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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-22223
PEOPLES-SIDNEY FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Delaware 31-1499862
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
101 E. Court Street, Sidney, Ohio 45365
- ----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (937) 492-6129
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
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. [ ]
State the issuer's revenues for its most recent fiscal year: $8,193,417
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock on
the NASDAQ System on August 30, 1999, was $14.85 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 30, 1999, there were issued and outstanding 1,664,622
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, 1999.
Part III of Form 10-KSB - Portions of Proxy Statement for 1999 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 the contiguous counties of Logan,
Auglaize, Miami, Darke and Champaign. The Association conducts business from its
main office in Sidney, Ohio and its full-service branches in Anna and Jackson
Center, Ohio. 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, mortgage-backed and related securities, 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 of 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
<PAGE>
historical earnings and those presently anticipated or projected. The Company
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.
-2-
<PAGE>
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.
-3-
<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,
---------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family...................... $ 84,166 79.51% $79,691 82.37% $75,808 82.24%
Construction and development............. 5,930 5.60 6,776 7.00 6,551 7.10
Commercial............................... 9,408 8.89 6,608 6.83 5,843 6.34
Multi-family............................. 1,359 1.28 655 0.68 219 0.24
Land..................................... 867 0.82 868 0.90 1,447 1.57
--------- ------- ------ ------ ------- ------
Total real estate loans.............. 101,730 96.10 94,598 97.78 89,868 97.49
--------- ------- ------ ------ ------- ------
Other Loans:
Consumer Loans:
Automobile.............................. 1,744 1.65 1,124 1.16 1,215 1.32
Deposit account......................... 223 0.21 257 0.27 351 0.38
Other................................... 771 0.73 672 0.69 719 0.78
--------- ------- ------ ------ ------- ------
Total consumer loans................. 2,738 2.59 2,053 2.12 2,285 2.48
--------- ------- ------ ------ ------- ------
Commercial business loans................ 1,393 1.31 101 0.10 29 0.03
--------- ------- ------ ------ ------- ------
Total loans.......................... 105,861 100.00% 96,752 100.00% 92,182 100.00%
--------- ------- ------ ------ ------- ------
Less:
Loans in process......................... (2,311) (2,079) (2,703)
Deferred loan fees....................... (218) (195) (158)
Allowance for loan losses................ (529) (426) (397)
-------- ------- ------
Total loans receivable, net.............. $102,803 $94,052 $88,924
======== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------
1996 1995
------------------------ -----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family...................... $65,448 79.60% $59,181 78.95%
Construction and development............. 7,091 8.63 6,639 8.86
Commercial............................... 5,302 6.45 5,750 7.67
Multi-family............................. 485 0.59 335 0.45
Land..................................... 1,342 1.63 909 1.21
------- ------ ------- ------
Total real estate loans.............. 79,668 96.90 72,814 97.14
------- ------ ------- ------
Other Loans:
Consumer Loans:
Automobile.............................. 1,274 1.55 1,042 1.39
Deposit account......................... 167 0.20 262 0.35
Other................................... 1,027 1.25 821 1.09
------- ------ ------- ------
Total consumer loans................. 2,468 3.00 2,125 2.83
------- ------ ------- ------
Commercial business loans................ 81 0.10 22 0.03
------- ------ ------- ------
Total loans.......................... 82,217 100.00% 74,961 100.00%
------- ------ ------- ------
Less:
Loans in process......................... (3,508) (2,579)
Deferred loan fees....................... (169) (198)
Allowance for loan losses................ (307) (251)
------ ----------
Total loans receivable, net.............. $78,233 $71,933
======= =======
</TABLE>
-4-
<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,
---------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family........... $ 31,611 29.86% $24,628 25.46% $21,836 23.69%
Construction and development....... 2,512 2.37 1,643 1.70 949 1.03
Commercial......................... 600 0.57 386 0.40 259 0.28
Multi-family....................... --- --- --- --- --- ---
Land............................... 20 0.02 80 0.08 184 0.20
--------- ------ ------- ------ ------- ------
Total real estate loans......... 34,743 32.82 26,737 27.64 23,228 25.20
Consumer loans...................... 2,738 2.59 2,053 2.12 2,285 2.48
Commercial business loans........... 641 0.60 101 0.10 29 .03
--------- ------ ------- ------ ------- ------
Total fixed-rate loans.......... 38,122 36.01 28,891 29.86 25,542 27.71
Adjustable-Rate Loans:
Real estate:
One- to four-family................ 52,555 49.65 55,063 56.91 53,972 58.55
Construction and development....... 3,418 3.23 5,133 5.30 5,602 6.07
Commercial......................... 8,808 8.32 6,222 6.43 5,584 6.06
Multi-family....................... 1,359 1.28 655 0.68 219 0.24
Land............................... 847 0.80 788 0.82 1,263 1.37
--------- ------ ------- ------ ------- ------
Total real estate loans......... 66,987 63.28 67,861 70.14 66,640 72.29
Consumer Loans....................... --- --- --- --- --- ---
Commercial Business Loans............ 752 0.71 --- --- --- ---
--------- ------ ------- ------ ------- ------
Total adjustable-rate loans..... 67,739 63.99 67,861 70.14 66,640 72.29
--------- ------ ------- ------ ------- ------
Total loans..................... 105,861 100.00% 96,752 100.00% 92,182 100.00%
====== ====== ======
Less:
Loans in process.................... (2,311) (2,079) (2,703)
Deferred loan fees.................. (218) (195) (158)
Allowance for loan losses........... (529) (426) (397)
-------- ------ -------
Total loans receivable, net...... $102,803 $94,052 $88,924
======== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------
1996 1995
------------------------ -----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family................ $17,166 20.88% $12,254 16.35%
Construction and development....... 775 0.94 526 0.70
Commercial......................... 179 0.22 313 0.42
Multi-family....................... --- --- --- ---
Land............................... 20 0.02 5 0.01
------- ------ ------- ------
Total real estate loans......... 18,140 22.06 13,098 17.48
Consumer loans...................... 2,468 3.00 2,125 2.83
Commercial business loans........... 81 0.10 22 0.03
------- ------ ------- ------
Total fixed-rate loans.......... 20,689 25.16 15,245 20.34
Adjustable-Rate Loans:
Real estate:
One- to four-family................ 48,282 58.73 46,927 62.60
Construction and development....... 6,316 7.68 6,113 8.15
Commercial......................... 5,123 6.23 5,437 7.25
Multi-family....................... 485 0.59 335 0.45
Land............................... 1,322 1.61 904 1.21
------- ------ ------- ------
Total real estate loans......... 61,528 74.84 59,716 79.66
Consumer Loans....................... --- --- --- ---
Commercial Business Loans............ --- --- --- ---
------- ------ ------- ------
Total adjustable-rate loans..... 61,528 74.84 59,716 79.66
------- ------ ------- ------
Total loans..................... 82,217 100.00% 74,961 100.00%
====== ======
Less:
Loans in process.................... (3,508) (2,579)
Deferred loan fees.................. (169) (198)
Allowance for loan losses........... (307) (251)
------ ---------
Total loans receivable, net...... $78,233 $71,933
======= =======
</TABLE>
-5-
<PAGE>
The following schedule presents the contractual maturities of the
Association's loan portfolio at June 30, 1999. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-------------------------------------------------------------
One- to Four-Family and Multi-family,
Construction and Development Commercial and Land Consumer
---------------------------- ----------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<C> <C> <C> <C> <C> <C> <C>
1 year or less(1).......... $ 52 8.64% $ --- ---% $ 456 8.40%
Over 1 year - 3 years...... 1,009 8.04 43 7.59 819 9.41
Over 3 years - 5 years..... 677 7.89 204 7.77 1,247 8.91
Over 5 years -
10 years.................. 5,197 7.89 2,063 7.73 146 6.18
Over 10 years -
20 years.................. 37,123 7.52 5,742 7.37 70 8.50
Over 20 years.............. 46,038 7.48 3,582 7.70 --- ---
-------- ---- --------- ------- --------- -----
Total.................. $90,096 7.53% $11,634 7.55% $2,738 8.82%
======= ==== ======= ======= ====== ====
<CAPTION>
Commercial Business Total
----------------------- --------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
1 year or less(1).......... $ 59 9.33% $ 567 8.52%
Over 1 year - 3 years...... 444 9.01 2,315 8.70
Over 3 years - 5 years..... 743 8.93 2,871 8.59
Over 5 years -
10 years.................. 147 8.75 7,553 7.83
Over 10 years -
20 years.................. --- --- 42,935 7.50
Over 20 years.............. --- --- 49,620 7.49
------ ----- -------- -----
Total.................. $1,393 8.95% $105,861 7.58%
====== ===== ======== =====
</TABLE>
(1) Includes demand loans, loans having no stated maturity and
overdraft loans.
The total amount of loans due after June 30, 2000 which have predetermined
interest rates is $37,596, while the total amount of loans due after such dates
which have floating or adjustable interest rates is $67,698.
-6-
<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, 1999, based on the above limitation, the Association's regulatory
loan-to-one borrower limit was approximately $1.97 million. On the same date,
the Association had no borrowers with outstanding balances in excess of this
amount. As of June 30, 1999, the largest dollar amount of indebtedness to one
borrower or group of related borrowers was $1,045,000, 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 $833,000 at June 30,
1999 and is also secured by multiple one-to four-family real estate properties.
As of June 30, 1999, 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, 1999, $84.2 million, or 79.5% 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 $57,000 and the largest outstanding residential loan had a principal
balance of $320,000. Virtually all of the residential loans originated by
Peoples Federal are secured by properties located in the Association's market
area.
Peoples Federal originates fixed-rate residential loans in amounts and
at rates which are monitored for compliance with the Association's
asset/liability management policy. Currently, the Association originates
fixed-rate loans with maturities of up to 20 years for retention in its own
portfolio. Limiting the contractual term to 20 years, as opposed to the more
traditional 30 year period, allows for accelerated principal repayment and
equity build up for the borrower. Currently, all such loans are made on
owner-occupied properties. All fixed-rate loans originated by the Association
are retained and serviced by it. At June 30, 1999, the Association had $31.6
million of fixed-rate permanent one-to four-family residential loans,
constituting 29.9% of the Association's loan portfolio at such date.
<PAGE>
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, 1999, the total
balance of one- to four-family ARMs was $52.6 million, or 49.7% of the
Association's loan portfolio. All ARMs originated by the Association are
retained and serviced by it.
-7-
<PAGE>
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, 1999, the
Association had $140,000 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,
1999, the Association had approximately $4.6 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.
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, 1999, the
Association had $251,000 of home equity lines of credit and an additional
$521,000 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, 1999, the Association had 38 construction loans
with outstanding aggregate balances of $5.0 million secured by residential
property. Of this amount, $4.5 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 three construction loans with outstanding
aggregate balances of $495,000 secured by one- to four-family residential
properties constructed by builders who have pre-sold their houses to individual
purchasers.
<PAGE>
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
-8-
<PAGE>
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, 1999, the Association had $956,000, or 0.9% of gross loans receivable, in
this category.
Construction and development lending generally affords the Association
an opportunity to receive interest at rates higher than those obtainable from
residential lending and to receive higher origination and other loan fees. In
addition, such loans are generally made for relatively short terms.
Nevertheless, construction lending to persons other than owner-occupants is
generally considered to involve a higher level of credit risk than one- to
four-family permanent residential lending due to the concentration of principal
in a limited number of loans and borrowers and the effects of general economic
conditions on construction projects, real estate developers and managers. In
addition, the nature of these loans is such that they are more difficult to
evaluate and monitor. The Association's risk of loss on a construction or
development loan is dependent largely upon the accuracy of the initial estimate
of the property's value upon completion of the project and the estimated cost
(including interest) of the project. If the estimate of value proves to be
inaccurate, the Association may be confronted, at or prior to the maturity of
the loan, with a project with a value which is insufficient to assure full
repayment and/or the possibility of having to make substantial investments to
complete and sell the project. Because defaults in repayment may not occur
during the construction period, it may be difficult to identify problem loans at
an early stage. When loan payments become due, the cash flow from the property
may not be adequate to service the debt. In such cases, the Association may be
required to modify the terms of the loan.
