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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission File Number 0-22223
PEOPLES-SIDNEY FINANCIAL CORPORATION
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(Name of small business issuer in its charter)
Delaware 31-1499862
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
101 E. Court Street, Sidney, Ohio 45365
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(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)
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 ]
<PAGE>
State the issuer's revenues for its most recent fiscal year: $8,130,061
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 August 25, 1998 was 31.0
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 August 25, 1998, there were issued and outstanding 1,775,375
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, 1998.
Part III of Form 10-KSB - Portions of Proxy Statement for 1998 Annual
Meeting of Stockholders.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
YES [ ] NO [ X ]
<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
capital stock of the Association issued in connection with the completion of the
Association's conversion from the mutual to stock form of organization on April
25, 1997. Unless the context otherwise requires, all references herein to the
Company include the Company and the Association on a consolidated basis, except
that information as of a date prior to April 25, 1997 relates only to the
Association. The Association, the Company's only subsidiary, was organized in
1886 as an Ohio-chartered mutual association and converted to a federally
chartered association in 1958.
The Association is 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 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").
Accordingly, the Association is also subject to regulation and oversight by the
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
When used in this Form 10-KSB and in future filings by the Company with
the Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
<PAGE>
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake--and specifically declines any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
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 area.
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 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 may
adjust or discontinue any product offering to respond to competitive or economic
factors.
<PAGE>
Loan Portfolio Composition. The following information sets forth the
composition of the Association's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred loan fees and
allowance for loan losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ---------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family............. $79,691 82.37% $75,808 82.24% $65,448 79.60% $59,181 78.95% $53,531 77.64%
Construction and development.... 6,776 7.00 6,551 7.10 7,091 8.63 6,639 8.86 6,254 9.07
Commercial...................... 6,608 6.83 5,843 6.34 5,302 6.45 5,750 7.67 6,080 8.82
Multi-family.................... 655 0.68 219 0.24 485 0.59 335 0.45 579 0.84
Land............................ 868 0.90 1,447 1.57 1,342 1.63 909 1.21 805 1.16
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans..... 94,598 97.78 89,868 97.49 79,668 96.90 72,814 97.14 67,249 97.53
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Other Loans:
Consumer Loans:
Automobile..................... 1,124 1.16 1,215 1.32 1,274 1.55 1,042 1.39 706 1.02
Deposit account................ 257 0.27 351 0.38 167 0.20 262 0.35 190 0.28
Other.......................... 672 0.69 719 0.78 1,027 1.25 821 1.09 749 1.09
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans........ 2,053 2.12 2,285 2.48 2,468 3.00 2,125 2.83 1,645 2.39
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Commercial business loans....... 101 0.10 29 0.03 81 0.10 22 0.03 55 0.08
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans................. 96,752 100.00% 92,182 100.00% 82,217 100.00% 74,961 100.00% 68,949 100.00%
------- ====== ------- ====== ====== ====== ======
Less:
Loans in process................ (2,079) (2,703) (3,508) (2,579) (1,929)
Deferred loan fees.............. (195) (158) (169) (198) (212)
Allowance for loan losses....... (426) (397) (307) (251) (198)
------- ------ ----- ------ -------
Total loans receivable, net..... $94,052 $88,924 $78,233 $71,933 $66,610
======= ======= ======= ======= =======
</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,
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ---------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family............ $24,628 25.46% $21,836 23.69% $17,166 20.88% $12,254 16.35% $11,708 16.98%
Construction and development... 1,643 1.70 949 1.03 775 0.94 526 0.70 768 1.11
Commercial..................... 386 0.40 259 0.28 179 0.22 313 0.42 395 0.57
Multi-family................... --- --- --- --- --- --- --- --- 12 0.02
Land........................... 80 0.08 184 0.20 20 0.02 5 0.01 29 0.04
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans..... 26,737 27.64 23,228 25.20 18,140 22.06 13,098 17.48 12,912 18.72
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Consumer loans.................. 2,053 2.12 2,285 2.48 2,468 3.00 2,125 2.83 1,645 2.39
Commercial business loans....... 101 0.10 29 .03 81 0.10 22 0.03 55 .08
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total fixed-rate loans...... 28,891 29.86 25,542 27.71 20,689 25.16 15,245 20.34 14,612 21.19
Adjustable-Rate Loans:
Real estate:
One- to four-family............ 55,063 56.91 53,972 58.55 48,282 58.73 46,927 62.60 41,823 60.66
Construction and development... 5,133 5.30 5,602 6.07 6,316 7.68 6,113 8.15 5,486 7.96
Commercial..................... 6,222 6.43 5,584 6.06 5,123 6.23 5,437 7.25 5,685 8.25
Multi-family................... 655 0.68 219 0.24 485 0.59 335 0.45 567 0.82
Land........................... 788 0.82 1,263 1.37 1,322 1.61 904 1.21 776 1.12
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total adjustable-rate loans. 67,861 70.14 66,640 72.29 61,528 74.84 59,716 79.66 54,337 78.81
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans................. 96,752 100.00% 92,182 100.00% 82,217 100.00% 74,961 100.00% 68,949 100.00%
====== ====== ====== ====== ======
Less:
Loans in process................ (2,079) (2,703) (3,508) (2,579) (1,929)
Deferred loan fees.............. (195) (158) (169) (198) (212)
Allowance for loan losses....... (426) (397) (307) (251) (198)
------- ------- ------- ------- -------
Total loans receivable, net.. $94,052 $88,924 $78,233 $71,933 $66,610
======= ======= ======= ======= =======
</TABLE>
<PAGE>
The following schedule presents the contractual maturities of the
Association's loan portfolio at June 30, 1998. 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 Commercial Business
----------------------------- ------------------------ ------------------- -----------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year or less(1) $ 7 8.47% $ 3 8.38% $ 549 9.65% $ 96 8.42%
Over 1 year - 3 years 358 8.77 24 7.64 883 9.84 5 9.75
Over 3 years - 5 years 1,587 8.41 258 8.06 621 9.22 -- --
Over 5 years -
10 years 4,785 8.31 1,881 7.98 -- -- --
Over 10 years -
20 years 31,834 7.84 4,064 7.79 -- -- --
Over 20 years 47,896 7.76 1,901 7.86 -- -- -- --
------- ---- ------- ---- ------- ---- ------- ----
Total $86,467 7.83% $ 8,131 7.86% $ 2,053 9.60% $ 101 8.49%
======= ==== ======= ==== ======= ==== ======= ====
<CAPTION>
Total
------------------------
Weighted
Average
Amount Rate
------- ----
<C> <C> <C>
1 year or less(1) $ 655 9.45%
Over 1 year - 3 years 1,270 9.50
Over 3 years - 5 years 2,466 8.58
Over 5 years -
10 years 6,666 8.22
Over 10 years -
20 years 35,898 7.83
Over 20 years 49,797 7.76
------- ----
Total $96,752 7.87%
======= ====
</TABLE>
- -----------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after June 30, 1999 which have predetermined
interest rates is $28,244,000, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $67,853,000.
<PAGE>
Under federal law, the aggregate amount of loans that the Association
is permitted to make to any one borrower is generally limited to 15% of
unimpaired capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At June
30, 1998, based on the above limitation, the Association's regulatory
loan-to-one borrower limit was approximately $2.75 million. On the same date,
the Association had no borrowers with outstanding balances in excess of this
amount. As of June 30, 1998, the largest dollar amount of indebtedness to one
borrower or group of related borrowers was $1,043,000 secured by multiple one-to
four-family real estate properties. The next largest loan to one borrower or
group of related borrowers had an outstanding balance of $764,000 at June 30,
1998 and is secured by commercial property leased to tenants involved in retail
business. As of June 30, 1998, such loans were 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, 1998, $79.7 million, or 82.4% of the
Association's loan portfolio, consisted of permanent loans on one- to
four-family residences. At that date, the average outstanding residential loan
balance was $53,000 and the largest outstanding residential loan had a principal
balance of $323,000. 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 or 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
<PAGE>
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, 1998,
the Association had $24.6 million of fixed-rate permanent one-to four-family
residential loans, constituting 25.5% 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, 1998, the total
balance of one- to four-family ARMs was $55.1 million, or 56.9% of the
Association's loan portfolio.
The Association also offers the "7/1" ARM 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, 1998, the
Association had $206,000 in "7/1" loans. In 1992, the Association initiated a
program specifically tailored to first time home 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,
1998, the Association had approximately $5.7 million of 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.
<PAGE>
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, 1998, the
Association had $418,000 of home equity lines of credit and an additional
$291,000 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, 1998, the Association had 43 construction loans
with outstanding aggregate balances of $5.1 million secured by residential
property. Of this amount, $3.2 million in loans were outstanding directly to
borrowers intending to live in the properties upon completion of construction.
At that same date, the Association had 15 construction loans with outstanding
aggregate balances of $1.9 million secured by one- to four-family residential
properties constructed 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, 1998, the Association had $1.7 million, or 1.8% of gross loans receivable,
in this category.
<PAGE>
Construction and development lending generally affords the Association
an opportunity to receive interest at rates higher than those obtainable from
residential lending and to receive higher origination and other loan fees. In
addition, such loans are generally made for relatively short terms.
Nevertheless, construction lending to persons other than owner-occupants is
generally considered to involve a higher level of credit risk than one- to
four-family permanent residential lending due to the concentration of principal
in a limited number of loans and borrowers and the effects of general economic
conditions on construction projects, real estate developers and managers. In
addition, the nature of these loans is such that they are more difficult to
evaluate and monitor. The Association's risk of loss on a construction or
development loan is dependent largely upon the accuracy of the initial estimate
of the property's value upon completion of the project and the estimated cost
(including interest) of the project. If the estimate of value proves to be
inaccurate, the Association may be confronted, at or prior to the maturity of
the loan, with a project with a value which is insufficient to assure full
repayment and/or the possibility of having to make substantial investments to
complete and sell the project. Because defaults in repayment may not occur
during the construction period, it may be difficult to identify problem loans at
an early stage. When loan payments become due, the cash flow from the property
may not be adequate to service the debt. In such cases, the Association may be
required to modify the terms of the loan.
Commercial Real Estate Lending
The Association's commercial real estate loan portfolio consists of
loans secured by a variety of non-residential properties including retail
facilities, small office buildings, farm real estate and churches. At June 30,
1998, the Association's largest commercial real estate loan totaled $764,000. At
that date, the Association had 64 commercial real estate loans, totaling $6.6
million or 6.8% 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, 1998.
<TABLE>
<CAPTION>
Outstanding
Number of Original Principal
Loans Loan Amount Balance
----- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Office...................... 15 $1,602 $1,197
Retail...................... 5 1,219 1,039
Farm real estate............ 40 4,115 4,115
Churches.................... 4 409 257
--- ------- --------
Total.................... 64 $7,345 $6,608
== ====== ======
</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 amount
of such loans at June 30, 1998 was insignificant, totaling $655,000, or 0.7% 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, 1998, the Association had $868,000, or 0.9%
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.
<PAGE>
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, 1998, the Association's consumer loans totaled $2.1
million, or 2.1% 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
automobile loans. At June 30, 1998, automobile loans totaled $1.1 million, or
1.2% 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, 1998, approximately 231 credit cards had been
issued, with an aggregate outstanding loan balance of $63,000 and unused credit
available of $256,000. 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 small portfolio of commercial business loans.
<PAGE>
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, 1998,
commercial business loans totaled $101,000, or 0.1% 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,
-------------------------------------
1998 1997 1996
-------- --------- --------
(In thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family $ 16,076 $ 14,908 $ 15,044
- commercial 2,839 2,849 1,366
- multi-family 470 180 180
Non-real estate - consumer -- -- --
- commercial business -- -- --
-------- -------- --------
Total adjustable-rate 19,385 17,937 16,590
Fixed rate:
Real estate - one- to four-family 8,247 7,406 9,458
- commercial 266 461 121
- multi-family -- -- --
Non-real estate - consumer 1,923 2,294 2,087
- commercial business 122 11 87
-------- -------- --------
Total fixed-rate 10,558 10,172 11,753
-------- -------- --------
Total loans originated 29,943 28,109 28,343
Principal repayments (24,670) (17,149) (21,939)
Increase in other items, net(1) (66) (134) (52)
-------- -------- --------
Net increase $ 5,207 $ 10,826 $ 6,352
======== ======== ========
</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 cure the delinquency 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.
