follows:
Balance at beginning of period $ 461,503
New loans --
Principal repayments (49,101)
--------------
Balance at end of period $ 412,402
==============
32
<PAGE>
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Year-end accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans $ 635,372 $ 542,937
Interest-bearing deposits in other
financial institutions 50,311 40,017
Securities 49,779 40,008
------------ ------------
$ 735,462 $ 622,962
============ ============
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Year-end premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 185,166 $ 185,166
Buildings and improvements 989,091 989,091
Furniture and equipment 564,022 552,434
------------ ------------
Total cost 1,738,279 1,726,691
Accumulated depreciation 982,993 929,020
------------ ------------
$ 755,286 $ 797,671
============ ============
</TABLE>
NOTE 7 - FEDERAL INCOME TAXES
The provision for federal income tax for the years ended June 30 consisted of
the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current tax expense $ 324,719 $ 396,004 $ 375,725
Deferred tax expense/(benefit) (12,778) 44,507 55,961
------------ ------------ ------------
$ 311,941 $ 440,511 $ 431,686
============ ============ ============
</TABLE>
33
<PAGE>
NOTE 7 - FEDERAL INCOME TAXES (Continued)
The sources of gross deferred tax assets and gross deferred tax liabilities for
the years ended June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Items giving rise to deferred tax assets
Deferred loan fees $ 33,693 $ 37,741
Reserve for delinquent interest 8,092 10,108
Other 2,824 81
------------ ------------
Total deferred tax assets 44,609 47,930
Items giving rise to deferred tax liabilities
Depreciation (43,727) (43,428)
Federal Home Loan Bank
stock dividends (74,052) (57,426)
Allowance for loan losses (58,055) (91,079)
Unrealized gain on securities available for sale (4,672)
------------ ------------
Total deferred tax liabilities (180,506) (191,933)
------------ ------------
Net deferred tax liability $ (135,897) $ (144,003)
============ ============
</TABLE>
The difference between the financial statement tax provision and amounts
computed by applying the statutory federal income tax rate of 34% to income
before income taxes is primarily because of the difference between the cost and
market value of ESOP shares released and nondeductible meals and entertainment
and club dues expenses. The reconciled difference between the financial
statement provision and the amounts computed by using the statutory rate for the
years ended June 30 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at the statutory
tax rate on pretax income $ 297,971 $ 439,361 $ 430,734
Add tax effect of:
ESOP 11,559
Nondeductible expenses and other 2,411 1,150 952
------------ ------------ ------------
$ 311,941 $ 440,511 $ 431,686
============ ============ ============
Statutory tax rate 34.0% 34.0% 34.0%
============ ============ ============
Effective tax rate 35.6% 34.1% 34.1%
============ ============ ============
</TABLE>
34
<PAGE>
NOTE 7 - FEDERAL INCOME TAXES (Continued)
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 June 30, 1997, the Association had
approximately $581,000 in bad debt reserves subject to recapture for federal
income tax purposes. The deferred tax liability related to the recapture has
been previously established. In fiscal 1997, no bad debt reserves were
recaptured as the Association met the residential lending requirements.
Retained earnings at June 30, 1997 and 1996 included approximately $1,732,000
for which no provision for federal income taxes had been made. This amount
represents the qualifying and nonqualifying tax bad debt reserve as of December
31, 1987, which is the end of the Association's base year for purposes of
calculating the bad debt deduction for tax purposes. The related amount of
unrecognized deferred tax liability was approximately $589,000 at June 30, 1997
and 1996. If this portion of retained earnings is used in the future for any
purpose other than to absorb bad debts, it will be added to future taxable
income.
35
<PAGE>
NOTE 8 - DEPOSITS
A summary of deposits for the years ended June 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Noninterest-bearing
demand deposits $ 150,161 $ 117,725
NOW accounts 3,469,190 3,183,873
Money market accounts 776,507 1,236,293
Savings accounts 17,685,203 19,038,989
Certificates of deposit 54,964,369 53,740,626
--------------- ----------------
$ 77,045,430 $ 77,317,506
=============== ================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $4,219,000 and $4,343,000 at June 30, 1997 and 1996, respectively.