Commercial Real Estate Lending
The Association's commercial real estate loan portfolio consists of
loans secured by a variety of non-residential properties including retail
facilities, small office buildings, farm real estate and churches. At June 30,
1999, the Association's largest commercial real estate loan totaled $692,000. At
that date, the Association had 77 commercial real estate loans, totaling $9.4
million or 8.9% 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.
<PAGE>
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.
-9-
<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, 1999.
<TABLE>
<CAPTION>
Outstanding
Number of Original Principal
Loans Loan Amount Balance
----- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Office 18 $ 3,209 $ 2,607
Retail 6 1,257 964
Farm real estate 49 6,301 5,277
Churches 4 659 560
------- ------- -------
Total 77 $11,426 $ 9,408
======= ======= =======
</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 amount of such loans has been
insignificant. At June 30, 1999, multi-family loans totaled $1.4 million, or1.3%
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, 1999, the Association had $867,000, or 0.8% 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, 1999, the Association's consumer loans totaled $2.7
million, or 2.6% of the Association's gross loan portfolio.
-10-
<PAGE>
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, 1999, automobile loans totaled $1.7 million, or
1.7% 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 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.
Although the portfolio remains a small percentage of gross loans outstanding,
the Association did experience substantial growth in 1999 primarily from the new
branch facilities. 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.
<PAGE>
Most of the Association's commercial business loans have terms ranging
from three months to one year and may carry fixed or adjustable 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, 1999, commercial business loans totaled $1.4 million, or 1.3% of the
Association's gross loans receivable.
-11-
<PAGE>
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.
The following table shows the loan origination and repayment activities
of the Association for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1999 1998 1997
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family, construction and
development and land................................... $14,661 $16,076 $14,908
- commercial................................ 3,178 2,839 2,849
- multi-family.............................. 752 470 180
Non-real estate - consumer.................................. --- --- ---
- commercial business.............. 1,411 --- ---
--------- ------------ ------------
Total adjustable-rate................................ 20,002 19,385 17,937
Fixed rate:
Real estate - one- to four-family, construction and
development and land................................... 15,781 8,247 7,406
- commercial................................ 598 266 461
- multi-family.............................. --- --- ---
Non-real estate - consumer.................................. 2,885 1,923 2,294
- commercial business.............. 702 122 11
---------- ---------- -----------
Total fixed-rate..................................... 19,966 10,558 10,172
-------- -------- --------
Total loans originated............................... 39,968 29,943 28,109
Principal repayments........................................ (30,841) (24,670) (17,149)
Increase in other items, net(1)............................... (188) (66) (134)
--------- ----------- ----------
Net increase......................................... $ 8,939 $ 5,207 $10,826
======= ======== =======
</TABLE>
- ------------
(1) Includes provision for loan losses, net charge-offs, net deferred loan
origination fees and transfers to foreclosed assets.
<PAGE>
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
-12-
<PAGE>
the Association may bid on the property to protect its interest. The decision to
foreclose is made by the Senior Loan Officer after discussion with the members
of the Executive Committee or Board of Directors.
Consumer loans are charged-off if they remain delinquent for 120 days
unless the borrower and lender agree on a payment plan. If terms of the plan are
not met, they are then subject to charge-off. The Association's procedures for
repossession and sale of consumer collateral are subject to various requirements
under Ohio consumer protection laws.
Real estate acquired by Peoples Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired by foreclosure or deed in lieu of foreclosure,
it is 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, 1999.
<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...... 8 $ 407 0.48% 21 $691 0.82% 29 $1,098 1.30%
Construction and
development............. --- --- --- --- --- --- --- --- ---
Commercial............... --- --- --- 1 13 --- 1 13 0.14
Multi-family............. --- --- --- --- --- --- --- --- ---
Land..................... 1 49 5.69 --- --- --- 1 49 5.69
Consumer................... 6 6 0.21 5 51 1.87 11 57 2.08
Commercial business........ --- --- --- --- --- --- --- --- ---
--- ------- ----- --- ---- ----- --- ------ -----
Total................. 15 $462 0.44% 27 $755 0.71% 42 $1,217 1.15%
== ==== ===== === ==== ==== ==== ====== =====
</TABLE>
<PAGE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the Association will sustain
some loss if the deficiencies are not corrected. Doubtful assets have the
weaknesses of Substandard assets, with the additional characteristics that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as Loss is considered uncollectible and
of such little value that continuance as an asset on the balance sheet of the
institution, without establishment of a specific valuation allowance or
charge-off, is not warranted. Assets classified as Substandard or Doubtful
require the institution to establish prudent general allowances for loan losses.
If an asset or portion thereof is classified as Loss, the institution may
charge-off such amount against the loan loss allowance. If an institution does
not agree with an examiner's classification of an asset, it may appeal this
determination to the District Director of the OTS.
-13-
<PAGE>
On the basis of management's review of its assets, at June 30, 1999,
the Association had classified a total of $362,000 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................ $302 $13 $--- $--- $315
Doubtful................... --- --- --- --- ---
Loss....................... --- --- --- 47 47
---- --- --- --- ----
$302 $13 --- $47 $362
==== === === === ====
</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.
-14-
<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,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non accruing loans:
One- to four-family $ 302 $ 713 $ 705 $ 564 $ 494
Construction and development -- -- -- -- --
Commercial real estate 13 -- 14 211 --
Multi-family -- -- -- -- --
Land -- -- -- 51 214
Consumer -- -- -- -- --
Commercial business -- -- -- -- --
------ ------ ------ ------ ------
Total 315 713 719 826 708
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days:
One- to four-family 389 235 143 326 604
Construction and development -- -- -- -- --
Commercial real estate -- -- -- 58 86
Multi-family -- -- -- -- --
Land -- -- -- -- --
Consumer 51 11 5 11 20
Commercial business -- -- -- -- --
------ ------ ------ ------ ------
Total 440 246 148 395 710
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family -- -- -- -- --
Construction and development -- -- -- -- --
Commercial real estate -- -- -- -- --
Multi-family -- -- -- -- --
Land -- -- -- -- --
Consumer -- -- -- -- --
Commercial business -- -- -- -- --
------ ------ ------ ------ ------
Total -- -- -- -- --
------ ------ ------ ------ ------
Total non performing assets $ 755 $ 959 $ 867 $1,221 $1,418
====== ====== ====== ====== ======
Total as a percentage of total assets 0.65% 0.91% 0.84% 1.41% 1.80%
====== ====== ====== ====== ======
</TABLE>
<PAGE>
For the year ended June 30, 1999 gross interest income which would have
been recorded had the non accruing loans been current in accordance with their
original terms amounted to $25,901. The amount that was included in interest
income on such loans was $19,628 for the year ended June 30, 1999.
Other Assets of Concern. As of June 30, 1999, 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.
-15-
<PAGE>
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 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, 1999, the Association's allowance for loan losses as a
percent of gross loans receivable and as a percent of nonperforming loans
amounted to 0.50% and 70.03%, respectively. In light of the level of
nonperforming 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.
-16-
<PAGE>
The following table sets forth an analysis of the Association's
allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $426 $397 $307 $251 $198
Charge-offs:
One- to four-family -- 7 -- 9 --
Construction and development -- -- -- -- --
Commercial real estate -- -- -- -- --
Multi-family -- -- -- -- --
Consumer 23 8 22 6 4
Commercial business -- -- -- -- --
---- ---- ---- ---- ----
23 15 22 15 4
---- ---- ---- ---- ----
Recoveries:
One- to four-family 19 -- -- 1 --
Construction and development -- -- -- -- --
Commercial real estate -- -- -- -- --
Multi-family -- -- -- -- --
Consumer 3 3 9 2 2
Commercial business -- -- -- -- --
---- ---- ---- ---- ----
22 3 9 3 2
---- ---- ---- ---- ----
Net charge-offs 1 12 13 12 2
Additions charged to operations 104 41 103 68 55
---- ---- ---- ---- ----
Balance at end of period $529 $426 $397 $307 $251
==== ==== ==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding(1) during the period ---% 0.01% 0.02% 0.02% ---%
==== ==== ==== ==== ====
Ratio of net charge-offs during the period to
nonperforming assets at the end of the period 0.08% 1.33% 1.49% 0.98% 0.14%
==== ==== ==== ==== ====
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
-17-
<PAGE>
The distribution of the Association's allowance for losses on loans at
the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Amount Loan in Each Amount Loan in Each Amount Loan in Each
of Amounts Category of Amounts Category 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......... $346 $84,166 79.51% $335 $79,691 82.37% $316 $75,808 82.24%
Construction and
development................. 13 5,930 5.60 16 6,776 7.00 14 6,551 7.10
Commercial real estate...... 32 9,408 8.89 15 6,608 6.83 15 5,843 6.34
Multi-family................ 4 1,359 1.28 2 655 0.68 --- 219 0.24
Land........................ 3 867 0.82 2 868 0.90 3 1,447 1.57
Consumer.................... 103 2,738 2.59 56 2,053 2.12 49 2,285 2.48
Commercial business......... 28 1,393 1.31 --- 101 0.10 --- 29 0.03
Unallocated................. --- --- --- --- --- --- --- --- ---
---- -------- ------ ---- ------- ------ ---- ------- ------
Total.................. $529 $105,861 100.00% $426 $96,752 100.00% $397 $92,182 100.00%
==== ======== ====== ==== ======= ====== ==== ======== ======
<CAPTION>
June 30,
---------------------------------------------------------------
1996 1995
-------------------------------- -----------------------------
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of Amounts Category of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
One- to four-family......... $ 211 $65,448 79.60% $ 179 $59,181 78.95%
Construction and
development................. 4 7,091 8.63 5 6,639 8.86
Commercial real estate...... 36 5,302 6.45 7 5,750 7.67
Multi-family................ 1 485 0.59 --- 335 0.45
Land........................ 2 1,342 1.63 21 909 1.21
Consumer.................... 53 2,468 3.00 39 2,125 2.83
Commercial business......... --- 81 0.10 --- 22 0.03
Unallocated................. --- --- --- --- --- ---
----- ------- ------ ----- ------- ------
Total.................. $ 307 $82,217 100.00% $ 251 $74,961 100.00%
===== ======= ====== ===== ======= ======
</TABLE>
-18-
<PAGE>
Investment Activities
As part of its asset/liability management strategy, the Association
invests in U.S. government and agency obligations and mortgage-backed securities
to supplement its lending activities. The Association's investment policy also
allows for investments in overnight funds and certificates of deposit. The
Association may consider the expansion of investments into other securities if
deemed appropriate. At June 30, 1999, 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, 1999, the Association's liquidity ratio (liquid
assets as a percentage of net withdrawable savings and current borrowings) was
7.47% as compared to the OTS requirement of 4.0%.
As of June 30, 1999 the Association had securities totaling $7.9
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.