<PAGE>
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 initially recorded at fair value at the date of acquisition. 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.
The following table sets forth the Association's loan delinquencies by
type, by amount and by percentage of type at June 30, 1998.
<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)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family...... 13 $592 0.74% 26 $948 1.19% 39 $1,540 1.93%
Construction and
development............. --- --- --- --- --- --- --- --- ---
Commercial............... 1 14 0.20 --- --- --- 1 14 0.20
Multi-family............. --- --- --- --- --- --- --- --- ---
Land..................... --- --- --- --- --- --- --- --- ---
Consumer................... 5 28 1.36 6 11 0.50 11 39 1.90
Commercial business........ --- --- --- --- --- --- --- --- ---
--- ---- ----- --- ---- ----- --- ------ ----
Total................. 19 $634 0.66% 32 $959 0.99% 51 $1,593 1.65%
== ==== ===== ==== ==== ===== === ====== ====
</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
<PAGE>
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.
On the basis of management's review of its assets, at June 30, 1998,
the Association had classified a total of $728,000 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................ $713 $--- $--- $ 3 $716
Doubtful................... --- --- --- --- ---
Loss....................... --- --- --- 12 12
---- --- --- ---- -----
$713 --- --- $15 $728
==== === === === ====
</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.
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets. Interest income on loans is accrued over the term of the loans based
upon the principal outstanding except where serious doubt exists as to the
collectibility of a loan, in which case the accrual of interest is discontinued.
For all years presented, the Association has had no troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates). Foreclosed
assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non accruing loans:
One- to four-family........................... $713 $705 $ 564 $ 494 $ 711
Construction and development.................. --- --- --- --- ---
Commercial real estate........................ --- 14 211 --- 17
Multi-family.................................. --- --- --- --- ---
Land.......................................... --- --- 51 214 192
Consumer...................................... --- --- --- --- ---
Commercial business........................... --- --- --- --- ---
---- ---- ------- ------- -------
Total...................................... 713 719 826 708 920
---- --- ------- ------- -------
Accruing loans delinquent more than 90 days:
One- to four-family........................... 235 143 326 604 564
Construction and development.................. --- --- --- --- ---
Commercial real estate........................ --- --- 58 86 35
Multi-family.................................. --- --- --- --- ---
Land.......................................... --- --- --- --- ---
Consumer...................................... 11 5 11 20 7
Commercial business........................... --- --- --- --- ---
---- ---- ------- ------- -------
Total...................................... 246 148 395 710 606
---- ---- ------- ------- -------
Foreclosed assets:
One- to four-family........................... --- --- --- --- ---
Construction and development.................. --- --- --- --- ---
Commercial real estate........................ --- --- --- --- ---
Multi-family.................................. --- --- --- --- 74
Land.......................................... --- --- --- --- ---
Consumer...................................... --- --- --- --- ---
Commercial business........................... --- --- --- --- ---
---- ---- ------- ------- -------
Total...................................... --- --- --- --- 74
---- ---- ------- ------- -------
Total non performing assets..................... $959 $867 $1,221 $1,418 $1,600
==== ==== ====== ===== ======
Total as a percentage of total assets........... 0.91% 0.84% 1.41% 1.80% 2.10%
==== ==== ==== ==== ====
</TABLE>
<PAGE>
For the year ended June 30, 1998 gross interest income which would have
been recorded had the non accruing loans been current in accordance with their
original terms amounted to $67,824. The amount that was included in interest
income on such loans was $46,267 for the year ended June 30, 1998.
Other Assets of Concern. As of June 30, 1998, 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.
Loan impairment is reported when full payment under the terms of the
loan is not expected. 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. If a loan
is impaired, a portion of the allowance for loan losses is allocated so that the
loan is reported net, at the present value of estimated future cash flows using
the loan's existing rate or at the fair value of collateral if repayment is
expected solely from the collateral. Loans are evaluated for impairment when
payments are delayed, typically 90 days or more, or when it is probable that not
all principal and interest payments will be collected in accordance with the
original terms of the loan.
As of June 30, 1998, the Association's allowance for loan losses as a
percent of gross loans receivable and as a percent of nonperforming loans
amounted to 0.44% and 44.41%, 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,
--------------------------------------------------------
1998 1997 1996 1995 1994
------ ---- ------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $397 $307 $ 251 $198 $123
Charge-offs:
One- to four-family................................ 7 --- 9 --- 1
Construction and development....................... --- --- --- --- ---
Commercial real estate............................. --- --- --- --- ---
Multi-family....................................... --- --- --- --- ---
Consumer........................................... 8 22 6 4 14
Commercial business................................ --- --- --- --- ---
----- ----- ------ ------ ------
15 22 15 4 15
---- ---- ----- ----- -----
Recoveries:
One- to four-family................................ --- --- 1 --- ---
Construction and development....................... --- --- --- --- ---
Commercial real estate............................. --- --- --- --- ---
Multi-family....................................... --- --- --- --- ---
Consumer........................................... 3 9 2 2 7
Commercial business................................ --- --- --- --- ---
----- ----- ------ ------ ------
3 9 3 2 7
----- ----- ------ ------ ------
Net charge-offs...................................... 12 13 12 2 8
Additions charged to operations...................... 41 103 68 55 83
------ ---- ------ ----- -----
Balance at end of period............................. $426 $397 $ 307 $251 $198
==== ==== ===== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding(1) during the period...... 0.01% 0.02% 0.02% ---% 0.01%
==== ==== ==== ==== ====
Ratio of net charge-offs during the period to
nonperforming assets at the end of the period....... 1.33% 1.49% 0.98% 0.14% 0.50%
==== ==== ==== ==== ====
</TABLE>
- -----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
<PAGE>
The distribution of the Association's allowance for losses on loans at
the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ -------------------------------- ------------------------------
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.................. $335 $79,691 82.37% $316 $75,808 82.24% $ 211 $65,448 79.60%
Construction and development......... 16 6,776 7.00 14 6,551 7.10 4 7,091 8.63
Commercial real estate............... 15 6,608 6.83 15 5,843 6.34 36 5,302 6.45
Multi-family......................... 2 655 0.68 --- 219 0.24 1 485 0.59
Land................................. 2 868 0.90 3 1,447 1.57 2 1,342 1.63
Consumer............................. 56 2,053 2.12 49 2,285 2.48 53 2,468 3.00
Commercial business.................. --- 101 0.10 --- 29 0.03 --- 81 0.10
Unallocated.......................... --- --- --- --- --- --- --- --- ---
----- ------- ------ ---- ------- ------ ---- ------- ------
Total........................... $426 $96,752 100.00% $397 $92,182 100.00% $ 307 $82,217 100.00%
==== ======= ====== ==== ======= ====== ===== ======= ======
<CAPTION>
June 30,
--------------------------------------------------------------------------
1995 1994
------------------------------------- ------------------------------------
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.................. $ 179 $59,181 78.95% $ 126 $53,531 77.64%
Construction and development......... 5 6,639 8.86 3 6,254 9.07
Commercial real estate............... 7 5,750 7.67 2 6,080 8.82
Multi-family......................... --- 335 0.45 --- 579 0.84
Land................................. 21 909 1.21 29 805 1.16
Consumer............................. 39 2,125 2.83 38 1,645 2.39
Commercial business.................. --- 22 0.03 --- 55 0.08
Unallocated.......................... --- --- --- --- --- ---
----- ------- ------ ----- -------- ------
Total........................... $ 251 $74,961 100.00% $ 198 $68,949 100.00%
===== ======= ====== ===== ======= ======
</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, 1998, the Association did not own any securities
of a single issuer which exceeded 10% of the Association's equity, 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, 1998, the Association's liquidity ratio (liquid
assets as a percentage of net withdrawable savings and current borrowings) was
11.49% as compared to the OTS requirement of 4.0%.
As of June 30, 1998 the Association had securities totaling $4.0
million classified as available for sale while there were no classified as held
to maturity. As future securities are acquired, the Association may elect to
classify them as either available for sale or held to maturity.
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,
--------------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------- --------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <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...... 4,016 80.92 2,013 20.59 --- ---
Time deposits...................................... 100 2.01 5,000 51.15 1,100 25.20
------- -------- ------ ----- ------ ------
Subtotal........................................ 4,116 82.93 9,012 92.19 3,698 84.72
FHLB stock........................................... 847 17.07 763 7.81 667 15.28
-------- ------- ------- -------- ------- ------
Total securities and FHLB stock................. $4,963 100.00 $ 9,775 100.00% $4,365 100.00%
====== ====== ======= ====== ====== ======
Average remaining life of securities
and time deposits.................................. 3.01 years 1.04 years 1.21 years
Other interest-earning assets:
Interest-bearing deposits with banks............... $ 2,292 53.40% $ 1,498 59.97% $1,355 57.54%
Overnight deposits................................. 2,000 46.60 1,000 40.03 1,000 42.46
-------- ------- ------ ------- ------ ------
Total........................................... $ 4,292 100.00% $ 2,498 100.00% $2,355 100.00%
======= ====== ======= ====== ====== ======
</TABLE>
<PAGE>
The composition and maturities of the time deposit and securities
portfolios, excluding FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------------------------------
Less Than 1 to 5 Total Securities
1 Year Years and Time Deposits
--------------------- -------------------------- ----------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
---- ---------- ---- ---------- ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Time deposit........................ $ 100 $ 100 $ --- $ --- $ 100 $ 100
Federal agency obligations held to
maturity............................ --- --- --- --- --- ---
Federal agency obligations
available for sale.................. 1,000 1,007 2,999 3,009 3,999 4,016
------- ------- ------- ------- ------ ------
Total securities and time deposit... $1,100 $1,107 $2,999 $3,009 $4,099 $4,116
====== ====== ====== ====== ====== ======
Weighted average yield.............. 6.41% 6.41% 6.50% 6.50% 6.48% 6.48%
</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 may 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.
<PAGE>
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.
The following table sets forth the savings flows at the Association
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1998 1997 1996
--------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $ 77,045 $ 77,318 $ 70,306
Deposits 87,133 111,312(1) 70,928
Withdrawals 88,401 114,882(1) 66,928
Interest credited 3,277 3,297 3,012
--------- --------- ---------
Ending balance $ 79,054 $ 77,045 $ 77,318
========= ========= =========
Net increase (decrease) $ 2,009 $ (273) $ 7,012
========= ========= =========
Percent increase (decrease) 2.61% (0.35)% 9.97%
========= ========= =========
</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,
---------------------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------------ -------------------------
Weighted
Average
Rate at Percent Percent Percent
June 30, 1998 Amount of Total Amount of Total Amount of Total
------------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transactions and Savings Deposits:
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest Bearing Demand....... $ 169 0.22% $ 150 0.19% $ 118 0.15%
Savings Accounts................. 3.05% 18,456 23.34 17,685 22.94 19,039 24.60
NOW Accounts..................... 2.42% 3,362 4.25 3,469 4.50 3,184 4.11
Money Market Accounts............ 2.50% 982 1.24 777 1.01 1,236 1.60
-------- ---- --------- ---- --------- ----
Total Non-Certificates........... 22,969 29.05 22,081 28.64 23,577 30.46
-------- ---- --------- ---- --------- ----
Certificates:
0.00 - 1.99%................... --- --- --- --- --- ---
2.00 - 3.99%................... --- --- --- --- 2 ---
4.00 - 5.99%................... 36,060 45.59 28,959 37.57 32,233 41.64
6.00 - 7.99%................... 20,025 25.32 26,005 33.74 21,506 27.79
8.00 - 9.99%................... --- --- --- --- --- ---
10.00% and over.................. --- --- --- --- --- ---
-------- ---- --------- --- --------- ----
Total Certificates............... 5.84% 56,085 70.91 54,964 71.31 53,741 69.43
-------- ---- --------- ---- --------- ----
Accrued Interest................. 35 0 .04 36 0.05 82 0.11
-------- ---- --------- ---- --------- ----
Total Deposits................... 4.99% $79,089 100.00% $77,081 100.00% $ 77,400 100.00%
======= ====== ======= ====== ========= ======
</TABLE>
<PAGE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of June 30, 1998.