Deposits in excess of $100,000 are not insured by the FDIC.
The scheduled maturities of certificates of deposit as of June 30, 1997 are as
follows:
1998 $ 31,961,931
1999 15,687,169
2000 4,294,322
2001 2,224,668
2002 796,279
-----------------
$ 54,964,369
=================
NOTE 9 - SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION
Included in FDIC deposit insurance premium expense in the Statement of Income
for the year ended June 30, 1997 is $455,901 for a special assessment resulting
from legislation passed and enacted into law on September 30, 1996 to
recapitalize the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation. Thrifts such as the Association paid a one-time
assessment in November, 1996 of $0.657 for each $100 in deposits as of March 31,
1995. As a result of the recapitalization, the Association began paying lower
deposit insurance premiums in January, 1997.
36
<PAGE>
NOTE 10 - RETIREMENT PLANS
Pension Plan: Prior to January 31, 1997, the Association maintained a
noncontributory defined benefit pension plan covering all employees who met
certain minimum service requirements. The Plan's funds were invested in
certificates of deposit of the Association with varying maturities and interest
rates, as selected by the trustees. The amount of benefit was computed based
upon average monthly compensation and number of years of employment. The
Association's policy was to fund the plan sufficiently to meet minimum funding
requirements set forth in the Employees Retirement Income Security Act of 1974,
plus such additional amounts as the Association may have determined to be
appropriate up to the maximum amount deductible for federal income tax purposes.
On November 8, 1996, the Board of Directors approved a resolution to terminate
the pension plan effective January 31, 1997. This eliminated the accrual of
benefits for future services, except for additional benefits that accrued for
employees during the Plan year beginning July 1, 1996. The nonvested accumulated
benefit obligation as of January 31, 1997 became vested. The vested benefit
obligation was settled by a lump-sum payment to each covered employee. The
pension expense for the year ended June 30, 1997 was $29,617.
The following table sets forth the Plan's funded status and amounts recognized
in the Corporation's financial statements at June 30, 1996.
<TABLE>
<CAPTION>
Actuarial present value of accumulated benefit obligation:
<S> <C>
Vested $ 200,961
Nonvested 377
--------------
Total accumulated benefit obligation 201,338
Additional benefits based on estimated
future salary levels 219,340
Projected benefit obligation 420,678
Plan assets at fair value, consisting of
certificates of deposit of the Association 338,658
Excess of projected benefit obligation
over plan assets (82,020)
Items not yet recognized in income:
Unrecognized transition amount 62,930
Unrecognized prior service cost 23,350
Unrecognized net gain (26,807)
Contribution adjustment 22,785
--------------
Prepaid pension cost $ 238
==============
</TABLE>
37
<PAGE>
NOTE 10 - RETIREMENT PLANS (Continued)
Net pension cost for the years ended June 30 included the following components:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Service cost - benefits earned during the period $ 24,407 $ 26,407
Interest cost on projected benefit obligation 27,182 25,880
Actual return on plan assets (30,641) 20,693
Net amortization and deferral 20,648 (29,496)
------------ ------------
$ 41,596 $ 43,484
============ ============
</TABLE>
Significant assumptions used in determining the net pension cost for 1996 and
1995 were:
Discount rate 7.50%
Rate of increase in compensation levels 4.00
Expected long-term rate of return on assets 5.00
Employee 401(k) and Profit Sharing Plan: In connection with the termination of
its defined benefit pension plan, the Corporation adopted a 401(k) profit
sharing plan on April 1, 1997. With certain exceptions, all employees who have
attained the age of 21 and who have completed one year of employment, during
which they worked at least 1,000 hours, are eligible to participate in the plan.