-19-
<PAGE>
The following table sets forth the composition of the Association's
investments in securities and time deposits at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ---------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities and time deposits:
U.S. government securities......................... $ --- ---% $ --- ---% $ --- ---%
Federal agency obligations held to maturity........ --- --- --- --- 1,999 20.45
Federal agency obligations available for sale...... 2,957 32.26 4,016 80.92 2,013 20.59
Time deposits...................................... 400 4.36 100 2.01 5,000 51.15
-------- ------ ------- ------ ------- ------
Subtotal........................................ 3,357 36.62 4,116 82.93 9,012 92.19
Mortgage-Backed Securities........................... 4,901 53.47
FHLB stock........................................... 908 9.91 847 17.07 763 7.81
-------- ------ ------- ------ ------- ------
Total securities, time deposits, mortgaged-
backed securities and FHLB stock............ $ 9,166 100.00% $ 4,963 100.00 $ 9,775 100.00%
======== ====== ======= ====== ======= ======
Average remaining life of securities
and time deposits.................................. 2.77 years 3.01 years 1.04 years
Other interest-earning assets:
Interest-bearing deposits with banks............... $ 635 100.00% $ 2,292 53.40% $ 1,498 59.97%
Overnight deposits................................. --- --- 2,000 46.60 1,000 40.03
-------- ------ ------- ------ ------- ------
Total........................................... $ 635 100.00% $ 4,292 100.00% $ 2,498 100.00%
======== ====== ======= ====== ======= ======
</TABLE>
-20-
<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, 1999
-----------------------------------------------------------------------------------
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 $ 400 $ 400 $ --- $ --- $ 400 $ 400
Federal agency obligations
available for sale -- -- 2,998 2,957 2,998 2,957
Mortgage-Backed Securities -- -- -- -- 4,929 4,901
------ ------ ------ ------ ------ ------
Total securities and time deposit $ 400 $ 400 $2,998 $2,957 $8,327 $8,258
====== ====== ====== ====== ====== ======
Weighted average yield 4.94% 4.94% 5.63% 5.63% 6.41% 6.41%
</TABLE>
Mortgage-Backed Securities. The Association had one GNMA
mortgage-backed security at June 30, 1999. From time to time, the Association
may purchase such securities to supplement loan production, leverage its capital
position or manage its assets/liability structure.
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.
-21-
<PAGE>
The following table sets forth the savings flows at the Association
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1999 1998 1997
--------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $ 79,054 $ 77,045 $ 77,318
Deposits 90,648 87,133 111,312(1)
Withdrawals 88,585 88,401 114,882(1)
Interest credited 3,193 3,277 3,297
--------- --------- ---------
Ending balance $ 84,310 $ 79,054 $ 77,045
--------- ========= =========
Net increase (decrease) $ 5,256 $ 2,009 $ (273)
========= ========= =========
Percent increase (decrease) 6.65% 2.61% (0.35)%
========= ========= =========
</TABLE>
- -------------
(1) Includes stock subscription deposit activity which was included in savings
accounts in conjunction with the Association's mutual to stock conversion.
-22-
<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,
----------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------
Weighted
Average
Rate at Percent Percent Percent
June 30, 1999 Amount of Total Amount of Total Amount of Total
------------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S>
Transactions and Savings Deposits:
Noninterest Bearing Demand <C> <C> <C> <C> <C> <C> <C>
Savings Accounts $ 650 0.77% $ 169 0.22% $ 150 0.19%
NOW Accounts 3.05% 19,544 23.17 18,456 23.34 17,685 22.94
Money Market Accounts 2.44 4,874 5.78 3,362 4.25 3,469 4.50
3.83 1,846 2.19 982 1.24 777 1.01
------- ------ ------- ------ ------- ------
Total Non-Certificates
26,914 31.91 22,969 29.05 22,081 28.64
------- ------ ------- ------ ------- ------
Certificates:
0.00 - 1.99%
2.00 - 3.99% -- -- -- -- -- --
4.00 - 5.99% 19 0.02 -- -- -- --
6.00 - 7.99% 41,767 49.51 36,060 45.59 28,959 37.57
8.00 - 9.99% 15,610 18.51 20,025 25.32 26,005 33.74
10.00% and over -- -- -- -- -- --
-- -- -- -- -- --
------- ------ ------- ------ ------- ------
Total Certificates
5.38 57,396 68.04 56,085 70.91 54,964 71.31
Accrued Interest ------- ------ ------- ------ ------- ------
44 0.05 35 0 .04 36 0.05
Total Deposits ------- ------ ------- ------
4.43% $84,354 100.00% $79,089 100.00% $77,081 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
-23-
<PAGE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of June 30, 1999.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
----- ----- ----- ----- --------
(Dollars in Thousands)
Certificate accounts
maturing
in quarter ending:
- ------------------
<S> <C> <C> <C> <C> <C>
September 30, 1999............. 19 6,445 61 6,525 11.37%
December 31, 1999.............. --- 6,901 1,378 8,279 14.42
March 31, 2000................. --- 6,182 2,159 8,341 14.53
June 30, 2000.................. --- 4,614 3,845 8,459 14.74
September 30, 2000............. --- 4,389 1,517 5,906 10.29
December 31, 2000.............. --- 4,138 1,330 5,468 9.53
March 31, 2001................. --- 2,958 197 3,155 5.50
June 30, 2001.................. --- 1,727 138 1,865 3.25
September 30, 2001............. --- 1,328 144 1,472 2.56
December 31, 2001.............. --- 1,243 559 1,802 3.14
March 31, 2002................. --- 308 189 497 0.87
June 30, 2002.................. --- 127 271 398 0.69
September 30, 2002............. --- 53 400 453 0.79
December 31, 2002.............. --- 275 458 733 1.28
March 31, 2003................. --- 102 1,036 1,138 1.98
June 30, 2003.................. --- 54 1,177 1,231 2.14
September 30, 2003............. --- 472 661 1,133 1.97
December 31, 2003.............. --- 152 90 242 0.42
March 31, 2004................. --- 227 --- 227 0.40
June 30, 2004.................. --- 72 --- 72 0.13
--- ------- ------- ------- ------
Total....................... $19 $41,767 $15,610 $57,396 100.00%
=== ======= ======= ======= ======
Percent of total........... 0.03% 72.77% 27.20%
==== ===== =====
</TABLE>
<PAGE>
At June 30, 1999 the Association had approximately $4.5 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.......................................... $224 5.61%
Over three through six months................................. 612 4.77
Over six through 12 months.................................... 1,842 5.23
Over 12 months................................................ 1,785 5.52
------- -------
Total......................................................... $4,463 5.30%
====== ======
</TABLE>
For additional information regarding the composition of the
Association's deposits, see Note 8 of Notes to Consolidated Financial
Statements.
-24-
<PAGE>
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 pro visions.
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,
-----------------------------------
1999 1998 1997
------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at period end:
FHLB advances........................................... $14,800 $7,000 $ ---
Maximum balance at any month end during the period:
FHLB advances........................................... $14,800 $7,000 $3,500
Average balance for the period:
FHLB advances........................................... $7,764 $ 96 $1,163
Weighted average rate................................... 6.05% 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 $2.3 million
at June 30, 1999 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
-25-
<PAGE>
total assets, to fund the operations of the OTS. The Association's OTS
assessment for the fiscal year ended June 30, 1999 was $34,000.
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, 1999, the Association's lending
limit under this restriction was $1.97 million. Peoples Federal is in compliance
with the loans- to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC
Peoples Federal is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
<PAGE>
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.
-26-
<PAGE>
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 assessment 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 2015.
Regulatory Capital Requirements
Federally insured savings associations, such as Peoples Federal, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1999, 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, 1999, Peoples Federal had tangible capital of $13.2
million, or 11.2% of adjusted total assets, which is approximately $11.4 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
<PAGE>
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, 1999, Peoples
Federal had no intangible assets which were subject to these tests.
At June 30, 1999, Peoples Federal had core capital equal to $13.2
million, or 11.2% of adjusted total assets, which is $8.5 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, 1999, Peoples Federal
had $482,000 of general loss reserves, which was less than 1.25% of
risk-weighted assets.
-27-
<PAGE>
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, 1999.
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.
On June 30, 1999, Peoples Federal had total capital of $13.6 million
(including $13.2 million in core capital and $482,000 in qualifying
supplementary capital) and risk-weighted assets of $75.9 million, or total
capital of 18.0% of risk-weighted assets. This amount was $7.6 million above the
8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
<PAGE>
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.
-28-
<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 1999 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, 1999, 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
<PAGE>
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.
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
-29-
<PAGE>
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.
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.
<PAGE>
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, 1999, 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."
-30-
<PAGE>
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, 1999, Peoples Federal had $908,000 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 6.97% and were 7.13% for
fiscal 1999.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Peoples Federal's FHLB stock may result in a corresponding
reduction in Peoples Federal's capital.
For the year ended June 30, 1999, dividends paid by the FHLB of
Cincinnati to Peoples Federal totaled $61,000, which constitutes a $4,000
increase over the amount of dividends received in fiscal year 1998. The $15,600
dividend for the quarter ended June 30, 1999 reflects an annualized rate of
6.98%, or 0.15% below the rate for fiscal 1999.
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
<PAGE>
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 was delayed until the first taxable
year beginning after December 31, 1997, because Peoples Federal met certain
residential lending requirements. At June 30, 1999, the Association had
approximately $484,000 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
fiscal 1999, $97,000 in bad debt reserves were recaptured.
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
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<PAGE>
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, 1999, the portion of Peoples Federal's reserves subject
to this treatment for tax purposes totaled approximately $2.2 million.
The Company and Peoples Federal file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting.
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.
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 1.4 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. 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, as amended by SFAS 137, is effective for
fiscal years beginning after June 15, 2000 with early adoption encouraged for
any fiscal quarter beginning July 1, 1998 or later, with no retroactive
application. Management does not expect the adoption of SFAS 133 to have a
significant impact on the Company's financial statements.
<PAGE>
SFAS No. 134 "Accounting for Mortgaged-Backed Securities Retained After
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" - SFAS 134 changes the way companies involved in mortgage banking
activities account for certain securities and other interests they retain after
securitizing mortgage loans that were held for sale. SFAS 134 allows any
retained mortgage-backed securities after a securitization of mortgage loans
held for sale to be classified based on holding intent in accordance with SFAS
115, except in cases where the retained mortgage-backed security is committed to
be sold before or during the securitization process, in which case it must be
classified as trading. Previously, all retained mortgage-backed securities were
required to be classified as trading. SFAS 134 was effective as of January 1,
1999 and did not have a significant impact on the Company's financial
statements.
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<PAGE>
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, 1999, the Association had a total of 26 full-time
employees, 13 of which have been employed by Peoples Federal for at least 10
years, and five part-time employees. None of the Association's employees are
represented by any collective bargaining group. Management considers its
employee relations to be good.
Executive Officers of the Registrant Who Are Not Directors
The following information as to the business experience during the past
five years is supplied with respect to the executive officers of the Company and
the Association who do not serve on the Company's Board of Directors. Executive
officers of the Company are elected annually to serve until their successors are
elected or until they resign or are removed by the Board of Directors. There are
no arrangements or understandings between the persons named and any other person
pursuant to which such officers were elected.
David R. Fogt. Mr. Fogt, age 48, 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 43, 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 41, 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.
-33-
<PAGE>
Item 2. Properties
The following table sets forth information concerning the main and
branch offices and a drive-in facility of the Association at June 30, 1999. The
Association believes that its current facilities are adequate. The Association
also maintains a 24-hour ATM at its main and both branch office locations.
Net Book
Owned Value at
Year or June 30,
Location Opened Leased 1999
- -------- ------ ------ ----
Main Office:
101 East Court Street 1917 Owned $252,000
Sidney, Ohio 45365
Drive-In:
232 S. Ohio Avenue 1971 Owned $174,000
Sidney, Ohio 45365
Anna Branch:
403 South Pike Street 1998 Owned $625,000
Anna, Ohio 45302
Jackson Center Branch:
115 East Pike Street 1998 Leased $109,000
Jackson Center, Ohio 45334
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, 1999
was approximately $257,000.
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.
-34-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitations of proxies or otherwise, during the quarter ended June 30, 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 4 of the Company's 1999 Annual Report to Stockholders is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 8 through 22 of the Company's 1999 Annual Report to Stockholders
are incorporated herein by reference.
Item 7. Financial Statements
Pages 23 through 49 of the Company's 1999 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 1999, which has been filed with the SEC.