<TABLE>
<CAPTION>
4.00- 6.00- Percent
5.99% 7.99% Total of Total
----- ----- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Certificate accounts
maturing
in quarter ending:
September 30, 1998............. 7,202 2,798 10,000 17.83%
December 31, 1998.............. 5,754 1,145 6,899 12.30
March 31, 1999................. 5,424 399 5,823 10.39
June 30, 1999.................. 4,865 903 5,768 10.29
September 30, 1999............. 3,045 59 3,104 5.53
December 31, 1999.............. 3,509 1,341 4,850 8.65
March 31, 2000................. 424 2,186 2,610 4.65
June 30, 2000.................. 499 3,816 4,315 7.69
September 30, 2000............. 1,651 1,607 3,258 5.81
December 31, 2000.............. 2,184 1,299 3,483 6.21
March 31, 2001................. 1,087 174 1,261 2.25
June 30, 2001.................. 301 112 413 0.74
September 30, 2001............. 11 142 153 0.27
December 31, 2001.............. --- 554 554 0.99
March 31, 2002................. 5 184 189 0.34
June 30, 2002.................. 99 262 361 0.64
September 30, 2002............. --- 452 452 0.81
December 31, 2002.............. --- 439 439 0.78
March 31, 2003................. --- 1,001 1,001 1.78
June 30, 2003.................. --- 1,152 1,152 2.05
------- ------- ------- ------
Total....................... $36,060 $20,025 $56,085 100.00%
======= ======= ======= ======
Percent of total............ 64.30% 35.70%
===== =====
</TABLE>
At June 30, 1998 the Association had approximately $4.1 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........................... $1,073 5.46%
Over three through six months.................. 554 6.01
Over six through 12 months..................... 900 5.48
Over 12 months................................. 1,530 6.05
------- ----
Total.......................................... $4,057 5.76%
====== ====
</TABLE>
<PAGE>
For additional information regarding the composition of the
Association's deposits, see Note 8 of Notes to Consolidated Financial
Statements.
Borrowings. Peoples Federal's other available sources of funds 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.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1998 1997 1996
------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at period end:
FHLB advances........................................... $7,000 $ --- $ --
Maximum balance at any month end during the period:
FHLB advances........................................... $7,000 $3,500 $ ---
Average balance for the period:
FHLB advances........................................... $ 96 $1,163 $ ---
Weighted average rate................................... 6.25% 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, 1998, in the stock of, or loans to, service corporation
subsidiaries. As of such date, Peoples Federal had no investments 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
Company also is subject to federal regulation and oversight. The purpose of the
regulation of the Company and other savings and loan 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.
<PAGE>
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
March 31, 1998. 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, 1998 was $32,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Peoples Federal and the
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, 1998, the Association's lending
limit under this restriction was $2.75 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
<PAGE>
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.
In order to equalize the deposit insurance premium schedules for BIF
and SAIF insured institutions, the FDIC imposed a one-time special assessment on
all SAIF-assessable deposits pursuant to federal legislation enacted on
September 30, 1996. Peoples Federal's special assessment, which was $456,000,
was paid in November 1996, and included in federal deposit insurance expense in
the fiscal year ended June 30, 1997. Effective January 1, 1997, the premium
schedule for BIF and SAIF insurance institutions ranged from 0 to 27 basis
points. However, SAIF-insured institutions are required to pay a Financing
Corporation (FICO) assessment, in order to fund the interest on bonds issued to
resolve thrift failures in the 1980's, equal to 6.48 basis points for each $100
in domestic deposits, while BIF-insured institutions pay an asessment equal to
1.52 basis points for each $100 in domestic deposits. The assessment is expected
to be reduced to 2.43 no later than January 1, 2000, when BIF insured
institutions fully participate in the assessment. These assessments, which may
be revised based upon the level of BIF and SAIF deposits, will continue until
the bonds mature in the year 2017.
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.
<PAGE>
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, 1998, 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, 1998, Peoples Federal had tangible capital of $18.3
million, or 17.3% of total assets, which is approximately $16.7 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
receivables. 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, 1998, Peoples
Federal had no intangible assets which were subject to these tests.
At June 30, 1998, Peoples Federal had core capital equal to $18.3
million, or 17.3% of adjusted total assets, which is 14.1 million above the
minimum leverage ratio requirement of 4% 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, 1998, Peoples Federal
had $413,000 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, 1998.
<PAGE>
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, 1998, Peoples Federal had total capital of $18.7 million
(including $18.3 million in core capital and $413,000 in qualifying
supplementary capital) and risk-weighted assets of $67.8 million, or total
capital of 27.6% of risk-weighted assets. This amount was $13.3 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.
<PAGE>
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 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 will be adopted.
<PAGE>
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 1998 Annual Report to Stockholders attached hereto as Exhibit 13 and
incorporated by reference herein. This liquid asset ratio requirement may vary
from time to time depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 4%.
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 of
1986, as amended (the "Code"). Under either test, such assets primarily consist
of residential housing related loans and investments. At June 30, 1998, 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 "- Regulation of the Company."
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.
<PAGE>
Due to the heightened attention being given to the CRA in recent 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 1998 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 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.
Regulation of the Company
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the 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 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 Company generally is
not subject to activity restrictions. If the 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 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 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 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.
<PAGE>
Federal Securities Law
The common stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration unless sold in accordance with certain resale restrictions. If the
Company meets specified current public information requirements, each affiliate
of the 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, 1998, 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, 1998, Peoples Federal had $847,000 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 6.60% and were 7.22% for
fiscal 1998.
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.
<PAGE>
For the year ended June 30, 1998, dividends paid by the FHLB of
Cincinnati to Peoples Federal totaled $57,000, which constitutes an $8,000
increase over the amount of dividends received in fiscal year 1997. The $15,000
dividend for the quarter ended June 30, 1998 reflects an annualized rate of
7.25%, or .03% above the rate for fiscal 1998.
Federal and State Taxation
Savings associations such as Peoples Federal, that meet certain
conditions prescribed by 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 was 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, 1998, 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, 1998, the portion of Peoples Federal's reserves subject
to this treatment for tax purposes totaled approximately $2.2 million.
Peoples Federal files federal income tax returns on a fiscal year basis
using the accrual method of accounting. The Company does not file consolidated
federal income tax returns with Peoples Federal.
Peoples Federal has been audited by the IRS, or the statute of
limitations for assessment has closed, with respect to federal income tax
returns through June 30, 1994. 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.
<PAGE>
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 by the Ohio
Revised Code pays a tax equal to 0.014 times its apportioned net worth. The
apportionment factor consists of a gross receipts factor, determined by
reference to the total receipts of the financial institution from all sources, a
property factor, determined by reference to the net book value of all loans and
fixed assets owned by the financial institution and a payroll factor.
Delaware Taxation. As a Delaware holding company, the 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 Company is also
subject to an annual franchise tax imposed by the State of Delaware. The Company
also files an Ohio franchise tax return and pays tax on its Ohio taxable income.
Impact of New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" - SFAS 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements. SFAS
130 requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS 130 will be effective in fiscal 1999 and is not
expected to have a significant impact on the Company's financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" - SFAS 131 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 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, SFAS
131 requires significantly more information to be disclosed for each reportable
segment than is presently being reported in annual financial statements. SFAS
131 also requires that selected information be reported in interim financial
statements. SFAS 131 will be effective for fiscal 1999 and is not expected to
have a significant impact on the Company's financial statements.
<PAGE>
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" - SFAS 132 amends the disclosure requirements of
previous pension and other postretirement benefit accounting standards by
requiring additional disclosures about such plans as well as eliminating some
disclosures no longer considered useful. SFAS 132 also allows greater
aggregation of disclosures for employers with multiple defined benefit plans.
Non-public companies are subject to reduced disclosure requirements; however,
such entities may elect follow the full disclosure requirements of SFAS 132.
SFAS 132 will be effective in fiscal 1999 and is not expected to have a
significant impact on the Company's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" - SFAS 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving off-setting changes in fair
value or cash flows. SFAS 133 does not allow hedging of a security which is
classified as held to maturity, accordingly, upon adoption of SFAS 133,
companies may reclassify any security from held to maturity to available for
sale if they wish to be able to hedge the security in the future. SFAS 133 is
effective for fiscal years beginning after June 15, 1999 with early adoption
encouraged for any fiscal quarter beginning July 1, 1998 or later, with no
retroactive application. Management does not expect the adoption SFAS 133 to
have a significant impact on the Company's financial statements.
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.
Employees
At June 30, 1998, the Association had a total of 21 full-time
employees, 12 of which have been employed by Peoples Federal for at least 10
years, and four part-time employees. None of the Association's employees are
represented by any collective bargaining group. Management considers its
employee relations to be good.
<PAGE>
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 47, 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 42, 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 40, is Chief Financial Officer and
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, 1998. 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 1998
- -------- ------ -------- -----
Main Office:
101 East Court Street 1917 Owned 241,000
Sidney, Ohio 45365
Drive-In:
232 S. Ohio Avenue 1971 Owned 182,000
Sidney, Ohio 45365
In December 1997, the Association acquired real estate in Anna, Ohio,
and announced plans to construct a new, full-service branch banking office. The
total projected cost of construction is expected to be $805,000. As of June 30,
1998, the Association has paid $196,000 in costs related to such construction.
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, 1998
was approximately $62,000.
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
A special meeting of stockholders of the Company was held on May 22,
1998. The matters voted on by the stockholders at the meeting and the number of
votes cast for, against, as abstentions and broker non-votes were as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--------- ------- ------- ---------
<S> <C> <C> <C>
Adoption of the Company's 1998
Stock Option and Incentive Plan 1,043,979 178,765 20,203 ---
Adoption of the Company's 1998 1,037,727 174,092 31,128 ---
Management Recognition Plan
</TABLE>
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 4 of the Company's 1998 Annual Report to Stockholders is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 8 through 20 of the Company's 1998 Annual Report to Stockholders
are incorporated herein by reference.
Item 7. Financial Statements
Pages 21 through 43 of the Company's 1998 Annual Report to Stockholders
are incorporated herein 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 Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1998, 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, 1998, the Company
complied with all Section 16(a) filing requirements applicable to its officers,
directors and greater than 10 percent beneficial owners.
<PAGE>
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 1998, 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 Company's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in 1998, 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 Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1998, 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
Reference to
Prior Filing
or Exhibit
Regulation Number
S-B Exhibit Attached
Number Document Hereto
- ------ -------- ------
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 Forms of Employment Agreements with David R. Fogt, *
Gary N. Fullenkamp, Debra A. Geuy and Steven Goins
10.4 401k Plan *
10.5 Incentive Bonus Plan *
10.6 Peoples-Sidney Financial Corporation 1998 Stock **
Option and Incentive Plan
10.7 Peoples-Sidney Financial Corporation 1998 **
Management Recognition 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
* Filed as an exhibit to the Registrant's Form S-1 registration statement
(File No. 333-20461) and incorporated herein by reference.
** Included as an exhibit to the Registrant's definitive proxy statement
on Schedule 14A (Commission File No. 0-22223) filed with the Commission
on April 20, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K
During the quarter ended June 30, 1998, the Company filed a Current
Report on Form 8-K on June 2, 1998 to report, under Item 5, the issuance of a
press release announcing the payment of a cash dividend, the Company's intention
to repurchase up to five percent of its outstanding shares of common stock and
that its stockholders had approved the Company's 1998 Stock Option and Incentive
Plan and 1998 Management Recognition Plan.