The Corporation provides a matching contribution on behalf of participants who
make elective compensation deferrals at the rate of 50% of the first 6% of
participant contributions up to a maximum match of 3% of the participant's
compensation. The Corporation may also contribute additional amounts at its
discretion. Employee contributions are vested at all times and the Corporation's
matching contributions vest evenly over 5 years of service. The cash
contribution and related expense included in salaries and employee benefits was
$5,219 for fiscal 1997.
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation offers an employee stock ownership plan ("ESOP") for the benefit
of substantially all employees of the Corporation and the Association. During
July, 1997, the ESOP received a favorable determination letter from the Internal
Revenue Service on the qualified status of the ESOP under applicable provisions
of the Internal Revenue Code.
38
<PAGE>
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
The ESOP borrowed funds from the Corporation in order to acquire common shares
of the Corporation. The loan is secured by the shares purchased with the loan
proceeds and will be repaid by the ESOP with funds from the Association's
discretionary contributions to the ESOP and earnings on ESOP assets. All
dividends on unallocated shares received by the ESOP are used to pay debt
service. The shares purchased with the loan proceeds are held in a suspense
account for allocation among participants as the loan is repaid. As payments are
made and the shares are released from the suspense account, such shares will be
validly issued, fully paid and nonassessable.
The Corporation accounts for its ESOP in accordance with Statement of Position
(SOP) 93-6. Accordingly, the shares pledged as collateral are reported as
unearned ESOP shares in the Consolidated Balance Sheets. As shares are released
from collateral, the Corporation reports compensation expense equal to the
current market price of the shares and the shares become outstanding for
earnings-per-share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt and accrued interest. ESOP compensation expense
was $136,017 for the year ended June 30, 1997.
The ESOP shares as of June 30, 1997 were as follows:
Allocated shares 10,202
Unreleased shares 132,628
Total ESOP shares 142,830
--------------
Fair value of unreleased shares $ 1,865,081
==============
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory actions that, if undertaken, could
have a direct material affect on the Association's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Association must meet specific capital guidelines that involve
quantitative measures of the Association's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Association's capital amounts and classifications are also subject to
qualitative judgments by the regulators about the Association's components, risk
weightings and other factors. At June 30, 1997 and 1996, management believes the
Association is in compliance with all regulatory capital requirements. Based on
the Association's computed regulatory capital ratios, the Association is
considered well capitalized under the Federal Deposit Insurance Act at June 30,
1997 and 1996.
39
<PAGE>
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS (Continued)
At year-end 1997 and 1996, the Association's actual capital levels (in
thousands) and minimum required levels were:
<TABLE>
<CAPTION>
Minimum
Required To Be
Minimum Required Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997
Total capital (to risk-weighted assets) $ 17,481 26.9% $ 5,208 8.0% $ 6,510 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 17,088 26.3 2,604 4.0 3,906 6.0
Tier 1 (core) capital (to adjusted
total assets) 17,088 16.6 3,094 3.0 5,156 5.0
Tangible capital (to adjusted total assets) 17,088 16.6 1,547 1.5 N/A
June 30, 1996
Total capital (to risk-weighted assets) $ 9,520 16.8% $ 4,532 8.0% $ 5,666 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 9,213 16.3 2,266 4.0 3,399 6.0
Tier 1 (core) capital (to adjusted
total assets) 9,213 10.6 2,607 3.0 4,345 5.0
Tangible capital (to adjusted total assets) 9,213 10.6 1,304 1.5 N/A
</TABLE>
In addition to certain federal income tax considerations, the Office of Thrift
Supervision (OTS) regulations impose limitations on the payment of dividends and
other capital distributions by savings associations. Under OTS regulations
applicable to converted savings associations, the Association is not permitted
to pay a cash dividend on its common shares if its regulatory capital would, as
a result of payment of such dividends, be reduced below the amount required for
the Liquidation Account, or below applicable regulatory capital requirements
prescribed by the OTS.