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
Information concerning compliance with Section 16(a) reporting
requirements by the Company's directors and executive officers is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1999, which has been filed with the SEC.
-35-
<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 1999, which has been filed with the SEC.
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 1999, which
has been filed with the SEC.
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 1999, which has
been filed with the SEC.
-36-
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference to
Prior Filing
or Exhibit
Regulation Number
S-B Exhibit Attached
Number Document Hereto
------ -------- ------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(i) Certificate of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of holders, including *
indentures
9 Voting trust agreement None
10.1 Employee Stock Ownership Plan *
10.2 Form of Employment Agreement with Douglas Stewart *
10.3 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 Amended and 10.1
Restated 1998 Stock Option and Incentive Plan
10.7 Peoples-Sidney Financial Corporation Amended and 10.2
Restated 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 23
24 Power of attorney Not required
27 Financial data schedule 27
99 Additional exhibits Not required
</TABLE>
* Filed as an exhibit to the Registrant's Form S-1 registration statement
(File No. 333-20461) and incorporated herein by reference.
(b) Reports on Form 8-K
During the quarter ended June 30, 1999, the Company filed three Current
Reports on Form 8-K. On April 19, 1999, under Item 5, the Company reported the
issuance of a press release announcing the Company's earnings for the quarter
ended March 31, 1999 and the declaration of a cash dividend. On May 26, 1999,
under Item 5, the Company reported the issuance of a press release announcing
its intention to repurchase up to 5% of its outstanding shares. On June 21,
1999, under Item 5, the Company reported the issuance of a press release
announcing the completion of the repurchase of 5% of its outstanding shares.
-37-
<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 27, 1999 Date: September 27, 1999
/s/Richard T. Martin /s/John W. Sargeant
- -------------------- -------------------
Richard T. Martin John W. Sargeant
Chairman of the Board Director
Date: September 27, 1999 Date: September 27, 1999
/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 27, 1999 Date: September 27, 1999
/s/Harry N. Faulkner
- --------------------
Harry N. Faulkner
Director
Date: September 27, 1999
-38-
<PAGE>
INDEX TO EXHIBITS
Number
------
10.1 Amended and Restated 1998 Stock Option and Incentive Plan
10.2 Amended and Restated 1998 Management Recognition and Retention Plan
13 Portions of Annual Report to Security Holders
23 Consent of Crowe, Chizek and Company LLP
21 Subsidiaries of the Registrant
27 Financial Data Schedule
PEOPLES-SIDNEY FINANCIAL CORPORATION
AMENDED AND RESTATED 1998 STOCK OPTION AND INCENTIVE PLAN
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Corporation and its stockholders by providing a means for
attracting and retaining directors, advisory directors, directors emeriti,
officers and employees of the Corporation and its Affiliates. It is intended
that designated Options granted pursuant to the provi sions of this Plan to
persons employed by the Corporation or its Affiliates will qualify as Incentive
Stock Options. Options granted to persons who are not employees will be
Non-Qualified Stock Options.
2. Definitions. The following definitions are applicable to the Plan:
"Affiliate" - means any "parent corporation" or "subsidiary corporation"
of the Corporation, as such terms are defined in Section 424(e) and (f),
respectively, of the Code.
"Association" - means Peoples Federal Savings & Loan Association of
Sidney and any successor entity.
"Award" - means the grant of an Incentive Stock Option, a Non-Qualified
Stock Option, a Stock Appreciation Right, a Limited Stock Appreciation Right or
any combination thereof, as provided in the Plan.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee referred to in Section 3 hereof.
"Continuous Service" - means the absence of any interruption or
termination of service as a director, advisory director, director emeritus,
officer or employee of the Corporation or an Affiliate, except that when used
with respect to any Options or Rights which at the time of exercise are intended
to be Incentive Stock Options, continuous service means the absence of any
interruption or termination of service as an employee of the Corporation or an
Affiliate. Service shall not be considered interrupted in the case of sick
leave, military leave or any other leave of absence approved by the Corporation
or in the case of transfers between payroll locations of the Corporation or
between the Corporation, its parent, its subsidiaries or its successor. With
respect to any advisory director or director emeritus, Continuous Service shall
mean the availability to perform such functions as may be required of such
persons.
"Corporation" - means Peoples-Sidney Financial Corporation, a Delaware
corporation.
"Employee" - means any person, including an officer or director, who is
employed by the Corporation or any Affiliate.
"ERISA" - means the Employee Retirement Income Security Act of 1974, as
amended.
<PAGE>
"Exercise Price" - means (i) in the case of an Option, the price per
Share at which the Shares subject to such Option may be purchased upon exercise
of such Option and (ii) in the case of a Right, the price per Share (other than
the Market Value per Share on the date of exercise and the Offer Price per Share
as defined in Section 10 hereof) which, upon grant, the Committee determines
shall be utilized in calculating the aggregate value which a Participant shall
be entitled to receive pursuant to Sections 9, 10 or 12 hereof upon exercise of
such Right.
"Incentive Stock Option" - means an option to purchase Shares granted by
the Committee pursuant to Section 6 hereof which is subject to the limitations
and restrictions of Section 8 hereof and is intended to qualify under Section
422(b) of the Code.
"Limited Stock Appreciation Right" - means a stock appreciation right
with respect to Shares granted by the Committee pursuant to Sections 6 and 10
hereof.
1
<PAGE>
"Market Value" - means the average of the high and low quoted sales price
on the date in question (or, if there is no reported sale on such date, on the
last preceding date on which any reported sale occurred) of a Share on the
Composite Tape for the New York Stock Exchange-Listed Stocks, or, if on such
date the Shares are not quoted on the Composite Tape, on the New York Stock
Exchange, or, if the Shares are not listed or admitted to trading on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which the Shares are listed or admitted
to trading, or, if the Shares are not listed or admitted to trading on any such
exchange, the mean between the closing high bid and low asked quotations with
respect to a Share on such date on the NASDAQ System, or any similar system then
in use, or, if no such quotations are available, the fair market value on such
date of a Share as the Committee shall determine.
"Non-Employee Director" - means a director who (a) is not currently an
officer or employee of the Corporation or any Affiliate; (b) is not a former
employee of the Corporation or any Affiliate who receives compensation for prior
services (other than from a tax-qualified retirement plan); (c) has not been an
officer of the Corporation or any Affiliate; (d) does not receive renumeration
from the Corporation or any Affiliate in any capacity other than as a director;
and (e) does not possess an interest in any other transactions or is not engaged
in a business relationship for which disclosure would be required under Item
404(a) or (b) of Regulation S-K.
"Non-Qualified Stock Option" - means an option to purchase Shares granted
by the Committee pursuant to Section 6 hereof, which is not intended to qualify
under Section 422(b) of the Code.
"Option" - means an Incentive Stock Option or a Non-Qualified Stock
Option.
"Participant" - means any director, advisory director, director emeritus,
officer or employee of the Corporation or any Affiliate who is selected by the
Committee to receive an Award or who is granted an Award pursuant to Section 20
hereof.
"Plan" - means the Amended and Restated 1998 Stock Option and Incentive
Plan of the Corporation.
"Related" - means (i) in the case of a Right, a Right which is granted in
connection with, and to the extent exercis able, in whole or in part, in lieu
of, an Option or another Right and (ii) in the case of an Option, an Option with
respect to which and to the extent a Right is exercisable, in whole or in part,
in lieu thereof has been granted.
"Right" - means a Limited Stock Appreciation Right or a Stock
Appreciation Right.
"Shares" - means the shares of common stock, par value $0.01 per share,
of the Corporation.
"Stock Appreciation Right" - means a stock appreciation right with
respect to Shares granted by the Committee pursuant to Sections 6 and 9 hereof.
3. Administration. The Plan shall be administered by a Committee
consisting of two or more members, each of whom shall be a Non-Employee
Director. The members of the Committee shall be appointed by the Board of
Directors of the Corporation. Except as limited by the express provisions of the
<PAGE>
Plan, the Committee shall have sole and complete authority and discretion to (i)
select Participants and grant Awards; (ii) determine the number of Shares to be
subject to types of Awards generally, as well as to individual Awards granted
under the Plan; (iii) determine the terms and conditions upon which Awards shall
be granted under the Plan; (iv) prescribe the form and terms of instruments
evidencing such grants; and (v) establish from time to time regulations for the
administration of the Plan, interpret the Plan, and make all determinations
deemed necessary or advisable for the administration of the Plan.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the Committee without a meeting, shall
be acts of the Committee.
2
<PAGE>
4. Participation in Committee Awards. The Committee may select from time
to time Participants in the Plan from those directors (including advisory
directors and directors emeriti), officers and employees (other than
Disinterested Persons), of the Corporation or its Affiliates who, in the opinion
of the Committee, have the capacity for contributing to the successful
performance of the Corporation or its Affiliates.
5. Shares Subject to Plan. Subject to adjustment by the operation of
Section 11 hereof, the maximum number of Shares with respect to which Awards may
be made under the Plan is 178,538 Shares. The Shares with respect to which
Awards may be made under the Plan may be either authorized and unissued shares
or issued shares heretofore or hereafter reacquired and held as treasury shares.
Shares which are subject to Related Rights and Related Options shall be counted
only once in determining whether the maximum number of Shares with respect to
which Awards may be granted under the Plan has been exceeded. An Award shall not
be considered to have been made under the Plan with respect to any Option or
Right which terminates and new Awards may be granted under the Plan with respect
to the number of Shares as to which such termination has occurred.
6. General Terms and Conditions of Options and Rights. The Committee
shall have full and complete authority and discretion, except as expressly
limited by the Plan, to grant Options and/or Rights and to provide the terms and
conditions (which need not be identical among Participants) thereof. In
particular, the Committee shall prescribe the following terms and conditions:
(i) the Exercise Price of any Option or Right, which shall not be less than the
Market Value per Share at the date of grant of such Option or Right, (ii) the
number of Shares subject to, and the expiration date of, any Option or Right,
which expiration date shall not exceed ten years from the date of grant, (iii)
the manner, time and rate (cumulative or otherwise) of exercise of such Option
or Right, and (iv) the restrictions, if any, to be placed upon such Option or
Right or upon Shares which may be issued upon exercise of such Option or Right.
The Committee may, as a condition of granting any Option or Right, require that
a Participant agree not to thereafter exercise one or more Options or Rights
previously granted to such Participant. Notwithstanding the foregoing no
individual shall be granted Awards in any calendar year with respect to more
than 50% of the total shares subject to the Plan.
At the time of any Award, the Participant shall enter into an agreement
with the Corporation in a form specified by the Committee, agreeing to the terms
and conditions of the Award and such other matters as the Committee, in its sole
discretion, shall determine (the "Option Agreement").
7. Exercise of Options or Rights.
(a) Except as provided herein, an Option or Right granted under the Plan
shall be exercisable during the lifetime of the Participant to whom such
Option or Right was granted only by such Participant and, except as
provided in paragraphs (c) and (d) of this Section 7, no such Option or
Right may be exercised unless at the time such Participant exercises such
Option or Right, such Participant has maintained Continuous Service since
the date of grant of such Option or Right.
(b) To exercise an Option or Right under the Plan, the Participant to whom
such Option or Right was granted shall give written notice to the
Corporation in form satisfactory to the Committee (and, if partial
exercises have been permitted by the Committee, by specifying the number
of Shares with respect to which such Participant elects to exercise such
<PAGE>
Option or Right) together with full payment of the Exercise Price, if any
and to the extent required. The date of exercise shall be the date on
which such notice is received by the Corporation. Payment, if any is
required, shall be made either (i) in cash (including check, bank draft
or money order) or (ii) by delivering (A) Shares already owned by the
Participant and having a fair market value equal to the applicable
exercise price, such fair market value to be determined in such
appropriate manner as may be provided by the Committee or as may be
required in order to comply with or to conform to requirements of any
applicable laws or regulations, or (B) a combination of cash and such
Shares.