<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 25, 1998 Date: September 25, 1998
------------------ ------------------
/s/ Richard T. Martin /s/ John W. Sargeant
- --------------------- --------------------
Richard T. Martin John W. Sargeant
Chairman of the Board Director
Date: September 25, 1998 Date: September 25, 1998
------------------ ------------------
/s/ Robert W. Bertsch /s/ Debra A. Geuy
- --------------------- -----------------
Robert W. Bertsch Debra A. Geuy
Director Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
Date: September 25, 1998 Date: September 25, 1998
------------------ ------------------
/s/ Harry N. Faulkner
- ---------------------
Harry N. Faulkner
Director
Date: September 25, 1998
------------------
<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, 1998
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
Sidney, Ohio
ANNUAL REPORT
June 30, 1998
CONTENTS
TO OUR SHAREHOLDERS..................................................... 2
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 ......................................... 21
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets ...................................... 22
Consolidated Statements of Income ................................ 23
Consolidated Statements of Shareholders' Equity .................. 24
Consolidated Statements of Cash Flows ............................ 25
Notes To Consolidated Financial Statements ....................... 27
SHAREHOLDER INFORMATION................................................. 44
CORPORATE INFORMATION................................................... 45
<PAGE>
[GRAPHIC-PHOTO OF ]
Dear Fellow Shareholder:
Peoples-Sidney Financial Corporation posted a record year in 1998!
In this letter, I will highlight where the Corporation has been and, through
strategic planning, where the Corporation is heading as we move toward the new
millenium.
RECORD EARNINGS
The Corporation's goal of achieving historically high net income was met. Net
income for the year ended June 30, 1998 reached $1,233,309, or $.74 per share.
These earnings were achieved as the result of increased loan demand supported by
steady deposits and stable interest rates. Our loan-to-deposit ratio exceeded
120% meaning that the Corporation invested all available funds in mortgage,
consumer and other loans in order to earn maximum returns for our Corporation
and our shareholders and to better serve our community.
FACILITIES EXPANSION
In late 1997, we announced plans to construct our first branch office in Anna,
Ohio, a diverse and growing community located within our county. As you review
this letter, final preparations are being made for the grand opening of the
facility. We look forward to serving the Anna residents and business community
by building upon our current relationships and expanding our products and
services.
In May 1998, we announced plans to expand our presence into Jackson Center,
Ohio, and to establish another full-service branch office. Jackson Center is
located in Northeast Shelby County. In anticipation of an October opening, we
are completing the remodeling of our leased space and hiring talented personnel
to promote our "community" banking products and services to the residents of the
Jackson Center area.
CAPITAL MANAGEMENT
Since our conversion to a stock company in April 1997, your directors and
management team have been carefully evaluating the "new" capital infusion as a
result of the overwhelming response to our public offering.
We realize that the investment community looks carefully for favorable "return
on assets" and "return on equity" ratios. Our Board is committed to analyze all
possibilities to keep our capital level manageable, and, over a period of time,
strive to reach reasonable returns on capital. This will be accomplished as we
continue to grow the Corporation and examine other means to add value for our
shareholders. This year, as a result of our evaluation, the Board of Directors
declared a special cash distribution of $4.00 per share and also announced a
stock repurchase program.
2
<PAGE>
YEAR 2000 ISSUE
As with all financial service providers, our operations are heavily dependent on
information technology systems. Management has been working with the companies
that supply or service our information technology systems to identify and remedy
any potential Year 2000 problems. We will continue to access and test our
systems to assure compliance into 2000 and beyond.
OUR PEOPLE, PRODUCTS AND COMMUNITIES
Peoples Federal's success over the years can be traced directly to the talent,
dedication and enthusiasm of our employees at every level. The benefits of
hiring the best people available as we expand our facilities are foremost in our
planning.
From the beginning, we have focused upon our customers - much more than just
serving them - by truly getting to know them and their banking needs. We
continually examine our products and services to meet our customers' evolving
needs. We believe that our customers expect to continue to work with persons
that they have known and trust. Our Mission in Sidney, Anna and Jackson Center
is to bring "hometown" banking services to the residents and business
communities for the long term. We want to be the "Peoples" choice and build
relationships that will extend from generation to generation.
In conclusion, we are pleased with the current positioning of our Corporation in
an ever-changing business environment. While we cannot assure the stock market's
continual rise or a repeat of our past years' performance, we can promise that
our management team is committed to being a long-term player in the financial
services arena. The Board, officers and employees of the Corporation appreciate
the confidence of your support. We invite you to encourage you family and
friends to use our services.
Sincerely,
Douglas Stewart
President and CEO
3
<PAGE>
BUSINESS OF PEOPLES-SIDNEY
FINANCIAL CORPORATION
Peoples-Sidney Financial Corporation (the "Corporation"), a unitary thrift
holding company incorporated under the laws of the State of Delaware, owns all
of the issued and outstanding capital stock of Peoples Federal Savings and Loan
Association (the "Association"), a savings and loan association chartered under
the laws of the United States. 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 mortgages
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 1,775,375 common shares outstanding on August 7, 1998, held
of record by approximately 952 shareholders. Price information with respect to
the Corporation's common shares is quoted on The Nasdaq National Market System.
The high and low trading prices for the common shares of the Corporation as
quoted by The Nasdaq Stock Market, Inc., and cash dividends paid by quarter are
shown below.
<TABLE>
<CAPTION>
September 30, December 31, March 31, June 30,
1997 1997 1998 1998
-------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
High $ 17.00 $ 18.50 $ 18.63 $ 24.38
Low 13.63 13.38 17.50 17.00
Cash Dividends(1) .05 .07 .07 4.07
</TABLE>
The trading price for the common shares of the Corporation from April 25, 1997,
the date of formation, to June 30, 1997, as quoted by The Nasdaq Stock Market,
Inc., ranged from $12.88 to $14.06. No dividends were paid during the year ended
June 30, 1997.
- ---------------
(1) Cash dividends for the quarter ended June 30, 1998 include a $4.00 per
share special return of capital distribution.
4
<PAGE>
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 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 more than 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 and earnings of and other data regarding the Corporation at
the dates and for the periods indicated. As the conversion was completed on
April 25, 1997, information before the year ended June 30, 1997 is for the
Association.
<TABLE>
<CAPTION>
Selected Financial Condition At June 30,
- ---------------------------- --------------------------------------------------------------------------
and Other Data: 1998 1997 1996 1995 1994
--------------- ------------ ------------- ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $ 105,903 $ 103,142 $ 86,882 $ 78,976 $ 76,134
Time deposits with other
financial institutions 100 5,000 1,100 - -
Securities available for sale 4,016 2,013 - - -
Securities held to maturity - 1,999 2,598 3,098 3,596
FHLB stock 847 763 667 622 572
Loans receivable, net (1) 94,053 88,924 78,233 71,933 66,610
Deposits 79,054 77,045 77,318 70,306 68,367
Borrowed funds 7,000 - - - -
Shareholders' equity (2) 19,626 25,712 9,213 8,361 7,526
<CAPTION>
Year ended June 30,
--------------------------------------------------------------------------
Selected Operations Data: 1998 1997 1996 1995 1994
- ------------------------- ------------ ------------- ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income $ 8,067 $ 7,189 $ 6,513 $ 5,725 $ 5,071
Interest expense 3,944 4,051 3,706 2,968 2,637
------------ ------------- ------------ ------------ ------------
Net interest income 4,123 3,138 2,807 2,757 2,434
Provision for loan losses 41 103 68 55 83
------------ ------------- ------------ ------------ ------------
Net interest income after
provision for loan losses 4,082 3,035 2,739 2,702 2,351
Service fees and other charges 63 63 57 60 65
Noninterest expense 2,205 2,222 1,504 1,495 1,427
------------ ------------- ------------ ------------ ------------
Income before income taxes and
accounting change 1,940 876 1,292 1,267 989
Income tax expense 707 312 440 432 334
Cumulative effect of change in
accounting for income taxes - - - - (69)
------------ ------------- ------------ ------------ ------------
Net income $ 1,233 $ 564 $ 852 $ 835 $ 586
============ ============= ============ ============ ============
Earnings per common
share - basic (3) $ .74 $ .09
============ ============
Earnings per common
share - diluted (3) $ .74 $ .09
============ ============
Dividends declared per share (3) $ 4.26 $ -
============ ============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
At or for the year ended June 30,
-----------------------------------------------------------------
Selected Financial Ratios and 1998 1997 1996 1995 1994
- ----------------------------- ----- ----- ----- ----- -----
Other Data:
-----------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net
income to average total assets) 1.17% 0.60% 1.01% 1.07% 0.79%
Return on equity (ratio of net
income to average equity) (2) 4.77 4.70 9.70 10.55 8.10
Interest rate spread (4):
Average during period 2.78 2.81 2.97 3.30 3.05
End of period 2.63 2.62 2.74 3.08 2.99
Net interest margin (5) 4.01 3.45 3.41 3.66 3.35
Ratio of operating expense to
average total assets 2.10 2.38 1.78 1.93 1.91
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.32x 1.14x 1.10x 1.09x 1.08x
Quality Ratios:
Nonperforming assets to total
assets at end of period (6) 0.91% 0.84% 1.41% 1.80% 2.10%
Allowance for loan losses to
nonperforming loans 44.41 45.78 25.14 17.70 12.98
Allowance for loan losses to
gross loans receivable (7) 0.44 0.43 0.37 0.33 0.29
Capital Ratios:
Shareholders' equity to total
assets at end of period (2) 18.53 24.93 10.60 10.59 9.88
Average equity to average
assets (2) 24.59 12.87 10.43 10.24 9.70
Other Data:
Number of full service offices 1 1 1 1 1
</TABLE>
- -----------
(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 before June 30, 1997.
(3) Earnings and dividends per share are not applicable for any of the periods
presented before June 30, 1997 due to the Association's mutual form of
ownership before April 25, 1997. Earnings per share for the period ended
June 30, 1997 were computed based on net income of the Corporation from
April 25, 1997 to June 30, 1997. The dividends for 1998 include a $4.00 per
share special return of capital distribution.
(4) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) 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.
(7) 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, 1998, 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 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 Corporation'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 was invested in the capital stock issued by
the Association to the Corporation because 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 and commercial business loans and invests in U.S. government
obligations, interest-bearing deposits in other financial institutions and other
investments permitted by applicable law.
Forward Looking Statements
When used in this discussion or future filings by the Corporation with the
Securities and Exchange Commission, or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," "believe" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Corporation
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities and competitive and regulatory factors, could affect the
Corporation's financial performance and could cause the Corporation's actual
results for future periods to differ materially from those anticipated or
projected.
<PAGE>
The Corporation is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on its liquidity,
capital resources or operations except as discussed herein. The Corporation is
not aware of any current recommendations by regulatory authorities that would
have such effect if implemented.
8
<PAGE>
The Corporation does not undertake, and specifically disclaims, any obligation
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
Financial Condition
Total assets at June 30, 1998 were $105.9 million compared to $103.1 million at
June 30, 1997, an increase of $2.8 million, or 2.7%. The increase in total
assets was primarily due to an increase in loans funded by proceeds from
maturities of time deposits in other financial institutions and increased
deposits.
$4.9 million net maturities of time deposits with other financial institutions
were redirected to provide for loan growth. The excess of such funds, which were
not used to fund loan growth, were invested in interest-bearing deposits with
other banks and overnight deposits to provide liquidity for future loan growth.
Interest-bearing deposits with other banks increased $794,000 and overnight
funds increased $1.0 million from June 30, 1997 to June 30, 1998. Total
securities remained relatively unchanged as funds provided by maturities of
securities classified as held to maturity were reinvested in securities
classified as available for sale.
Loans receivable increased $5.2 million from $88.9 million at June 30, 1997 to
$94.1 million at June 30, 1998. The Corporation experienced increases in all
mortgage loan categories except for land. The largest increase was in one- to
four-family residential real estate loans which increased $3.9 million while
multi-family residential and commercial real estate loans increased a combined
total of $1.2 million. The increase in total mortgage loans is reflective of a
strong local economy coupled with attractive loan rates and products compared to
local competition. The Corporation has not changed its philosophy regarding
pricing or underwriting standards during the year.
The Corporation's consumer and other loan portfolio decreased $160,000 between
June 30, 1997 and June 30, 1998. Consumer loans remain a small portion of the
entire loan portfolio and represented only 2.2% and 2.5% of gross loans at June
30, 1998 and June 30, 1997.