40
<PAGE>
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS (Continued)
OTS regulations applicable to all savings and loan associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half that which its total capital to assets
ratio exceeded it required capital to assets ratio at the beginning of the
calendar year, or (2) 75% of its net earnings for the most recent four-quarter
period. Savings associations with total capital in excess of the capital
requirements that have been notified by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends. A savings
association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.
The Association currently meets all of its capital requirements and, unless the
OTS determines that the Association is an institution requiring more than normal
supervision, the Association may pay dividends in accordance with the foregoing
provisions of OTS regulations.
NOTE 13 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material effect
on financial condition or results of operations.
Some financial instruments are used in the normal course of business to meet
financing needs of customers and reduce exposure to interest rate changes. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. These involve, to varying degrees, credit risk
in excess of the amount reported in the financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on extension of credit is based on
management's credit evaluation and generally consists of residential or
commercial real estate.
41
<PAGE>
NOTE 13 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK (Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements.
As of year-end 1997 and 1996, the Corporation had commitments to make fixed rate
commercial and residential real estate mortgage loans at current market rates
approximating $156,000 and $581,000, and variable rate commercial and
residential real estate mortgage loans at current market rates approximating
$876,000 and $1,708,000. Loan commitments are generally for 30 days. The
interest rates on fixed rate commitments were 8.25% at June 30, 1997 and ranged
from 7.50% to 8.50% at June 30, 1996. The interest rates on variable rate
commitments ranged from 7.25% to 8.50% at June 30, 1997 and 7.00% to 8.75% at
June 30, 1996.
The Corporation also had unused lines of credit approximating $622,000 and
$614,000 at year-end 1997 and 1996.
At June 30, 1997, the Association had a cash management line of credit enabling
it to borrow up to $5,000,000 with the Federal Home Loan Bank (FHLB) of
Cincinnati. The line of credit must be renewed on an annual basis. No borrowings
were outstanding on this line of credit at year-end 1997 or 1996. As a member of
the Federal Home Loan Bank system, the Association has the ability to obtain
additional borrowings up to a maximum total of $15,250,000, including the line
of credit. Advances under such borrowing agreement and the line of credit are
collateralized by a blanket pledge of the Association's residential mortgage
loan portfolio and its Federal Home Loan Bank stock. The average balance of
borrowings outstanding during fiscal 1997 totaled $1,163,000, while there were
no borrowings during fiscal 1996.
At June 30, 1997 and 1996, the Association was required to have $298,000 and
$269,000 on deposit with its correspondent banks as a compensating clearing
requirement.
The Association entered into employment agreements with certain officers of the
Corporation and Association. The agreements provide for a term of one to three
years and a salary and performance review by the Board of Directors not less
often than annually, as well as inclusion of the employee in any formally
established employee benefit, bonus, pension and profit-sharing plans for which
management personnel are eligible. 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 employment agreements also provide for vacation and sick
leave.
42
<PAGE>
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values of the Corporation's
financial instruments and the related carrying values for the years ended June
30, 1996 and 1997. Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
1997
-----------------------------------
Estimated
Carrying Fair
Value Value
--------------- ----------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,795,826 $ 2,796,000
Time deposits with other financial
institutions 5,000,000 5,000,000
Securities available for sale 2,012,802 2,013,000
Securities held to maturity 1,999,375 1,997,000
Loans receivable, net 88,924,339 88,015,000
Accrued interest receivable 735,462 735,000
Federal Home Loan Bank stock 762,500 763,000
Financial liabilities:
Deposits $ (77,045,430) $ (77,542,000)
Accrued interest payable (36,095) (36,000)
<CAPTION>
1996
-----------------------------------
Estimated
Carrying Fair
Value Value
--------------- ----------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,720,809 $ 2,721,000
Time deposits with other financial
institutions 1,100,000 1,102,000
Securities held to maturity 2,598,404 2,576,000
Loans receivable, net 78,232,660 77,744,000
Accrued interest receivable 622,962 623,000
Federal Home Loan Bank stock 667,000 667,000
Financial liabilities:
Deposits $ (77,317,506) $ (77,736,000)
Accrued interest payable (81,871) (82,000)
</TABLE>
43
<PAGE>
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
The estimated fair value for cash and cash equivalents is considered to
approximate cost. The estimated fair value for securities is based on quoted
market values for the individual securities or for equivalent securities.