(c) If a Participant to whom an Option or Right was granted shall cease to
maintain Continuous Service for any reason (excluding death, disability
and termination of employment by the Corporation or any Affiliate for
cause),
3
<PAGE>
such Participant may, but only within the period of three months
immediately succeeding such cessation of Continuous Service and in no
event after the expiration date of such Option or Right, exercise such
Option or Right to the extent that such Participant was entitled to
exercise such Option or Right at the date of such cessation, provided,
however, that such right of exercise after cessation of Continuous
Service shall not be available to a Participant if the Committee
otherwise determines and so provides in the applicable instrument or
instruments evidencing the grant of such Option or Right. If a
Participant to whom an Option or Right was granted shall cease to
maintain Continuous Service by reason of death or disability then, unless
the Committee shall have otherwise provided in the instrument evidencing
the grant of an Option or Right, all Options and Rights granted and not
fully exercisable shall become exercisable in full upon the happening of
such event and shall remain so exercisable (i) in the event of death for
the period described in paragraph (d) of this Section 7 and (ii) in the
event of disability for a period of three months following such date. If
the Continuous Service of a Participant to whom an Option or Right was
granted by the Corporation is terminated for cause, all rights under any
Option or Right of such Participant shall expire immediately upon the
effective date of such termination.
(d) In the event of the death of a Participant while in the Continuous
Service of the Corporation or an Affiliate or within the three-month
period referred to in paragraph (c) of this Section 7, the person to whom
any Option or Right held by the Participant at the time of his death is
transferred by will or the laws of descent and distribution, or in the
case of an Award other than an Incentive Stock Option, pursuant to a
qualified domestic relations order, as defined in the Code or Title 1 of
ERISA or the rules thereunder may, but only to the extent such
Participant was entitled to exercise such Option or Right upon his death
as provided in paragraph (c) above, exercise such Option or Right at any
time within a period of one year succeeding the date of death of such
Participant, but in no event later than ten years from the date of grant
of such Option or Right. Following the death of any Partici pant to whom
an Option was granted under the Plan, irrespective of whether any Related
Right shall have theretofore been granted to the Participant or whether
the person entitled to exercise such Related Right desires to do so, the
Committee may, as an alternative means of settlement of such Option,
elect to pay to the person to whom such Option is transferred by will or
by the laws of descent and distribution, or in the case of an Option
other than an Incentive Stock Option, pursuant to a qualified domestic
relations order, as defined in the Code or Title I of ERISA or the rules
thereunder, the amount by which the Market Value per Share on the date of
exercise of such Option shall exceed the Exercise Price of such Option,
multiplied by the number of Shares with respect to which such Option is
properly exercised. Any such settlement of an Option shall be considered
an exercise of such Option for all purposes of the Plan.
(e) Notwithstanding the provisions of subparagraphs (c) and (d) above, the
Committee may, in its sole discretion, establish different terms and
conditions pertaining to the effect of termination to the extent
permitted by applicable federal and state law.
<PAGE>
8. Incentive Stock Options. Incentive Stock Options may be granted only
to Participants who are Employees. Any provision of the Plan to the contrary
notwithstanding, (i) no Incentive Stock Option shall be granted more than ten
years from the date the Plan is adopted by the Board of Directors of the
Corporation and no Incentive Stock Option shall be exercisable more than ten
years from the date such Incentive Stock Option is granted, (ii) the Exercise
Price of any Incentive Stock Option shall not be less than the Market Value per
Share on the date such Incentive Stock Option is granted, (iii) any Incentive
Stock Option shall not be transferable by the Participant to whom such Incentive
Stock Option is granted other than by will or the laws of descent and
distribution, and shall be exercisable during such Participant's lifetime only
by such Participant, (iv) no Incentive Stock Option shall be granted to any
individual who, at the time such Incentive Stock Option is granted, owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Corporation or any Affiliate unless the Exercise Price
of such Incentive Stock Option is at least 110 percent of the Market Value per
Share at the date of grant and such Incentive Stock Option is not exercisable
after the expiration of five years from the date such Incentive Stock Option is
granted, and (v) the aggregate Market Value (determined as of the time any
Incentive Stock Option is granted) of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by a Participant in any
calendar year shall not exceed $100,000.
4
<PAGE>
9. Stock Appreciation Rights. A Stock Appreciation Right shall, upon its
exercise, entitle the Participant to whom such Stock Appreciation Right was
granted to receive a number of Shares or cash or combination thereof, as the
Committee in its discretion shall determine, the aggregate value of which (i.e.,
the sum of the amount of cash and/or Market Value of such Shares on date of
exercise) shall equal (as nearly as possible, it being understood that the
Corporation shall not issue any fractional shares) the amount by which the
Market Value per Share on the date of such exercise shall exceed the Exercise
Price of such Stock Appreciation Right, multiplied by the number of Shares with
respect of which such Stock Appreciation Right shall have been exercised. A
Stock Appreciation Right may be Related to an Option or may be granted
independently of any Option as the Committee shall from time to time in each
case determine. At the time of grant of an Option the Committee shall determine
whether and to what extent a Related Stock Appreciation Right shall be granted
with respect thereto, provided, however, and notwithstanding any other provision
of the Plan, that if the Related Option is an Incentive Stock Option, the
Related Stock Appreciation Right shall satisfy all the restrictions and
limitations of Section 8 hereof as if such Related Stock Appreciation Right were
an Incentive Stock Option and as if other rights which are Related to Incentive
Stock Options were Incentive Stock Options. In the case of a Related Option,
such Related Option shall cease to be exercisable to the extent of the Shares
with respect to which the Related Stock Appreciation Right was exercised. Upon
the exercise or termination of a Related Option, any Related Stock Appreciation
Right shall terminate to the extent of the Shares with respect to which the
Related Option was exercised or terminated.
10. Limited Stock Appreciation Rights. At the time of grant of an Option
or Stock Appreciation Right to any Participant, the Committee shall have full
and complete authority and discretion to also grant to such Participant a
Limited Stock Appreciation Right which is Related to such Option or Stock
Appreciation Right, provided, however and notwithstanding any other provision of
the Plan, that if the Related Option is an Incentive Stock Option, the Related
Limited Stock Appreciation Right shall satisfy all the restrictions and
limitations of Section 8 hereof as if such Related Limited Stock Appreciation
Right were an Incentive Stock Option and as if all other Rights which are
Related to Incentive Stock Options were Incentive Stock Options. A Limited Stock
Appreciation Right shall be exercisable only during the period beginning on the
first day following the date of expiration of any "offer" (as such term is
hereinafter defined) and ending on the forty-fifth day following such date.
A Limited Stock Appreciation Right shall, upon its exercise, entitle the
Participant to whom such Limited Stock Appreciation Right was granted to receive
an amount of cash equal to the amount by which the "Offer Price per Share" (as
such term is hereinafter defined) or the Market Value on the date of such
exercise, as shall have been provided by the Committee in its discretion at the
time of grant, shall exceed the Exercise Price of such Limited Stock
Appreciation Right, multiplied by the number of Shares with respect to which
such Limited Stock Appreciation Right shall have been exercised. Upon the
exercise of a Limited Stock Appreciation Right, any Related Option and/or
Related Stock Appreciation Right shall cease to be exercisable to the extent of
the Shares with respect to which such Limited Stock Appreciation Right was
exercised. Upon the exercise or termination of a Related Option or Related Stock
Appreciation Right, any Related Limited Stock Appreciation Right shall terminate
to the extent of the Shares with respect to which such Related Option or Related
Stock Appreciation Right was exercised or terminated.
<PAGE>
For the purposes of this Section 10, the term "Offer" shall mean any
tender offer or exchange offer for Shares other than one made by the
Corporation, provided that the corporation, person or other entity making the
offer acquires pursuant to such offer either (i) 25% of the Shares outstanding
immediately prior to the commencement of such offer or (ii) a number of Shares
which, together with all other Shares acquired in any tender offer or exchange
offer (other than one made by the Corporation) which expired within sixty days
of the expiration date of the offer in question, equals 25% of the Shares
outstanding immediately prior to the commencement of the offer in question. The
term "Offer Price per Share" as used in this Section 10 shall mean the highest
price per Share paid in any Offer which Offer is in effect any time during the
period beginning on the sixtieth day prior to the date on which a Limited Stock
Appreciation Right is exercised and ending on the date on which such Limited
Stock Appreciation Right is exercised. Any securities or property which are part
or all of the consideration paid for Shares in the Offer shall be valued in
determining the Offer Price per Share at the higher of (A) the valuation placed
on such securities or property by the corporation, person or other entity making
such Offer or (B) the valuation placed on such securities or property by the
Committee.
5
<PAGE>
11. Adjustments Upon Changes in Capitalization. In the event of any
change in the outstanding Shares subsequent to the effective date of the Plan by
reason of any reorganization, recapitalization, stock split, stock dividend,
cash distribution in excess of normal dividend levels, combination or exchange
of shares, merger, consolidation or any change in the corporate structure or
Shares of the Corporation, the maximum aggregate number and class of shares as
to which Awards may be granted under the Plan and the number, class and exercise
price of shares with respect to which Awards theretofore have been granted under
the Plan shall be appropriately adjusted by the Committee, whose determination
shall be conclusive.
12. Effect of Merger. In the event of any merger, consolidation or
combination of the Corporation (other than a merger, consolidation or
combination in which the Corporation is the continuing entity and which does not
result in the outstanding Shares being converted into or exchanged for different
securities, cash or other property, or any combination thereof) pursuant to a
plan or agreement the terms of which are binding upon all stockholders of the
Corporation (except to the extent that dissenting stockholders may be entitled,
under statutory provisions or provisions contained in the certificate or
articles of incorporation, to receive the appraised or fair value of their
holdings), any Participant to whom an Option or Right has been granted shall
have the right (subject to the provisions of the Plan and any limitation or
vesting period applicable to such Option or Right), thereafter and during the
term of each such Option or Right, to receive upon exercise of any such Option
or Right an amount equal to the excess of the fair market value on the date of
such exercise of the securities, cash or other property, or combination thereof,
receivable upon such merger, consolidation or combination in respect of a Share
over the Exercise Price of such Right or Option, multiplied by the number of
Shares with respect to which such Option or Right shall have been exercised.
Such amount may be payable fully in cash, fully in one or more of the kind or
kinds of property payable in such merger, consolidation or combination, or
partly in cash and partly in one or more of such kind or kinds of property, all
in the discretion of the Committee.
13. Effect of Change in Control. If a tender offer or exchange offer for
Shares (other than such an offer by the Corporation) is commenced, or if the
stockholders of the Corporation shall approve an agreement providing either for
a transaction in which the Corporation will cease to be an independent publicly
owned entity or for a sale or other disposition of all or substantially all the
assets of the Corporation or the Association, unless the Committee shall have
otherwise provided in the instrument evidencing the grant of an Option or Stock
Appreciation Right, all Options and Stock Appreciation Rights theretofore
granted and not fully exercisable shall become exercisable in full upon the
happening of such event and shall remain so exercisable for a period of sixty
days following such date, after which they shall revert to being exercisable in
accordance with their terms; provided, however, that no Option or Stock
Appreciation Right which has previously been exercised or otherwise terminated
shall become exercisable.
14. Assignments and Transfers. No Award nor any right or interest of a
Participant under the Plan in any instrument evidencing any Award under the Plan
may be assigned, encumbered or transferred except, in the event of the death of
a Participant, by will or the laws of descent and distribution or in the case of
Awards other than Incentive Stock Options pursuant to a qualified domestic
relations order, as defined in the Code or Title I of ERISA or the rules
thereunder.