Total deposits increased $2.1 million from $77.0 million at June 30, 1997 to
$79.1 million at June 30, 1998. The Corporation experienced increases in all
types of deposits other than negotiable orders of withdrawal ("NOW") accounts,
which decreased only slightly. The majority of deposit growth was in savings
accounts, which increased by $770,000 and certificates of deposit which,
increased by $1.1 million. Management believes the shift of funds between
savings and NOW accounts is the result of normal patterns of consumer use of
funds. Certificate of deposit growth has been due to normal operating procedures
as the Corporation has not used any special promotions to attract increased
volume. All certificates of deposit mature within five years with the majority
maturing in the next two years.
Borrowed funds totaled $7.0 million at June 30, 1998 while there were no
borrowings at June 30, 1997. The Association borrowed $7.0 million under a ten
year fixed rate advance from the Federal Home Loan Bank of Cincinnati ("FHLB")
to fund a $4.00 per share tax-free return of capital totaling $7.1 million. The
Corporation paid the return of capital on June 26, 1998 as a means of reducing
the excess capital provided from the stock conversion.
<PAGE>
As an additional source of liquidity, the Association maintains a $5.1 million
cash management line-of-credit with the FHLB. There were no advances outstanding
under this line of credit at June 30, 1998 or 1997. Advances are variable rate
and can be prepaid at any time without penalty. Advances may be obtained from
the FHLB to fund future loan growth and liquidity.
Total shareholders' equity decreased $6.1 million from $25.7 million at June 30,
1997 to $19.6 million at June 30, 1998. The net decrease is due to the return of
capital discussed above.
9
<PAGE>
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, 1998 and June
30, 1997
Net Income. The Corporation earned net income of $1,233,000 for the year ended
June 30, 1998 compared to net income of $564,000 for the year ended June 30,
1997. The increase in net income was primarily due to an increase in net
interest income and reduced FDIC deposit insurance premiums partially offset by
an increase in the noninterest expense categories of compensation and benefits,
state franchise taxes and other expense.
Net Interest Income. Net interest income totaled $4,123,000 for the year ended
June 30, 1998 compared to $3,138,000 for the year ended June 30, 1997, an
increase of $985,000, or 31.4%. The change in net interest income is
attributable to higher average balances of interest-earning assets funded with
the proceeds from the mutual to stock conversion.
Interest and fees on loans increased $658,000, or 9.7%, from $6,805,000 for the
year ended June 30, 1997 to $7,463,000 for the year ended June 30, 1998. The
increase in interest income was due to higher average loans receivable, related
primarily to the origination of new one- to four-family first mortgages.
Additionally, interest on loans was also enhanced by a slight increase in the
average yield earned on loans from 8.06% for the year ended June 30, 1997 to
8.09% for the year ended June 30, 1998.
Interest earned on securities totaled $252,000 for the year ended June 30, 1998
compared to $141,000 for the year ended June 30, 1997. Similarly, interest on
interest-bearing demand, time and overnight deposits with other financial
institutions increased $100,000 for the year ended June 30, 1998 compared to the
year ended June 30, 1997. The increases were the result of higher average
balances of securities and interest-bearing deposits partly offset by decreases
in the average yields earned on such investments.
Dividends on FHLB stock increased slightly over the comparable periods due to an
increase in the number of shares of FHLB stock owned combined with an increase
in the dividend rate paid by the FHLB.
Interest paid on deposits decreased $47,000 for the year ended June 30, 1998
compared to the year ended June 30, 1997. There was little change in the
interest paid on deposits as the average balance and mix of the deposit
portfolio remained fairly stable while the average cost of deposits decreased
slightly from 5.09% for the year ended June 30, 1997 to 5.06% for the year ended
June 30, 1998.
10
<PAGE>
Interest paid on borrowed funds totaled $6,000 for the year ended June 30, 1998
compared to $65,000 for the year ended June 30, 1997. The decrease was a result
of a decrease in the average level of borrowings over the comparable period. The
Corporation did not borrow funds during 1998 until June 25, 1998 to fund the
return of capital discussed previously. Throughout 1997, the Corporation used
short-term advances from the FHLB to provide liquidity for loan growth.
Management expects interest paid on borrowed funds to significantly increase in
the future as a result of the $7.0 million ten year, fixed-rate, interest-only
advance borrowed at the end of 1998 to fund the return of capital. The annual
interest expense related to the advance, assuming no principal repayment, will
be $429,000.
Provision for Loan Losses. The Corporation maintains an allowance for loan
losses in an amount that, 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 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, 1998 totaled $41,000
compared to $103,000 for the year ended June 30, 1997, a decrease of $62,000, or
60.2%. The allowance for loan losses totaled $426,000, or 0.44% of total loans
receivable and 44.4% of total nonperforming loans at June 30, 1998, compared
with $397,000, or 0.43% of total loans receivable and 45.8% of total
nonperforming loans at June 30, 1997. The reduction in the provision is
reflective of the fact that the Corporation has not experienced significant
charge-offs in any period presented. Charge-offs experienced by the Corporation
have primarily related to consumer and other non-real estate loans. As indicated
previously, such loans make up an insignificant portion of the Corporation's
total loan portfolio. The Corporation's low historical charge-off history is the
product of a variety of factors, including the Corporation's underwriting
guidelines, which generally require a loan-to-value or projected completed value
ratio of 90% for purchase or construction of one- to four-family residential
properties and 75% for commercial real estate and land loans, established income
information and defined ratios of debt to income. Notwithstanding the charge-off
history, as well as a low volume of non-performing loans, management believes it
is prudent to continue to increase the allowance for loan losses as total loans
increase. Accordingly, management anticipates it will continue its provisions to
the allowance for loan losses as loan growth continues.
Noninterest income. Noninterest income includes service fees and other
miscellaneous income and totaled $63,000 for each of the years ended June 30,
1998 and 1997.
Noninterest expense. Noninterest expense totaled $2,205,000 for the year ended
June 30, 1998 compared to $2,222,000 for the year ended June 30, 1997, a
decrease of $17,000, or 0.8%. Increases in compensation and benefits, state
franchise taxes and other expenses were offset by a decrease in the FDIC deposit
insurance premiums.
11
<PAGE>
Compensation and benefits expense increased $216,000, or 24.7%. The increase is
the result of normal, annual merit increases, the addition of new employees and
the added expense of employee benefit plans. The expense related to the employee
stock ownership plan increased as the Corporation was able to allocate more
shares to participants in 1998. Compensation expense related to the ESOP was
$250,000 for the year ended June 30, 1998 compared to $136,000 for the year
ended June 30, 1997. The Corporation also implemented a Management Recognition
Plan ("MRP") in May, 1998. State franchise taxes increased $80,000, or 59.7%,
due to the change in corporate structure during fiscal 1997 and the resulting
tax impact of higher capital levels at the Association and earnings at the
Corporation. The third and fourth quarters of fiscal 1998 were the first periods
impacted by the capital raised in the conversion. The increase in other expense
was attributable to increases in director fees, professional service fees and
printing costs. These increases were largely related to the conversion to stock
ownership.
The FDIC deposit insurance premium was $49,000 for the year ended June 30, 1998
compared to $560,000 for the year ended June 30, 1997. Included in the year
ended June 30, 1997 was a special deposit insurance assessment of $456,000
resulting from legislation enacted into law on September 30, 1996 to
recapitalize the Savings Association Insurance Fund ("SAIF") of the FDIC. The
SAIF was below the level required by law because a significant portion of the
assessments paid into the SAIF by thrifts, like the Association, were used to
pay the cost of prior thrift failures. The legislation called for a one-time
assessment estimated at $0.657 for each $100 in deposits held as of March 31,
1995. Because 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. If such legislation were enacted, the Association could
be required to convert to a different financial institution charter and possibly
become subject to more restrictive activity limits. The Association cannot
predict the probability of the enactment of any such legislation.
Income Tax Expense. The volatility of income tax expense is primarily
attributable to the change in income before income taxes. The provision for
income taxes totaled $706,000 for the year ended June 30, 1998 compared to
$312,000 for the year ended June 30, 1997, a increase of $394,000, or 126.3%.
The effective tax rates were 36.4% and 35.6% for the years ended June 30, 1998
and 1997, 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.
<PAGE>
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. Therefore, 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, 1998, 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.
12
<PAGE>
Comparison of Results of Operations for the Year Ended June 30, 1997 and June
30, 1996
Net Income. The Corporation earned 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 the special
deposit-insurance assessment discussed previously.
Net Interest Income. Net interest income totaled $3,138,000 for the year ended
June 30, 1997 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.
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
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 compared to the year ended June 30, 1996. The
decline was the result of lower average balances of interest-bearing demand,
time and overnight deposits, 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
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 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 before 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 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 0.43% of total loans receivable and 45.8% of total nonperforming
loans at June 30, 1997, compared with $307,000, or 0.37% of total loans
receivable and 25.1% of total nonperforming loans at June 30, 1996. The increase
in the provision for loan losses was primarily attributable to an increase in
the total loan portfolio.
13
<PAGE>
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 previously.
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.
Income Tax Expense. 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 previously. The effective tax
rates were 35.6% and 34.1% for the years ended June 30, 1997 and 1996,
respectively.
14
<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 daily balances.
Nonaccruing loans have been included in the table as loans carrying a zero
yield.
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- ------------------------------- ------------------------------
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 $ 5,919 $ 295 4.98% $ 3,467 $ 194 5.60% $ 4,849 $ 270 5.57%
Securities available
for sale (1) 3,013 199 6.65 308 21 6.84 - - -
Securities held to
maturity 958 53 5.53 2,138 120 5.61 2,752 150 5.45
Loans receivable (2) 92,208 7,463 8.09 84,421 6,805 8.06 74,071 6,048 8.17
Federal Home Loan
Bank stock 789 57 7.22 698 49 7.02 640 45 7.03
--------- ------- -------- ------- -------- -----
Total interest-
earning assets $ 102,887 8,067 7.84 $ 91,032 7,189 7.90 $ 82,312 6,513 7.91
========= ------- ======== ------- ======== -----
Interest-bearing
liabilities:
Savings deposits $ 18,236 557 3.05 $ 17,973 555 3.09 $ 18,484 563 3.05
Demand and NOW
deposits 3,911 95 2.43 4,313 105 2.43 4,580 108 2.36
Certificate accounts 55,737 3,286 5.90 56,085 3,326 5.93 52,012 3,035 5.84
--------- ------- -------- ------- -------- -----
Total deposits 77,884 3,938 5.06 78,371 3,986 5.09 75,076 3,706 4.94
Borrowed funds 96 6 6.25 1,163 65 5.59 - - -
--------- ------- -------- ------- -------- -----
Total interest-
bearing liabilities $77,980 3,944 5.06 $ 79,534 4,051 5.09 $ 75,076 3,706 4.94
========= ------- ======== ------- ======== -----
Net interest income;
interest rate
spread (3) $ 4,123 2.78% $ 3,138 2.81% $2,807 2.97%
======= ==== ======= ==== ====== ====
Net earning assets $ 24,907 $ 11,498 $ 7,236
========= ======== ========
Net interest margin (4) 4.01% 3.45% 3.41%
==== ==== ====
Average interest-earning
assets to interest-
bearing liabilities 1.32x 1.14x 1.10x
==== ==== ====
</TABLE>
- ------------------------
<PAGE>
(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.
15
<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,
-------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------- ---------------------------
Increase Increase
(decrease) (decrease)
due to due to
---------------- ---------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-earning deposits $ 124 $ (23) $ 101 $ (77) $ 1 $ (76)
Securities available for sale 180 (2) 178 21 - 21
Securities held to maturity (65) (2) (67) (34) 4 (30)
Loans receivable 630 28 658 835 (78) 757
Federal Home Loan Bank stock 7 1 8 4 - 4
--------- -------- --------- ------- -------- -------
Total interest-earning assets $ 876 $ 2 878 $ 749 $ (73) 676
========= ======== --------- ======= ======== -------
Interest expense attributable to:
Savings deposits 8 (6) 2 (16) 8 (8)
Demand and NOW deposits (10) - (10) (6) 3 (3)
Certificates accounts (21) (19) (40) 241 50 291
Borrowed funds (66) 7 (59) 65 - 65
Total interest-bearing liabilities $ (89) $ (18) (107) $ 284 $ 61 345
========= ======== --------- ======= ======== -------
Net interest income $ 985 $ 331
========= =======
</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.