Carrying value is considered to approximate fair value for Federal Home Loan
Bank stock, for loans that contractually reprice at intervals of less than one
year, for accrued interest receivable, for deposit liabilities subject to
immediate withdrawal and for accrued interest payable. The fair values of
fixed-rate loans, loans that reprice less frequently than each year, time
deposits with other financial institutions and certificates of deposit are
approximated by a discount rate value technique utilizing estimated market
interest rates as of June 30, 1997 and 1996, respectively. The fair values of
unrecorded commitments at June 30, 1997 and 1996 are not material.
While these estimates are based on management's judgment of the appropriate
valuation factors, the Corporation can give no assurance that, if the
Corporation were to have liquidated such items at June 30, 1997 and 1996, the
estimated fair values would necessarily have been realized. The estimated fair
values should not be considered to apply at subsequent dates.
Other assets and liabilities of the Corporation that are not defined as
financial instruments are not included in the above disclosures. These would
include, among others, such items as property and equipment, other assets and
the intangible value of the Corporation's customer base and profit potential.
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Peoples-Sidney Financial Corporation as of
June 30, 1997 and for the period beginning April 25, 1997, the effective date of
the conversion, through June 30, 1997 is as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
June 30, 1997
<S> <C>
Assets
Cash and cash equivalents $ 290,815
Investment in subsidiary 17,097,380
Loans receivable 8,326,279
----------------
Total assets $ 25,714,474
================
Liabilities
Other liabilities $ 2,761
Shareholders' Equity 25,711,713
Total liabilities and shareholders' equity $ 25,714,474
================
</TABLE>
44
<PAGE>
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
April 25, 1997 - June 30, 1997
<S> <C>
Income
Interest on loans $ 23,006
Operating expenses 14,884
----------------
Income before income taxes and equity in
undistributed earnings of subsidiary 8,122
Income tax expense 2,761
----------------
Income before equity in undistributed
earnings of subsidiary 5,361
Equity in undistributed earnings of subsidiary 144,937
Net income $ 150,298
================
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS April
25, 1997 - June 30, 1997
<S> <C>
Cash flows from operating activities
Net income $ 150,298
Adjustments to reconcile net income
to cash provided by operations:
Equity in undistributed income of subsidiary (144,937)
Net change in other liabilities 2,762
Net cash from operating activities 8,123
Cash flows from investing activities
Purchase of stock in Peoples Federal Savings and
Loan Association (8,608,972)
Loan to ESOP (1,428,300)
Loan to subsidiary (7,000,000)
Proceeds from loan principal repayments 102,020
---------------
Net cash from investing activities (16,935,252)
Cash flows from financing activities
Proceeds from issuance of common stock,
net of conversion costs 17,217,944
Net change in cash and cash equivalents 290,815
Cash and cash equivalents at beginning of year
Cash at end of year $ 290,815
===============
</TABLE>
45
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 11:00 a.m., Sidney, Ohio time
on October 10, 1997 at the Holiday Inn, I-75 and S.R. 47, Sidney, Ohio.
STOCK LISTING
Peoples-Sidney Financial Corporation common stock is traded on the National
Association of Securities Dealers, Inc. National Market under the symbol "PSFC".
PRICE RANGE OF COMMON STOCK
The per share price range of the common stock for each quarter since the common
stock began trading on April 25, 1997 was as follows:
FISCAL 1997 HIGH LOW DIVIDENDS
- ----------- ---- --- ---------
Fourth Quarter $ 14 1/16 $ 12 7/8 $ --
(1) Reflects the period from April 25, 1997 through June 30, 1997.
The stock price information set forth in the table above was provided by the
National Association of Securities Dealers, Inc. Automated Quotation System.