<PAGE>
15. Employee Rights Under the Plan. No director, officer or employee
shall have a right to be selected as a Participant nor, having been so selected,
to be selected again as a Participant and no director, officer, employee or
other person shall have any claim or right to be granted an Award under the Plan
or under any other incentive or similar plan of the Corporation or any
Affiliate. Neither the Plan nor any action taken thereunder shall be construed
as giving any employee any right to be retained in the employ of the Corporation
or any Affiliate.
16. Delivery and Registration of Stock. The Corporation's obligation to
deliver Shares with respect to an Award shall, if the Committee so requests, be
conditioned upon the receipt of a representation as to the investment intention
of the Participant to whom such Shares are to be delivered, in such form as the
Committee shall determine to be necessary or advisable to comply with the
provisions of the Securities Act of 1933 or any other Federal, state or local
securities legislation or regulation. It may be provided that any representation
requirement shall become inoperative
6
<PAGE>
upon a registration of the Shares or other action eliminating the necessity of
such representation under such Securities Act or other securities legislation.
The Corporation shall not be required to deliver any Shares under the Plan prior
to (i) the admission of such shares to listing on any stock exchange or other
system on which Shares may then be listed, and (ii) the completion of such
registration or other qualification of such Shares under any state or Federal
law, rule or regulation, as the Committee shall determine to be necessary or
advisable.
17. Withholding Tax. The Corporation shall have the right to deduct from
all amounts paid in cash with respect to the exercise of a Right under the Plan
any taxes required by law to be withheld with respect to such cash payments.
Where a Participant or other person is entitled to receive Shares pursuant to
the exercise of an Option or Right pursuant to the Plan, the Corporation shall
have the right to require the Participant or such other person to pay the
Corporation the amount of any taxes which the Corporation is required to
withhold with respect to such Shares, and may, in its sole discretion, withhold
sufficient Shares to cover the amount of taxes which the Corporation is required
to withhold.
18. Amendment or Termination. The Board of Directors of the Corporation
may amend, suspend or terminate the Plan or any portion thereof at any time but
no amendment shall be made without approval of the stockholders of the
Corporation which shall, (i) increase the aggregate number of Shares with
respect to which Awards may be made under the Plan (except pursuant to Section
11), (ii) materially change the requirements as to eligibility for participation
in the Plan or (iii) change the class of persons eligible to participate in the
Plan; provided, however, that no such amendment, suspension or termination shall
impair the rights of any Participant, without his consent, in any Award
theretofore made pursuant to the Plan.
19. Effective Date and Term of Plan. The Plan shall become effective upon
its ratification by stockholders of the Corporation. It shall continue in effect
for a term of ten years unless sooner terminated under Section 18 hereof.
<PAGE>
20. Initial Grant. By, and simultaneously with, the ratification of this
Plan by the stockholders of the Corporation, each member of the Board of
Directors of the Corporation at the time of stockholder ratification of this
Plan who is not a full-time Employee, is hereby granted a ten-year,
Non-Qualified Stock Option to purchase 8,926 Shares. Each such Option shall be
evidenced by a Non-Qualified Stock Option Agreement in a form approved by the
Board of Directors and shall be subject in all respects to the terms and
conditions of this Plan, which are controlling. All Options granted pursuant to
this section shall vest in five equal annual installments with the first
installment vesting on the first anniversary of the date of grant, subject to
Section 13 of this Plan and to the Director maintaining Continuous Service with
the Corporation or its Affiliates since the date of grant.
7
PEOPLES-SIDNEY FINANCIAL CORPORATION
AMENDED AND RESTATED 1998 MANAGEMENT RECOGNITION PLAN
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Corporation and its stockholders by providing a means for
attracting and retaining directors, executive officers and employees of the
Corporation and its Affiliates.
2. Definitions. The following definitions are applicable to the Plan:
"Award" - means the grant of Restricted Stock pursuant to the terms of
Section 12 of the Plan or by the Committee, as provided in the Plan.
"Affiliate" - means any "parent corporation" or "subsidiary corporation"
of the Corporation, as such terms are defined in Section 424(e) and (f),
respectively, of the Code.
"Association" - means Peoples Federal Savings & Loan Association of
Sidney, a savings institution and its successors.
"Beneficiary" - means the person or persons designated by a Participant
to receive any benefits payable under the Plan in the event of such
Participant's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Participant's surviving spouse, if
any, or if none, his estate.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee of the Board of Directors of the
Corporation referred to in Section 6 hereof.
"Continuous Service" - means the absence of any interruption or
termination of service as a director, director emeritus, advisory director,
executive officer or employee of the Corporation or any Affiliate. Service shall
not be considered interrupted in the case of sick leave, military leave or any
other leave of absence approved by the Corporation or any Affiliate or in the
case of transfers between payroll locations of the Corporation or between the
Corporation, its Affiliates or its successor. With respect to any director
emeritus or advisory director, Continuous Service shall mean the availability to
perform such functions as may be required of such individuals.
"Corporation" - means Peoples-Sidney Financial Corporation, a Delaware
corporation.
"Disability" - means any physical or mental impairment which qualifies
an employee, director, director emeritus or advisor director for disability
benefits under any applicable long-term disability plan maintained by the
Association or an Affiliate, or, if no such plan applies, which renders such
employee or director, in the judgment of the Committee, unable to perform his
customary duties and responsibilities.
"ERISA" - means the Employee Retirement Income Security Act of 1974, as
amended.
<PAGE>
"Participant" - means any director, director emeritus, advisory
director, executive officer or employee of the Corporation or any Affiliate who
is selected by the Committee to receive an Award or is granted an Award pursuant
to Section 12.
"Non-Employee Director" - means a director who (a) is not currently an
officer or employee of the Corporation or any Affiliate; (b) is not a former
employee of the Corporation or any Affiliate who receives compensation for prior
services (other than from a tax-qualified retirement plan); (c) has not been an
officer of the Corporation or any Affiliate; (d) does not receive renumeration
from the Corporation or any Affiliate in any capacity other than as a director;
and (e)
1
<PAGE>
does not possess an interest in any other transactions or is not engaged in a
business relationship for which disclosure would be required under Item 404(a)
or (b) of Regulation S-K.
"Plan" - means the Amended and Restated 1998 Management Recognition Plan
of the Corporation.
"Restricted Period" - means the period of time selected by the Committee
for the purpose of determining when restrictions are in effect under Section 3
hereof with respect to Restricted Stock awarded under the Plan.
"Restricted Stock" - means Shares which have been contingently awarded
to a Participant by the Committee subject to the restrictions referred to in
Section 3 hereof, so long as such restrictions are in effect.
"Shares" - means the common stock, par value $0.01 per share, of the
Corporation.
3. Terms and Conditions of Restricted Stock. The Committee shall have
full and complete authority, subject to the limitations of the Plan, to grant
Awards and, in addition to the terms and conditions contained in paragraphs (a)
through (f) of this Section 3, to provide such other terms and conditions (which
need not be identical among Participants) in respect of such Awards, and the
vesting thereof, as the Committee shall determine.
(a) At the time of an Award, the Committee shall establish for each
Participant a Restricted Period which shall not be less than five
years, during which or at the expiration of which, as the Committee
shall determine and provide in the agreement referred to in paragraph
(d) of this Section 3, the Shares awarded as Restricted Stock shall
vest, and subject to any such other terms and conditions as the
Committee shall provide, Shares of Restricted Stock may not be sold,
assigned, transferred, pledged, voted or otherwise encumbered by the
Participant, except as hereinafter provided, during the Restricted
Period. During the restricted period, Shares awarded as Restricted
Stock will be voted by an independent trustee (which may be the
Trustee identified in paragraph (c) of this Section 3) and not by the
Participant. Except for such restrictions, and subject to paragraphs
(c) and (e) of this Section 3 and Section 4 hereof, the Participant as
owner of such shares shall have all the rights of a stockholder. The
Committee shall have the authority, in its discretion, to accelerate
the time at which any or all of the restrictions shall lapse with
respect to an Award, or to remove any or all of such restrictions,
whenever it may determine that such action is appropriate by reason of
changes in applicable tax or other laws or other changes in
circumstances occurring after the commencement of such Restricted
Period.
(b) Except as provided in Section 5 hereof, if a Participant ceases to
maintain Continuous Service for any reason (other than death or
disability), unless the Committee shall otherwise determine, all
Shares of Restricted Stock theretofore awarded to such Participant and
which at the time of such termination of Continuous Service are
subject to the restrictions imposed by paragraph (a) of this Section 3
shall upon such termination of Continuous Service be forfeited and
returned to the Corporation. If a Participant ceases to maintain
Continuous Service by reason of death or disability, Restricted Stock
then still subject to restrictions imposed by paragraph (a) of this
Section 3 will be free of those restrictions.
<PAGE>
(c) (i) Unless the alternative procedure set forth in subparagraph (ii) of
this paragraph (c) is followed, each certificate in respect of Shares
of Restricted Stock awarded under the Plan shall be registered in the
name of the Participant and deposited by the Participant, together
with a stock power endorsed in blank, with the Corporation and shall
bear the following (or a similar) legend:
The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and conditions
(including forfeiture) contained in the Amended and Restated 1998
Management Recognition Plan of Peoples-Sidney Financial Corporation.
Copies of such Plan are on file in the offices of the Secretary of
Peoples-Sidney Financial Corporation, 101 East Court Street, Sidney,
Ohio 45365.
2
<PAGE>
(ii) In lieu of issuing certificates for Shares of Restricted Stock to
and in the name of the Participant at the time of an Award pursuant to
subparagraph (i) of this paragraph (c), the Corporation may instead
issue such Shares on the Award date to and in the name of First Bankers
Trust Company, N.A., or any successor, as trustee under the Trust
Agreement for the Peoples-Sidney Financial Corporation 1998 Management
Recognition Plan (the "Trustee"), to be held for the benefit of the
Participant prior to vesting.
(d) At the time of the granting of any Award, the Participant shall enter
into an Agreement with the Corporation in a form specified by the
Committee, agreeing to the terms and conditions of the Award and such
other matters as the Committee, in its sole discretion, shall
determine (the "Restricted Stock Agreement").
(e) The payment to the Participant of any dividends declared or paid by
the Corporation on any Restricted Stock shall be deferred and held by
the Corporation (or by the Trustee, if the Shares of Restricted Stock
are issued in the name of the Trustee pursuant to subparagraph (ii) of
paragraph (c) of this Section 3) for the account of the Participant
until the earlier to occur of (i) the lapsing of the restrictions
imposed under paragraph (a) of this Section 3 or (ii) the forfeiture
of such shares under paragraph (b) of this Section 3. There shall be
credited at the end of each year (or portion thereof) interest on the
amount of the Participant's account at a rate per annum as the
Committee, in its discretion, may determine. Payment of deferred
dividends to the Participant, together with interest accrued thereon,
shall be made upon the lapsing of the restrictions imposed under
paragraph (a) of this Section 3. Shares of Restricted Stock shall not
be voted by the Participant during the Restricted Period. Shares of
Restricted Stock still subject to restriction shall be voted by an
independent party to be named by the Committee.
(f) At the lapsing of the restrictions imposed by paragraph (a) of this
Section 3, the Corporation shall, (i) if the procedure set forth in
subparagraph (i) of paragraph (c) of this Section 3 is followed,
deliver to the Participant (or where the relevant provision of
paragraph (b) of this Section 3 applies in the case of a deceased
Participant, to his legal representative, beneficiary or heir) the
certificate(s) and stock power deposited with it pursuant to
subparagraph (i) of paragraph (c) of this Section 3 and the Shares
represented by such certificate(s) shall be free of the restrictions
referred to in paragraph (a) of this Section 3 or (ii) if the
procedure set forth in subparagraph (ii) of paragraph (c) of this
Section 3 is followed, cause a certificate representing the number of
Shares then vesting to be issued in the name of the Participant, free
of all restrictions initially placed on such Shares. Any remaining
unvested Shares shall continue to be held by and in the name of the
Trustee for the benefit of the Participant until such Shares vest.