16
<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, 1998, the most recent available date, 2% of the present value of
the Association's assets was $2,110,000. 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 $1,588,000 at March 31,
1998, 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, 1998, 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.
<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 $15,187 $(3,087) (16.9)% 14.39% (16.9)% (75)%
+300 16,493 (1,781) (9.7) 15.63 (9.7) (45)
+200 17,703 (571) (3.1) 16.78 (3.1) (20)
+100 18,259 (15) (0.1) 17.30 (0.1) (10)
Static 18,274 0 0.0 17.32 0.0 0
(100) 17,508 (766) (4.2) 16.59 (4.2) (10)
(200) 16,686 (1,588) (8.7) 15.81 (8.7) (20)
(300) 16,074 (2,200) (12.0) 15.23 (12.1) (45)
(400) 15,898 (2,376) (13.0) 15.07 (13.0) (75)
</TABLE>
<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.
17
<PAGE>
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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Net income $ 1,233 $ 564 $ 852
Adjustments to reconcile net income to net
cash from operating activities 83 134 (15)
------------- ------------ ------------
Net cash from operating activities 1,316 698 837
Net cash from investing activities (602) (16,140) (6,968)
Net cash from financing activities 1,437 15,517 7,012
------------- ------------ ------------
Net change in cash and cash equivalents 2,151 75 881
Cash and cash equivalents at beginning of period 2,796 2,721 1,840
------------- ------------ ------------
Cash and cash equivalents at end of period $ 4,947 $ 2,796 $ 2,721
============= ============ ============
</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 in an amount equal to 4% of the sum of the Association's
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement, which may be changed
from time to time by the OTS to reflect changing economic conditions, is
intended to provide a source of relatively liquid funds on which the Association
may rely, if necessary, to fund deposit withdrawals or other short-term funding
needs. At June 30, 1998, the Association's regulatory liquidity was 11.5% At
such date, the Corporation had commitments to originate fixed-rate commercial
and residential real estate loans totaling $621,000, and variable-rate
commercial and residential real estate mortgage loans totaling $687,000. Loan
commitments are generally for 30 days. The Corporation considers its liquidity
and capital reserves sufficient to meet its outstanding short- and long-term
needs. See Note 16 of the Notes to Consolidated Financial Statements.
<PAGE>
The Association is subject to various regulatory capital requirements
administered by 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 involving
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 regulators about the Association's components, risk
weightings and other factors. At June 30, 1998, management believes the
Association complied 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, 1998.
Management is not aware of any matters occurring after June 30, 1998 that would
cause the Association's capital category to change.
18
<PAGE>
The following table summarizes the Association's minimum regulatory capital
requirements and actual capital at June 30, 1998.
<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>
Total risk-based
capital $ 18,743 27.6% $ 5,426 8.0% $ 13,317 19.6% $ 67,831
Tier 1 risk-based
capital 18,330 27.0 2,713 4.0 15,617 23.0 67,831
Core capital 18,330 17.3 4,240 4.0 14,090 14.3 106,009
Tangible capital 18,330 17.3 1,590 1.5 16,740 15.8 106,009
</TABLE>
In December 1997, the Association acquired real estate in Anna, Ohio, and
announced plans to construct a new, full-service branch banking office. The
total projected cost of construction is expected to be $805,000. As of June 30,
1998, the Association has paid $196,000 in costs related to such construction.
In May 1998, the Board of Directors of the Corporation authorized the purchase
of up to 5% of the Corporation's outstanding common shares over a twelve-month
period to commence on July 1, 1998. The shares will be purchased in the
over-the-counter market. The number of shares to be purchased and the price to
be paid will depend upon the availability of shares, the prevailing market
prices and any other considerations which may, in the opinion of the
Corporation's Board of Directors or management, affect the advisability of
purchasing shares.
Impact of New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" - SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and loses)
in a full set of general-purpose financial statements. SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS 130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. SFAS 130 will be effective in fiscal 1999 and is not expected to have
a significant impact on the Corporation's financial statements.
<PAGE>
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" - SFAS 131 significantly changes the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
reportable segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 uses a "management approach"
to disclose financial and descriptive information about 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, SFAS 131 requires significantly more information to be disclosed for
each reportable segment than is presently being reported in annual financial
statements. SFAS 131 also requires selected information to be reported in
interim financial statements. SFAS 131 will be effective in fiscal 1999 and is
not expected to have a significant impact on the Corporation's financial
statements.
19
<PAGE>
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" - SFAS 132 amends the disclosure requirements of previous pension and
other postretirement benefit accounting standards by requiring additional
disclosures about such plans as well as eliminating some disclosures no longer
considered useful. SFAS 132 also allows greater aggregation of disclosures for
employers with multiple defined benefit plans. Non-public companies are subject
to reduced disclosure requirements, however, such entities may elect to follow
the full disclosure requirements of SFAS 132. SFAS 132 will be effective in
fiscal 1999 and is not expected to have a significant impact on the
Corporation's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" -
SFAS 133 requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS 133
does not allow hedging of a security which is classified as held to maturity,
accordingly, upon adoption of SFAS 133, companies may reclassify any security
from held to maturity to available for sale if they wish to be able to hedge the
security in the future. SFAS 133 is effective for fiscal years beginning after
June 15, 1999 with early adoption encouraged for any fiscal quarter beginning
July 1, 1998 or later, with no retroactive application. Management does not
expect the adoption SFAS 133 to have a significant impact on the Corporation's
financial statements.
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.
Year 2000 Issue
Many computer programs use only two digits to identify a year in the date field
and were apparently designed and developed without considering the impact of the
upcoming change in the century. Such programs could erroneously read entries for
the Year 2000 as the Year 1900. This could result in major systems failures and
miscalculations. Rapid and accurate data processing is essential to the
operations of financial institutions, such as the Corporation. The Corporation
has formed a Year 2000 committee to assess the extent to which it and its
outside vendors may be adversely affected by Year 2000 problems. Management has
determined that most programs are or will be capable of identifying the turn of
the century. The issue is closely monitored by management and full compliance is
expected by the end of 1998. While the Corporation does not anticipate that any
Year 2000 computer problems or expenses required to correct such problems will
materially affect its financial condition and results of operations, no
assurance can be given in this regard.
20
<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, 1998 and 1997 and the related statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended June 30, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
July 10, 1998
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 655,188 $ 297,722
Interest-bearing deposits in other financial institutions 2,292,065 1,498,104
Overnight deposits 2,000,000 1,000,000
----------------- ----------------
Total cash and cash equivalents 4,947,253 2,795,826
Time deposits in other financial institutions 100,000 5,000,000
Securities available for sale 4,015,890 2,012,802
Securities held to maturity (Estimated fair value of $1,996,795) - 1,999,375
Loans receivable, net 94,052,531 88,924,339
Accrued interest receivable 722,401 735,462
Premises and equipment, net 973,403 755,286
Federal Home Loan Bank stock available for sale 846,500 762,500
Other assets 245,339 156,772
----------------- ----------------
Total assets $ 105,903,317 $ 103,142,362
================= ================
LIABILITIES
Deposits $ 79,053,686 $ 77,045,430
Borrowed funds 7,000,000 -
Accrued expense and other liabilities 223,615 385,219
----------------- ----------------
Total liabilities 86,277,301 77,430,649
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 17,854
Additional paid-in capital 10,717,991 17,234,087
Retained earnings 10,581,096 9,776,982
Unearned employee stock ownership plan shares (1,702,114) (1,326,280)
Unrealized gain on securities available for sale 11,189 9,070
----------------- ----------------
Total shareholders' equity 19,626,016 25,711,713
----------------- ----------------
Total liabilities and shareholders' equity $ 105,903,317 $ 103,142,362
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income
Loans, including fees $ 7,463,234 $ 6,804,933 $ 6,048,141
Securities 252,271 140,604 150,483
Interest-bearing demand, time and overnight deposits 294,440 194,226 269,849
Dividends on Federal Home Loan Bank stock 57,204 49,055 44,781
-------------- -------------- ---------------
Total interest income 8,067,149 7,188,818 6,513,254
Interest expense
Deposits 3,938,606 3,985,995 3,706,608
Borrowed funds 5,878 64,640 -
-------------- -------------- ---------------
Total interest expense 3,944,484 4,050,635 3,706,608
-------------- -------------- ---------------
Net interest income 4,122,665 3,138,183 2,806,646
Provision for loan losses 41,240 102,743 68,447
-------------- -------------- ---------------
Net interest income after provision for loan losses 4,081,425 3,035,440 2,738,199
Noninterest income
Service fees and other charges 62,912 63,048 57,473
Noninterest expense
Compensation and benefits 1,090,237 873,749 665,728
Director fees 93,000 83,800 43,200
Occupancy and equipment 156,676 137,027 123,922
Computer processing expense 156,470 152,318 138,926
FDIC deposit insurance premiums 49,096 559,660 165,917
State franchise taxes 213,864 133,639 120,222
Other 445,197 281,909 245,520
-------------- -------------- ---------------
Total noninterest expense 2,204,540 2,222,102 1,503,435
-------------- -------------- ---------------
Income before income taxes 1,939,797 876,386 1,292,237
Income tax expense 706,488 311,941 440,511
-------------- -------------- ---------------
Net income $ 1,233,309 $ 564,445 $ 851,726
============== ============== ===============
Earnings per common share - basic $ .74 $ .09
============== ==============
Earnings per common share - diluted $ .74 $ .09
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended June 30, 1998, 1997 and 1996
- -----------------------------------------------------------------------------------------------------------------------------------
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, 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
Net income for the year
ended June 30, 1997 -- -- 1,233,309 -- -- 1,233,309
Cash dividends - $.26
per share -- -- (429,195) -- -- (429,195)
Return of capital - $4.00
per share -- (6,602,996) -- (538,504) -- (7,141,500)
Commitment to release
13,920 employee stock
ownership plan shares -- 86,900 -- 162,670 -- 249,570
Change in unrealized gain on
securities available for sale -- -- -- -- 2,119 2,119
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1998 $ 17,854 $ 10,717,991 $ 10,581,096 $ (1,702,114) $ 11,189 $ 19,626,016
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998, 1997 and 1995
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,233,309 $ 564,445 $ 851,726
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 51,399 53,973 55,445
Provision for loan losses 41,240 102,743 68,447
FHLB stock dividends (57,000) (48,900) (44,600)
Deferred taxes (1,101) (12,778) 44,507
Gain on sale or disposal of premises
and equipment - - (8,890)
Compensation expense related to
ESOP shares 249,570 136,017 -
Change in:
Accrued interest receivable and
other assets (212,755) (127,860) (99,015)
Accrued expense and other liabilities (25,707) 41,393 (2,259)
Deferred loan fees 37,183 (11,400) (28,282)
--------------- -------------- ---------------
Net cash from operating activities 1,316,138 697,633 837,079
Cash flows from investing activities
Purchase of securities available for sale (2,499,141) (1,998,974) -
Proceeds from maturities of securities
available for sale 500,000 - -
Purchase of securities held to maturity - - (2,498,047)
Proceeds from maturities of securities
held to maturity 2,000,000 600,000 3,000,000
Purchase of time deposits in other financial
institutions (3,100,000) (5,000,000) (1,100,000)
Proceeds from maturities of time deposits
in other financial institutions 8,000,000 1,100,000 -
Purchase of Federal Home Loan Bank stock (27,000) (46,600) -
Net increase in loans (5,206,615) (10,825,674) (6,352,041)
Premises and equipment expenditures (269,516) (11,588) (39,844)
Proceeds from sale of premises and
equipment - - 10,000
Proceeds from sale of real estate owned - 42,652 11,938
--------------- -------------- ---------------
Net cash from investing activities (602,272) (16,140,184) (6,967,994)
</TABLE>
(Continued)
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended June 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits $ 2,008,256 $ (272,076) $ 7,011,556
Proceeds from long-term debt 7,000,000 - -
Proceeds from issuance of common stock,
net of conversion costs - 17,217,944 -
Cash provided to ESOP - (1,428,300) -
Return of capital (7,141,500) - -
Cash dividends paid (429,195) - -
--------------- -------------- ---------------
Net cash from financing activities 1,437,561 15,517,568 7,011,556
Net change in cash and cash equivalents 2,151,427 75,017 880,641
Cash and cash equivalents at beginning
of period 2,795,826 2,720,809 1,840,168
--------------- -------------- ---------------
Cash and cash equivalents at end of period $ 4,947,253 $ 2,795,826 $ 2,720,809
=============== ============== ===============
Supplemental disclosures of
cash flow information
Cash paid during the year for
Interest $ 3,946,041 $ 4,096,411 $ 3,716,477
Income taxes 951,000 240,000 406,444
Noncash transactions
Transfer from loans to
real estate owned - 42,652 11,938
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the
preparation of the accompanying consolidated 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.