At August 8, 1997, there were 1,785,375 shares of Peoples-Sidney Financial
Corporation common stock issued and outstanding (including unallocated ESOP
shares) and there were 990 holders of record.
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
Douglas Stewart, President Registrar and Transfer Co.
Peoples-Sidney Financial Corporation 10 Commerce Drive
101 East Court Street
P.O. Box 727 Cranford, NJ 07016
Sidney, Ohio 45365-3021
(937) 492-6129
ANNUAL AND OTHER REPORTS
A copy of Peoples-Sidney Financial Corporation's Annual Report on Form 10-KSB
for the year ended June 30, 1997, as filed with the Securities and Exchange
Commission, may be obtained without charge by contacting Douglas Stewart,
President and Chief Executive Officer, Peoples-Sidney Financial Corporation, 101
East Court Street, P.O. Box 727, Sidney, Ohio 45365.
46
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CORPORATE INFORMATION
<S> <C>
CORPORATION AND ASSOCIATION ADDRESS
101 East Court Street Telephone: (937) 492-6129
P.O. Box 727 Fax: (937) 498-4554
Sidney, Ohio 45365
DIRECTORS OF THE BOARD
Douglas Stewart Richard T. Martin (Chairman of the Board)
President and Chief Executive Officer of Certified Public Accountant, in private
Peoples Federal Savings and Loan Association practice
Robert W. Bertsch Harry N. Faulkner
Retired Treasurer of Peoples Federal Partner in the law firm of Faulkner,
Garmhausen, Keister & Shenk LPA
*George R. Hoellrich James W. Kerber
Retired President and Chief Executive Owner of James W. Kerber CPA, a private
Officer of Peoples Federal practice accounting firm
John W. Sargeant Officers of the Corporation and the Association:
Part Owner of Sidney Tool and Die Co. and
BenSar Development, a warehouse provider Douglas Stewart, President & CEO
David R. Fogt, VP Financial Services and
Operations
Gary N. Fullenkamp, VP Mortgage Loans
and Corporate Secretary
Debra A. Geuy, Treasurer
*Board Member of the Association Only
Special Counsel Independent Auditors
Silver, Freedman & Taff, L.L.P. Crowe, Chizek and Company LLP
1100 New York Avenue, N.W. One Columbus
Washington, D.C. 20005-3934 10 West Broad Street
Columbus, OH 43215
</TABLE>
47
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
<S> <C> <C> <C>
Peoples-Sidney Financial Corporation Peoples Federal Savings & Loan 100% Federal
Association of Sidney
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
annual report on Form 10-KSB or the fiscal year ended June 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 298
<INT-BEARING-DEPOSITS> 6,498
<FED-FUNDS-SOLD> 1,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,013
<INVESTMENTS-CARRYING> 1,999
<INVESTMENTS-MARKET> 1,997
<LOANS> 88,294
<ALLOWANCE> 397
<TOTAL-ASSETS> 103,142
<DEPOSITS> 77,045
<SHORT-TERM> 0
<LIABILITIES-OTHER> 385
<LONG-TERM> 0
18
0
<COMMON> 0
<OTHER-SE> 25,694
<TOTAL-LIABILITIES-AND-EQUITY> 103,142
<INTEREST-LOAN> 6,805
<INTEREST-INVEST> 141
<INTEREST-OTHER> 243
<INTEREST-TOTAL> 7,189
<INTEREST-DEPOSIT> 3,986
<INTEREST-EXPENSE> 4,051
<INTEREST-INCOME-NET> 3,138
<LOAN-LOSSES> 103
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,222
<INCOME-PRETAX> 876
<INCOME-PRE-EXTRAORDINARY> 564
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 564
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<YIELD-ACTUAL> 3.45
<LOANS-NON> 719
<LOANS-PAST> 148
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 307
<CHARGE-OFFS> 22
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 397
<ALLOWANCE-DOMESTIC> 397
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