4. Adjustments Upon Changes in Capitalization. In the event of any change
in the outstanding Shares subsequent to the effective date of the Plan by reason
of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
number and class of shares with respect to which Awards theretofore have been
<PAGE>
granted under the Plan shall be appropriately adjusted by the Committee, whose
determination shall be conclusive. Any shares of stock or other securities
received, as a result of any of the foregoing, by a Participant with respect to
Restricted Stock shall be subject to the same restrictions and the
certificate(s) or other instruments representing or evidencing such shares or
securities shall be issued in the manner provided in Section 3 hereof.
5. Assignments and Transfers. During the Restricted Period, no Award nor
any right or interest of a Participant under the Plan in any instrument
evidencing any Award under the Plan may be assigned, encumbered or transferred
except (i) in the event of the death of a Participant, to the Participant's
Beneficiary, or (ii) pursuant to a qualified domestic relations order as defined
in the Code or Title I of ERISA or the rules thereunder.
6. Administration. The Plan shall be administered by a Committee
consisting of two or more members, each of whom shall be a Non-Employee
Director. The members of the Committee shall be appointed by the Board of
Directors of the Corporation. Except as limited by the express provisions of the
Plan, the Committee shall have sole
3
<PAGE>
and complete authority and discretion to: (i) select Participants and grant
Awards; (ii) determine the number of Shares to be subject to types of Awards
generally, as well as individual Awards granted under the Plan; (iii) determine
the terms and conditions upon which Awards shall be granted under the Plan; (iv)
prescribe the form and terms of instruments evidencing such grants; and (v)
establish from time to time regulations for the administration of the Plan,
interpret the Plan, and make all determinations deemed necessary or advisable
for the administration of the Plan.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the Committee without a meeting, shall
be acts of the Committee.
7. Shares Subject to Plan. Subject to adjustment by the operation of
Section 4 hereof, the maximum number of Shares with respect to which Awards may
be made under the Plan is 71,415 Shares. The Shares with respect to which Awards
may be made under the Plan may be either authorized and unissued Shares or
issued Shares heretofore or hereafter reacquired and held as treasury Shares. An
Award shall not be considered to have been made under the Plan with respect to
Restricted Stock which is forfeited and new Awards may be granted under the Plan
with respect to the number of Shares as to which such forfeiture has occurred.
The Corporation's obligation to deliver Shares with respect to an Award
shall, if the Committee so requests, be conditioned upon the receipt of a
representation as to the investment intention of the Participant or any other
person to whom such Shares are to be delivered, in such form as the Committee
shall determine to be necessary or advisable to comply with the provisions of
the Securities Act of 1933 or any other Federal, state or local securities
legislation or regulation. It may be provided that any representation
requirement shall become inoperative upon a registration of the Shares or other
action eliminating the necessity of such representation under such Securities
Act or other securities legislation. The Corporation shall not be required to
deliver any Shares under the Plan prior to (i) the admission of such shares to
listing on any stock exchange on which Shares may then be listed, and (ii) the
completion of such registration or other qualification of such Shares under any
state or Federal law, rule or regulation, as the Committee shall determine to be
necessary or advisable.
8. Employee Rights Under the Plan. No director, director emeritus,
advisory director, officer or employee shall have a right to be selected as a
Participant nor, having been so selected, to be selected again as a Participant
and no director, officer, employee or other person shall have any claim or right
to be granted an Award under the Plan or under any other incentive or similar
plan of the Corporation or any Affiliate. Neither the Plan nor any action taken
thereunder shall be construed as giving any officer or employee any right to be
retained in the employ of the Corporation, the Association or any Affiliate.
9. Withholding Tax. Upon the termination of the Restricted Period with
respect to any shares of Restricted Stock (or at such earlier time, if any, that
an election is made by the Participant under Section 83(b) of the Code, or any
successor provision thereto, to include the value of such shares in taxable
income), the Corporation may, in its sole discretion, withhold from any payment
or distribution made under this Plan sufficient Shares or withhold sufficient
cash to cover any applicable withholding and employment taxes. The Corporation
<PAGE>
shall have the right to deduct from all dividends paid with respect to shares of
Restricted Stock the amount of any taxes which the Corporation is required to
withhold with respect to such dividend payments. No discretion or choice shall
be conferred upon any Participant with respect to the form, timing or method of
any such tax withholding.
10. Amendment or Termination. The Board of Directors of the Corporation
may amend, suspend or terminate the Plan or any portion thereof at any time;
provided, however, that no such amendment, suspension or termination shall
impair the rights of any Participant, without his consent, in any Award
theretofore made pursuant to the Plan.
11. Term of Plan. The Plan shall become effective upon its ratification by
the stockholders of the Corporation. It shall continue in effect for a term of
ten years unless sooner terminated under Section 11 hereof.
4
<PAGE>
12. Director Awards. By, and simultaneously with, the ratification of this
Plan by the stockholders of the Corporation, each non-employee member of the
Board of Directors of the Corporation is hereby granted an Award equal to 3,570
Shares. Each such Award shall be evidenced by a Restricted Stock Agreement in a
form approved by the Corporation and shall be subject in all respects to the
terms and conditions of this Plan, which are controlling. Except as otherwise
provided herein or in the applicable Restricted Stock Agreement, all Awards
granted pursuant to this Section 12 shall be earned in five equal annual
installments, with the first installment vesting on the one-year anniversary of
the date of grant, as long as the director maintains Continuous Service with the
Corporation or its Affiliates, provided, however, no Award shall be earned in
any fiscal year in which the Association fails to meet its capital requirements.
5
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PEOPLES-SIDNEY FINANCIAL CORPORATION
1999 ANNUAL REPORT
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
Sidney, Ohio
ANNUAL REPORT
June 30, 1999
CONTENTS
TO OUR SHAREHOLDERS................................................... 3
BUSINESS OF PEOPLES-SIDNEY FINANCIAL CORPORATION...................... 4
MARKET PRICE OF THE CORPORATION'S COMMON SHARES
AND RELATED SHAREHOLDER MATTERS..................................... 4
SELECTED CONSOLIDATED FINANCIAL INFORMATION
AND OTHER DATA...................................................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................. 8
REPORT OF INDEPENDENT AUDITORS ....................................... 23
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets .................................... 24
Consolidated Statements of Income .............................. 25
Consolidated Statements of Changes in Shareholders' Equity ..... 26
Consolidated Statements of Cash Flows .......................... 29
Notes To Consolidated Financial Statements ..................... 31
SHAREHOLDER INFORMATION............................................... 50
CORPORATE INFORMATION................................................. 51
<PAGE>
{GRAPHIC-MAP WITH PHOTOS OF BANK LOCATIONS]
<PAGE>
[GRAPHIC-PHOTO OF PRESIDENT AND CEO]
Dear Shareholder:
As you will see as you review this report, fiscal 1999 was a year of growth for
our Corporation and its subsidiary, Peoples Federal Savings and Loan
Association. This growth, both in operations and physical structures will now
serve as a foundation as we prepare to enter the next millennium.
The Corporation experienced increases in assets, deposits, mortgage and consumer
loans. These gains were enhanced by the addition of consumer and business lines
of credit and agricultural operation loans. Assets increased 10%, reaching
$117,000,000 at June 30, 1999. Deposits reached $84,300,000 at our fiscal year
end, a 7% gain. Total mortgage loans increased $7,100,000 to $101,700,000, an 8%
increase over fiscal 1998. You will also note that our consumer and other loan
portfolio reflected a 92% increase to $4,130,000.
Net income for the year totaled $510,376 or $.32 per share. Although net income
was lower than the previous year, the Corporation's income reflects the
additional costs of our two new facilities and additional staff in Anna and
Jackson Center, Ohio. I am pleased to report that our branch offices are
currently operating at their anticipated levels and will soon celebrate their
one-year anniversaries. Additional costs were also recognized to enhance our
employee benefit plans which were approved by the shareholders on May 22, 1998.
The Corporation is now poised at a new plateau of operations which, over time,
will continue to enhance shareholder value.
Speaking of shareholder value, during the past year we continued to manage our
capital position by completing two separate stock buybacks. A total of 176,881
shares were purchased in the open market. Outstanding shares at June 30 totaled
1,664,622, a 9.6% decrease. As favorable market conditions prevail, the
Corporation will continue stock repurchases. Our current capital ratio is
14.85%, well in excess of regulatory requirements.
Our portfolio of services is constantly monitored to offer contemporary products
which meet our customers needs. During the past year, as a result of a study to
enhance operations, we elected to discontinue offering our VISA and Mastercard
credit card program. The entire program was sold to a provider who will continue
offering this service to our customers. Our products were, however, enhanced
with the addition of a Master Money Debit Card program. The initial results have
been favorable.
In conclusion, Peoples-Sidney Financial Corporation and its subsidiary are proud
of the talent and dedication of its biggest asset...its employees. Their
enthusiasm to promote our services and assist customers remains noteworthy. As
we move forward I can assure you that our Directors, Officers and staff will
diligently guard the interests of our shareholders. I invite you to promote our
company and use our services.
Sincerely,
/s/Douglas Stewart
------------------
Douglas Stewart
President and CEO
<PAGE>
BUSINESS OF PEOPLES-SIDNEY
FINANCIAL CORPORATION
Peoples-Sidney Financial Corporation ("Peoples"), 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 ("Association"), a savings and loan association chartered under the
laws of the United States together referred to as the Corporation. On April 25,
1997, Peoples 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 ("Conversion"). Peoples' 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 main office at 101 East Court Street, Sidney, Ohio. During fiscal 1999, the
Association opened full-service branches in Anna and Jackson Center, 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,
mortgage-backed and related securities and various types of short-term liquid
assets.
As a savings and loan holding company, Peoples is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury ("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"). The FDIC insures deposits in the Association
up to applicable limits. The Association is also a member of the Federal Home
Loan Bank of Cincinnati ("FHLB").
MARKET PRICE OF THE CORPORATION'S COMMON SHARES AND
RELATED SHAREHOLDER MATTERS
The Corporation had 1,664,622 common shares outstanding on August 6, 1999, held
of record by approximately 919 shareholders. Price information with respect to
the Corporation's common shares is quoted on The NASDAQ National Market System.
The high and low daily closing 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.
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
-------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
High $ 21.75 $ 18.06 $ 16.88 $ 13.25
Low 18.13 15.00 12.50 10.00
Cash Dividends .07 .07 .07 .07
<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>
(1) Cash dividends for the quarter ended June 30, 1998 include a $4.00 per
share special dividend of which $3.99 was a 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 may make capital distributions in a calendar year without
prior notice to the OTS as long as the distributions do not exceed an amount
equal to the savings association's net income for that year to date plus the
savings association's retained net income for the preceding two years. An
application and approval from the OTS must be obtained if the proposed
distribution would cause total distributions for that year to exceed net income
for that year to date plus the savings association's retained net income for the
preceding two years. Savings associations would be required to file a notice
with the OTS whenever an application would not be required based on the above
and: (1) The savings association will not be at least adequately capitalized
following the capital distribution; (2) The capital distribution would reduce
the amount of, or retire any part of the savings association's common or
preferred stock, or retire any part of debt instruments such as notes or
debentures included in capital; (3) The proposed distribution would violate a
prohibition contained in any applicable statute, regulation or agreement between
the savings association and the OTS (or the FDIC), or a condition imposed on the
savings association in an OTS-approved application or notice; or, (4) The
savings association is a subsidiary of a savings and loan holding company.