Estimates: 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 allowance for loan losses, 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 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. Securities available for sale are carried at fair
value, with unrealized holding gains or losses reported separately in
shareholders' equity, net of tax. Securities are written down to fair value when
a decline in fair value is not temporary. Realized gains and losses on sales of
securities are determined using the amortized cost of the specific security
sold. Interest and dividend income, adjusted by amortization of premiums and
accretion of discounts, is included in earnings.
Loans Receivable: Loans are reported at the principal balance outstanding, net
of deferred loan fees and costs and the allowance for loan losses. 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.
(Continued)
27
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Loan impairment is reported when full payment under the terms of the loan is not
expected. 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. If a loan is impaired, a
portion of the allowance for loan losses is allocated so that the loan is
reported net, at the present value of estimated future cash flows using the
loan's existing rate or at the fair value of collateral if repayment is expected
solely from the collateral. Loans are evaluated for impairment when payments are
delayed, typically 90 days or more, or when it is probable that not all
principal and interest payments will be collected in accordance with the
original terms of the loan.
Real Estate Owned: Real estate acquired in collection of a loan is initially
recorded at fair value at acquisition. Any reduction to fair value from the
carrying value of the related loan at the time the property is acquired is
accounted for as a loan charge-off. 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 1998 or 1997.
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 98% and 97% of the Corporation's
loan portfolio at June 30, 1998 and 1997. The remainder of the portfolio
consists of consumer and other loans secured by automobiles, deposit balances at
the Association and various other assets.
(Continued)
28
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Earnings per Common Share: The Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," on December 31,
1997. SFAS No. 128 requires dual presentation of basic and diluted earnings per
share ("EPS") for entities with complex capital structures. Prior EPS data has
been restated to conform to the new method. Basic EPS is based on net income
divided by the weighted average number of shares outstanding during the period.
Diluted EPS shows the dilutive effect of unearned management recognition plan
("MRP") shares and the additional common shares issuable under stock options.
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 from April 25, 1997. No
earnings per common share is shown for the years ended June 30, 1996, as prior
to April 25, 1997, the Association was a mutual company. The financial
information for the year ended June 30, 1996 reflects the Association before the
conversion.
The weighted average number of shares outstanding for basic and diluted EPS was
1,657,544 and 1,644,981 for the years ended June 30, 1998 and 1997. Unreleased
employee stock ownership plan shares are not considered outstanding for
determining the weighted average number of shares used in calculating both basic
and diluted EPS. Unearned MRP shares are not considered to be outstanding shares
for determining the weighted average number of shares used in calculating basic
EPS. Stock options granted did not have a dilutive effect on EPS for the year
ended June 30, 1998 as the exercise price of outstanding options was greater
than the average market price for the year. Unearned MRP shares did not have a
dilutive effect on EPS, as no shares had been purchased by the MRP plan as of
June 30, 1998. Unearned MRP shares and stock options did not have a dilutive
effect on the weighted average shares outstanding for the ended June 30, 1997 as
the neither MRP shares or stock options were granted until May 22, 1998.
Dividend Restriction: Financial institution regulations, which require the
maintenance of certain capital levels, may limit the amount of dividends that
may be paid. For regulatory capital requirements, see a separate Note.
Reclassification: Reclassification of certain amounts in the prior consolidated
financial statements has been made to conform to the 1998 presentation.
(Continued)
29
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
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 was invested in the capital stock issued by
the Association to the Corporation because of the conversion.
At the time of conversion, the Association established a liquidation account
that was equal to its regulatory capital as of the latest practicable date
before 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.
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 that 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 year-end are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
1998
Securities available for sale
U.S. Government agencies $ 3,998,936 $ 21,459 $ 4,505 $ 4,015,890
=============== ========== =========== ==============
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
=============== ========== =========== ==============
</TABLE>
(Continued)
30
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 3 - SECURITIES (Continued)
The amortized cost and estimated fair value of securities at year-end 1998, 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 in one year or less $ 999,717 $ 1,006,720
Due after one year through five years 2,999,219 3,009,170
-------------- ---------------
$ 3,998,936 $ 4,015,890
============== ===============
</TABLE>
No securities were pledged as collateral at year-end 1998 or 1997. No securities
were sold during the years ended June 30, 1998, 1997 and 1996.
NOTE 4 - LOANS RECEIVABLE
Year-end loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Mortgage loans:
1-4 family residential $ 79,690,787 $ 75,808,323
Multi-family residential 654,871 219,153
Commercial real estate 6,608,207 5,842,476
Real estate construction and
development 6,776,389 6,551,430
Land 867,755 1,446,838
--------------- ----------------
Total mortgage loans 94,598,009 89,868,220
Consumer and other loans 2,154,474 2,314,263
--------------- ----------------
Total loans receivable 96,752,483 92,182,483
Less:
Allowance for loan losses (425,642) (397,159)
Loans in process (2,078,937) (2,702,795)
Deferred loan fees (195,373) (158,190)
--------------- ----------------
$ 94,052,531 $ 88,924,339
=============== ================
</TABLE>
<PAGE>
Activity in the allowance for loan losses for years ended June 30 is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 397,159 $ 307,308 $ 250,880
Provision for losses 41,240 102,743 68,447
Charge-offs (15,037) (21,645) (14,748)
Recoveries 2,280 8,753 2,729
------------ ------------ ------------
Balance at end of year $ 425,642 $ 397,159 $ 307,308
============ ============ ============
</TABLE>
(Continued)
31
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 4 - LOANS RECEIVABLE (Continued)
As of and for the years ended June 30, 1998, 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 $713,000
and $719,000 at June 30, 1998 and 1997.
Certain executive officers, directors and companies with which they are
affiliated are loan customers. The following is an analysis of loans aggregating
$60,000 or more to any one related party for the year ended June 30, 1998.
Balance at beginning of period $ 412,402
New loans -
Principal repayments (29,305)
Other changes (71,929)
--------------
Balance at end of period $ 311,168
==============
Other changes are the result excluding certain loans that were included in the
beginning balance but no longer meet the criteria for disclosure.
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Year-end accrued interest receivable is summarized as follows:
1998 1997
------------ ------------
Loans $ 655,509 $ 635,372
Securities 66,579 49,779
Interest-bearing deposits in other
financial institutions 313 50,311
------------ ------------
$ 722,401 $ 735,462
============ ============
NOTE 6 - PREMISES AND EQUIPMENT
Year-end premises and equipment is summarized as follows:
1998 1997
------------ ------------
Land $ 225,166 $ 185,166
Buildings and improvements 995,468 989,091
Furniture and equipment 590,421 564,022
Construction in progress 196,212 -
------------ ------------
Total cost 2,007,267 1,738,279
Accumulated depreciation 1,033,864 982,993
------------ ------------
$ 973,403 $ 755,286
============ ============
(Continued)
32
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 7 - FEDERAL INCOME TAXES
The provision for federal income tax for the years ended June 30 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current tax expense $ 707,589 $ 324,719 $ 396,004
Deferred tax expense/(benefit) (1,101) (12,778) 44,507
------------ ------------ ------------
$ 706,488 $ 311,941 $ 440,511
============ ============ ============
</TABLE>
The sources of gross deferred tax assets and gross deferred tax liabilities at
year-end are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Items giving rise to deferred tax assets
Deferred loan fees $ 43,422 $ 33,693
Reserve for delinquent interest 7,607 8,092
Other 10,420 2,824
------------ ------------
Total deferred tax assets 61,449 44,609
Items giving rise to deferred tax liabilities
Depreciation (45,387) (43,727)
Federal Home Loan Bank
stock dividends (93,432) (74,052)
Allowance for loan losses (52,754) (58,055)
Unrealized gain on securities available for sale (5,764) (4,672)
------------ ------------
Total deferred tax liabilities (197,337) (180,506)
------------ ------------
Net deferred tax liability $ (135,888) $ (135,897)
============ ============
</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. 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:
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes computed at the statutory
tax rate on pretax income $ 659,531 $ 297,971 $ 439,361
Add tax effect of:
ESOP 46,546 11,559 -
Nondeductible expenses and other 411 2,411 1,150
------------ ------------ ------------
$ 706,488 $ 311,941 $ 440,511
============ ============ ============
Statutory tax rate 34.0% 34.0% 34.0%
============ ============ ============
Effective tax rate 36.4% 35.6% 34.1%
============ ============ ============
</TABLE>
(Continued)
33
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
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. Therefore, 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, 1998, 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 1998, no bad debt reserves were
recaptured as the Association met the residential lending requirements.
Retained earnings at June 30, 1998 and 1997 included approximately $2,174,000
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 $739,000 at June 30, 1998
and 1997. 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.
NOTE 8 - DEPOSITS
A summary of year-end deposits is as follows:
1998 1997
--------------- ----------------
Noninterest-bearing
demand deposits $ 168,836 $ 150,161
NOW accounts 3,362,538 3,469,190
Money market accounts 981,958 776,507
Savings accounts 18,455,589 17,685,203
Certificates of deposit 56,084,765 54,964,369
--------------- ----------------
$ 79,053,686 $ 77,045,430
=============== ================
<PAGE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $4,057,000 and $4,219,000 at June 30, 1998 and 1997, respectively.
Deposits more than $100,000 are not insured by the FDIC.
(Continued)
34
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 8 - DEPOSITS (Continued)
The scheduled maturities of certificates of deposit as of June 30, 1998 are as
follows:
1999 $ 28,489,582
2000 14,878,399
2001 8,415,274
2002 1,257,516
2003 3,043,994
-----------------
$ 56,084,765
=================
NOTE 9 - BORROWED FUNDS
At June 30, 1998, the Association had a cash management line of credit enabling
it to borrow up to $5,100,000 from the Federal Home Loan Bank of Cincinnati
("FHLB"). The line of credit must be renewed on an annual basis. There were no
borrowings outstanding on this line of credit at June 30, 1998 or 1997.
As a member of the FHLB system, the Association has the ability to obtain
borrowings up to a maximum total of $16,930,000, including the line of credit.
The Association had one fixed-rate borrowing, with an interest rate of 6.13%,
totaling $7,000,000 at June 30, 1998, while there were no such borrowings at
June 30, 1997. The original term of the borrowing was 120 months with interest
due monthly and principal due upon maturity on June 25, 2008. The maximum
month-end balance of advances outstanding was $7,000,000 in 1998 and $3,500,000
in 1997. Average balances of borrowings outstanding during 1998 and 1997 were
$96,000 and $1,163,000. Advances under the borrowing agreements are
collateralized by a blanket pledge of the Association's residential mortgage
loan portfolio and its FHLB stock.
NOTE 10 - 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. Because of the recapitalization, the Association began paying lower
deposit insurance premiums in January, 1997.
NOTE 11 - 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 Employee 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.
(Continued)
35
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 11 - RETIREMENT PLANS (Continued)
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.
Net pension cost for the year ended June 30, 1996 included the following
components:
1996
Service cost - benefits earned during the period $ 24,407
Interest cost on projected benefit obligation 27,182
Actual return on plan assets (30,641)
Net amortization and deferral 20,648
$ 41,596
Significant assumptions used in determining the net pension cost for 1996 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
$18,440 and $5,219 for the years ended June 30, 1998 and 1997.
NOTE 12 - 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.
(Continued)
36
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 12 - 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.
In June 1998, the ESOP accrued the purchase of an additional 26,000 shares using
the proceeds provided from a $4.00 per share return of capital paid by the
Corporation. The ESOP received approximately $539,000 as a return of capital on
134,626 unallocated shares. The additional shares purchased will be held in
suspense and allocated to participants in a manner similar to the original ESOP
shares.
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 $249,570 and $136,017 for the years ended June 30, 1998 and 1997.
The ESOP shares as of June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Allocated shares 24,122 8,204
Shares committed to be released for allocation - 1,998
Unreleased shares 144,708 132,628
--------------- --------------
Total ESOP shares 168,830 142,830
Fair value of unreleased shares $ 2,568,567 $ 1,865,081
=============== ==============
</TABLE>
NOTE 13 - STOCK OPTION AND INCENTIVE PLAN
Upon approval of the Stock Option and Incentive Plan by the shareholders of the
Corporation on May 22, 1998, the Board of Directors granted options to purchase
138,809 shares of common stock at an exercise price of $20.00 to certain
officers and directors of the Association and Corporation. No options had been
previously awarded. One-fifth of the options awarded become first exercisable on
each of the first five anniversaries of the date of grant. The option period
expires 10 years from the date of grant. No options were exercisable at June 30,
1998. In addition, 39,729 options to purchase common stock are reserved for
future grants.
(Continued)
37
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 13 - STOCK OPTION AND INCENTIVE PLAN (Continued)
The fair value of options granted in 1998 was estimated using the Black-Scholes
options pricing model with the following weighted-average information: risk-free
interest rate of 5.44%, expected life of 10 years, expected volatility of stock
price of 32.65% and expected dividend rate of 1.47%. Based on these assumptions,
the estimated fair value per share of options granted in 1998 was $8.89.
SFAS No. 123, "Accounting for Stock Based Compensation," requires pro forma
disclosures for corporations not adopting its fair value accounting method for
stock-based employee compensation. Accordingly, the following pro forma
information presents net income for 1998 had the Standard's fair value method
been used to measure compensation cost for stock option plans. Earnings per
share for 1998 would not have been impacted. No compensation expense was
recognized for the year ended June 30, 1998.
Net income as reported $ 1,233,309
Pro forma net income 1,219,735
NOTE 14 - MANAGEMENT RECOGNITION PLAN
A Management Recognition Plan ("MRP") was adopted by the Board of Directors and
approved by the shareholders of the Corporation on May 22, 1998. The MRP will be
used as a means of providing directors and certain key employees of the
Association and Corporation with an ownership interest in the Corporation in a
manner designed to compensate such directors and key employees for services to
the Association and Corporation. The MRP will purchase 71,415 common shares in
the open market, which is equal to 4% of the common shares sold in connection
with the conversion. As of June 30, 1998, no shares have been purchased.
In conjunction with the adoption of the MRP on May 22, 1998, the Board of
Directors awarded 57,128 shares to certain directors and officers of the
Association and Corporation. No shares had been previously awarded. One-fifth of
such shares will be earned and nonforfeitable on each of the first five
anniversaries of the date of the award. In the event of the death or disability
of a participant or a change in control of the Corporation, however, the
participant's shares will be deemed to be earned and nonforfeitable upon such
date. At June 30, 1998, there were 14,287 shares reserved for future awards.
Compensation expense related to MRP shares is based upon the cost of the shares.
For the year ended June 30, 1998, the Corporation has accrued compensation
expense totaling $20,000 based upon the estimated cost of the number of shares
earned during fiscal 1998. No compensation expense was recognized during the
years ended June 30, 1997 and 1996.
(Continued)
38
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 15 - 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 Corporation'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, 1998 and 1997, management believes the
Association complies 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, 1998 and
1997. Management is not aware of any matters occurring after June 30, 1998 that
would cause the Association's capital category to change.
At year-end 1998 and 1997, the Association's actual capital levels 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
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital (to risk-weighted assets) $ 18,743 27.6% $ 5,426 8.0% $ 6,783 10.0%
Tier 1 (core) capital (to risk-weighted
assets) 18,330 27.0 2,713 4.0 4,070 6.0
Tier 1 (core) capital (to adjusted
total assets) 18,330 17.3 4,240 4.0 5,300 5.0
Tangible capital (to adjusted total assets) 18,330 17.3 1,590 1.5 N/A
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
</TABLE>
In addition to certain federal income tax considerations, the Office of Thrift
Supervision (OTS) regulations imposes 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.
(Continued)
39
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 15 - 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 more than 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 to the Corporation in accordance
with the foregoing provisions of OTS regulations.
NOTE 16 - 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 and
interest rate risk more than amounts 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.
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.
(Continued)
40
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 16 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK (Continued)
As of year-end 1998 and 1997, the Corporation had commitments to make fixed-rate
commercial and residential real estate mortgage loans at current market rates
approximating $621,000 and $156,000, and variable-rate commercial and
residential real estate mortgage loans at current market rates approximating
$687,000 and $876,000. Loan commitments are generally for 30 days. The interest
rates on fixed-rate commitments ranged from 7.50% to 8.25% at June 30, 1998 and
were 8.25% at June 30, 1997. The interest rates on variable-rate commitments
ranged from 7.25% to 8.00% at June 30, 1998 and 7.25% to 8.50% at June 30, 1997.
The Corporation also had unused lines of credit approximating $548,000 and
$622,000 at year-end 1998 and 1997.
At June 30, 1998 and 1997, the Association was required to have $299,000 and
$298,000 on deposit with its correspondent banks as a compensating clearing
requirement.
The Association entered 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.
<PAGE>
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's financial instruments at year-end
are as follows:
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,947,253 $ 4,947,000 $ 2,795,826 $ 2,796,000
Time deposits in other
financial institutions 100,000 100,000 5,000,000 5,000,000
Securities available for sale 4,015,890 4,016,000 2,012,802 2,013,000
Securities held to maturity - - 1,999,375 1,997,000
Loans receivable, net 94,052,531 93,954,000 88,924,339 88,015,000
Accrued interest receivable 722,401 722,000 735,462 735,000
Federal Home Loan Bank
stock available for sale 846,500 847,000 762,500 763,000
Financial liabilities:
Deposits (79,053,686) (79,500,000) (77,045,430) (77,542,000)
Borrowed funds (7,000,000) (7,000,000) - -
Accrued interest payable (34,538) (35,000) (36,095) (36,000)
</TABLE>
(Continued)
41
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. Estimated
fair values of fixed-rate loans and loans that reprice less frequently than each
year, are based on the rates charged at year-end for new loans with similar
maturities, applied until the loan is assumed to reprice or be paid. Estimated
fair values for certificates of deposit and long-term debt are based on the
rates paid at year-end for new deposits or borrowings applied until maturity.
Estimated fair values for other financial instruments and off-balance-sheet loan
commitments are considered nominal.
NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Peoples-Sidney Financial Corporation as of
and for the year ended June 30, 1998 and 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 SHEETS
June 30, 1998 and 1997
1998 1997
--------------- ----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 47,373 $ 290,815
Investment in subsidiary 18,341,302 17,097,380
Loans receivable 1,224,257 8,326,279
Other assets 13,084 -
--------------- ----------------
Total assets $ 19,626,016 $ 25,714,474
=============== ================
Liabilities
Other liabilities $ - $ 2,761
Shareholders' Equity 19,626,016 25,711,713
--------------- ----------------
Total liabilities and shareholders' equity $ 19,626,016 $ 25,714,474
=============== ================
</TABLE>
(Continued)
42
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Period from
Year April 25, 1997
Ended through
June 30, 1998 June 30, 1997
--------------- ----------------
<S> <C> <C>
Interest on loans $ 515,584 $ 23,006
Operating expenses 100,294 14,884
--------------- ----------------
Income before income taxes and equity in
undistributed earnings of subsidiary 415,290 8,122
Income tax expense 139,211 2,761
--------------- ----------------
Income before equity in undistributed earnings of subsidiary 276,079 5,361
Equity in undistributed earnings of subsidiary 957,230 144,937
--------------- ----------------
Net income $ 1,233,309 $ 150,298
=============== ================
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Period from
Year April 25, 1997
Ended Through
June 30, 1998 June 30, 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,233,309 $ 150,298
Adjustments to reconcile net income
to cash provided by operations:
Equity in undistributed income of subsidiary (957,230) (144,937)
Net change in other assets and liabilities (15,845) 2,762
--------------- ----------------
Net cash from operating activities 260,234 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 7,102,022 102,020
--------------- ----------------
Net cash from investing activities 7,102,022 (16,935,252)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from financing activities
Proceeds from issuance of common stock, net of conversion costs - 17,217,944
Return of capital (7,141,500) -
Cash dividends paid (429,195) -
Dividends on unallocated ESOP shares (35,003) -
--------------- ----------------
Net cash from financing activities (7,605,698) 17,217,944
Net change in cash and cash equivalents (243,442) 290,815
Cash and cash equivalents at beginning of year 290,815 -
--------------- ----------------
Cash at end of year $ 47,373 $ 290,815
=============== ================
</TABLE>
43
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 11:00 a.m., Sidney, Ohio time
on October 9, 1998 at the Holiday Inn, I-75 and S.R. 47, Sidney, Ohio.
STOCK LISTING
Peoples-Sidney Financial Corporation common stock is traded on the Nasdaq
National Market under the symbol "PSFC".
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
Douglas Stewart, President Registrar and Transfer Co.
Peoples-Sidney Financial Corporation 10 Commerce Drive
101 East Court Street Cranford, NJ 07016
P.O. Box 727
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, 1998, 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 45365-3021.
44
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CORPORATE INFORMATION
CORPORATION AND ASSOCIATION ADDRESS
101 East Court Street Telephone: (937) 492-6129
P.O. Box 727 Fax: (937) 498-4554
Sidney, Ohio 45365-3021
DIRECTORS OF THE BOARD
<TABLE>
<CAPTION>
<S> <C>
Douglas Stewart Richard T. Martin (Chairman of the Board)
President and Chief Executive Officer of Certified Public Accountant, in private practice
Peoples Federal Savings and Loan Association
Harry N. Faulkner
Robert W. Bertsch Partner in the law firm of Faulkner, Garmhausen,
Retired Treasurer of Peoples Federal Keister & Shenk LPA
John W. Sargeant James W. Kerber
Part Owner of Sidney Tool and Die Co. and Owner of James W. Kerber CPA, a private practice
BenSar Development, a warehouse provider accounting firm
</TABLE>
Officers of the Corporation and the Association:
Douglas Stewart, President & CEO
David R. Fogt, VP Financial Services and
Operations
Gary N. Fullenkamp, VP Mortgage Loans
and Corporate Secretary
Debra A. Geuy, Chief Financial Officer
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
45
Exhibit 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
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
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 655
<INT-BEARING-DEPOSITS> 2,292
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,016
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 94,053
<ALLOWANCE> 426
<TOTAL-ASSETS> 105,903
<DEPOSITS> 79,054
<SHORT-TERM> 0
<LIABILITIES-OTHER> 224
<LONG-TERM> 7,000
18
0
<COMMON> 0
<OTHER-SE> 19,608
<TOTAL-LIABILITIES-AND-EQUITY> 105,903
<INTEREST-LOAN> 7,463
<INTEREST-INVEST> 252
<INTEREST-OTHER> 352
<INTEREST-TOTAL> 8,067
<INTEREST-DEPOSIT> 3,939
<INTEREST-EXPENSE> 3,944
<INTEREST-INCOME-NET> 4,123
<LOAN-LOSSES> 41
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,205
<INCOME-PRETAX> 1,940
<INCOME-PRE-EXTRAORDINARY> 1,940
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,233
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
<YIELD-ACTUAL> 4.01
<LOANS-NON> 713
<LOANS-PAST> 246
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 397
<CHARGE-OFFS> 15
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 426
<ALLOWANCE-DOMESTIC> 426
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