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: 1999 1998 1997 1996 1995
--------------- ------------ ------------- ------------ ------------ ------------
(In thousands)
Total amount of:
<S> <C> <C> <C> <C> <C>
Assets $ 116,882 $ 105,903 $ 103,142 $ 86,882 $ 78,976
Time deposits in other
financial institutions 400 100 5,000 1,100 -
Securities available for sale 7,858 4,016 2,013 - -
Securities held to maturity - - 1,999 2,598 3,098
FHLB stock 908 847 763 667 622
Loans receivable, net (1) 102,803 94,053 88,924 78,233 71,933
Deposits 84,310 79,054 77,045 77,318 70,306
Borrowed funds 14,800 7,000 - - -
Shareholders' equity (2) 17,362 19,626 25,712 9,213 8,361
<CAPTION>
Year ended June 30,
--------------------------------------------------------------------------
Selected Operations Data: 1999 1998 1997 1996 1995
- ------------------------ ------------ ------------- ----------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $ 8,105 $ 8,067 $ 7,189 $ 6,513 $ 5,725
Interest expense 4,353 3,944 4,051 3,706 2,968
------------ ------------- ------------ ------------ ------------
Net interest income 3,752 4,123 3,138 2,807 2,757
Provision for loan losses 104 41 103 68 55
------------ ------------- ------------ ------------ ------------
Net interest income after
provision for loan losses 3,648 4,082 3,035 2,739 2,702
Noninterest income 89 63 63 57 60
Noninterest expense 2,873 2,205 2,222 1,504 1,495
------------ ------------- ------------ ------------ ------------
Income before income taxes 864 1,940 876 1,292 1,267
Income tax expense 354 707 312 440 432
------------ ------------- ------------ ------------ ------------
Net income $ 510 $ 1,233 $ 564 $ 852 $ 835
============ ============= ============ ============ ============
Earnings per common
share - basic (3) $ .32 $ .74 $ .09
============ ============ ============
Earnings per common
share - diluted (3) $ .32 $ .74 $ .09
============ ============ ============
Dividends declared per share (3) $ .28 $ 4.26 $ -
============ ============ ============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
At or for the year ended June 30,
----------------------------------------------------------------------
Selected Financial Ratios and 1999 1998 1997 1996 1995
- ----------------------------- ------------ ------------- ----------- ------------ --------
Other Data:
----------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net
income to average total assets) 0.47% 1.17% 0.60% 1.01% 1.07%
Return on equity (ratio of net
income to average equity) (2) 2.73 4.77 4.70 9.70 10.55
Interest rate spread (4) 2.81 2.78 2.81 2.97 3.30
Net interest margin (5) 3.57 4.01 3.45 3.41 3.66
Ratio of operating expense to
average total assets 2.65 2.10 2.38 1.78 1.93
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.18x 1.32x 1.14x 1.10x 1.09x
Quality Ratios:
Nonperforming assets to total
assets at end of period (6) 0.65% 0.91% 0.84% 1.41% 1.80%
Allowance for loan losses to
nonperforming loans 70.03 44.41 45.78 25.14 17.70
Allowance for loan losses to
gross loans receivable (7) 0.50 0.44 0.43 0.37 0.33
Capital Ratios:
Shareholders' equity to total
assets at end of period (2) 14.85 18.53 24.93 10.60 10.59
Average equity to average
assets (2) 17.24 24.59 12.87 10.43 10.24
Other Data:
Number of full service offices 3 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 was 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 dividend of which $3.99 was a 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 consolidated
financial condition and consolidated results of operations as of and for the
year ended June 30, 1999, 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 consolidated
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. The conversion
was consummated on April 25, 1997 by amending the Association's charter and the
sale of Peoples' common stock in an amount equal to the pro forma market value
of the Association after giving effect to the conversion. A total of 1,785,375
common shares of Peoples were sold at $10.00 per share. Net proceeds from the
sale were $17,217,944 after deducting the costs of conversion. Peoples 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 Peoples
because of the conversion.
The Corporation provides financial services through its main office in Sidney,
Ohio, and branch offices in Anna and Jackson Center, Ohio. Its primary deposit
products are checking, savings and term certificate accounts, and it primary
lending products are residential mortgage, commercial and installment loans.
Substantially all loans are secured by specific items of collateral including
business assets, consumer assets and real estate. Commercial loans are expected
to be repaid from cash flow from operations of businesses. Real estate loans are
secured by both residential and commercial real estate. Substantially all
revenues and services are derived from financial institution products and
services in Shelby County and contiguous counties.
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.
(Continued)
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, 1999 were $116.9 million compared to $105.9 million at
June 30, 1998, an increase of $11.0 million, or 10.4%. The increase in total
assets was primarily due to an increase in loans, securities available for sale
and premises and equipment funded by a decrease in cash and cash equivalents,
and an increase in deposits and borrowed funds.
Interest-bearing deposits with other banks decreased $1.7 million and overnight
funds decreased $2.0 million from June 30, 1998 to June 30, 1999 to provide for
loan growth. The excess of such funds, which were not used to fund loan growth,
was invested in securities available for sale to improve earnings.
Securities available for sale increased $3.8 million from June 30, 1998 to June
30, 1999. The Corporation borrowed $5.0 million in June 1999 under a 10-year
fixed-rate advance from the FHLB and purchased GNMA mortgage-backed securities
with an original par value of $5.0 million to leverage some of the Corporation's
excess capital.
Loans receivable increased $8.7 million from $94.1 million at June 30, 1998 to
$102.8 million at June 30, 1999. The Corporation experienced increases in all
mortgage loan categories except for real estate construction and development and
land. The largest increase was in one- to four-family residential real estate
loans which increased $4.5 million while multi-family residential and commercial
real estate loans increased a combined total of $3.5 million. These increases
were partially offset by a $846,000 decrease in real estate construction and
development loans. The overall increase and continued growth 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 increased $2.0 million
between June 30, 1998 and June 30, 1999. The increase was primarily related to
new auto loans and commercial lines of credit originated at the Association's
two new branch locations. Even with the increase, consumer and other loans
remain a small portion of the entire loan portfolio and represented only 3.9% of
gross loans at June 30, 1999 compared to 2.2% at June 30, 1998.
Premises and equipment increased $1.0 million from $1.0 million at June 30, 1998
to $2.0 million at June 30, 1999. The increase resulted because the Corporation
constructed a new, full-service branch banking office in Anna, Ohio. The
Corporation also purchased equipment and made leasehold improvements in
connection with the opening of a new, leased branch banking office in Jackson
Center, Ohio.
<PAGE>
Total deposits increased $5.2 million from $79.1 million at June 30, 1998 to
$84.3 million at June 30, 1999. The Corporation experienced increases in all
types of deposits. The majority of deposit growth was in negotiable orders of
withdrawal ("NOW") accounts, which increased by $1.5 million, savings accounts,
which increased by $1.1 million and certificates of deposit, which increased by
$1.3 million. The increases in the various deposit types are the result of
regular interest-rate promotions, as well as special promotions offered in
connection with the opening of new branch locations in Anna and Jackson Center,
Ohio. All certificates of deposit mature within five years with the majority
maturing in the next two years.
(Continued)
9
<PAGE>
Borrowed funds totaled $14.8 million at June 30, 1999 and $7.0 million at June
30, 1998. Borrowings at June 30, 1999 consisted of $2.8 million in short-term
cash management advances and $12.0 million in long-term fixed-rate advances. The
$5.0 million long-term fixed-rate advance borrowed in June 1999 was discussed
above. The remaining $7.0 million in long-term fixed-rate advance was borrowed
near the end of fiscal 1998 under a 10-year fixed-rate advance from the FHLB of
Cincinnati to fund a $4.00 per share special dividend, of which $3.99 was a 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.
Total shareholders' equity decreased $2.2 million from $19.6 million at June 30,
1998 to $17.4 million at June 30, 1999. The net decrease is due to the purchase
of treasury stock, the establishment of a Management Recognition Plan ("MRP")
and paying out almost all the Corporation's 1999 earnings in dividends. The
decrease is part of Management's capital planning strategy. During 1999, the
Corporation's Board of Directors approved two separate 5% stock buybacks, which
were completed prior to June 30, 1999.
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, 1999 and June 30, 1998
Net Income. The Corporation earned net income of $510,000 for the year ended
June 30, 1999 compared to net income of $1,233,000 for the year ended June 30,
1998. The decrease in net income was primarily due to a decrease in net interest
income combined with an increase in noninterest expense.
Net Interest Income. Net interest income totaled $3,752,000 for the year ended
June 30, 1999 compared to $4,123,000 for the year ended June 30, 1998, a
decrease of $371,000, or 9.0%. The decrease was the result of additional
interest paid on borrowed funds.
<PAGE>
Interest and fees on loans increased $234,000, or 3.1%, from $7,463,000 for the
year ended June 30, 1998 to $7,697,000 for the year ended June 30, 1999. The
increase in interest income was due to higher average loans receivable, related
primarily to the origination of new commercial real estate and one- to
four-family residential loans. The increase in interest and fees on loans due to
volume was partially offset by a decline in the yield earned on loans, which
dropped from 8.09% for 1998 to 7.88% for 1999.
(Continued)
10
<PAGE>
Interest earned on securities totaled $229,000 for the year ended June 30, 1999
compared to $252,000 for the year ended June 30, 1998. Interest on
interest-bearing demand, time and overnight deposits with other financial
institutions decreased $177,000 for the year ended June 30, 1999 compared to the
year ended June 30, 1998. The decreases were the result of lower average
balances of securities and interest-bearing deposits and 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.
Interest paid on deposits decreased $55,000 for the year ended June 30, 1999
compared to the year ended June 30, 1998. The average balance for all
interest-bearing deposits increased and the mix of the deposit portfolio shifted
slightly from certificates of deposit to transaction accounts. The average cost
of deposits decreased from 5.06% for the year ended June 30, 1998 to 4.80% for
the year ended June 30, 1999. The decrease in the average cost of funds more
than offset the increase in volume.
Interest paid on borrowed funds totaled $470,000 for the year ended June 30,
1999 compared to $6,000 for the year ended June 30, 1998. The Corporation did
not borrow funds during 1998 until June 25, 1998 to fund the return of capital
discussed previously. Management borrowed short- and long-term funds from the
FHLB throughout 1999 to fund loan growth and leverage some of the Corporation's
excess capital.
Provision for Loan Losses. The Corporation maintains an allowance for loan
losses in an amount that, in management's judgment, is adequate to absorb
probable 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 probable 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, 1999 totaled $104,000
compared to $41,000 for the year ended June 30, 1998, an increase of $63,000, or
151.7%. The allowance for loan losses totaled $529,000, or 0.50% of gross loans
receivable and 70.0% of total nonperforming loans at June 30, 1999, compared
with $426,000, or 0.44% of gross loans receivable and 44.4% of total
nonperforming loans at June 30, 1998. Charge-offs experienced by the Corporation
have primarily related to consumer and other non-real estate loans. As indicated
previously, such loans make up a small 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
<PAGE>
defined ratios of debt to income. Notwithstanding the charge-off history, as
well as a lower volume of nonperforming loans, management believes it is
necessary 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 $89,000 for the year ended June 30, 1999
compared to $63,000 for the year ended June 30, 1998. The primary reasons for
the increase were higher late charge income and service charges on NOW accounts
due to the increase in the number of accounts.
(Continued)
11
<PAGE>
Noninterest expense. Noninterest expense totaled $2,872,000 for the year ended
June 30, 1999 compared to $2,205,000 for the year ended June 30, 1998, an
increase of $667,000 or 30.3%. The increase is primarily related to compensation
and benefits, occupancy expenses and state franchise taxes.
Compensation and benefits expense increased $409,000, or 37.5%. The increase is
the result of normal, annual merit increases, the addition of employees for the
two new branches and the added expense of the MRP, which began in May 1998.
Compensation expense related to the MRP was $187,000 and $20,000 for the years
ended June 30, 1999 and 1998. Occupancy and equipment expense increased
$128,000, or 82.0%, due to the added costs of the two new branch offices. State
franchise taxes increased $70,000, or 32.7%, due to being taxed at higher
capital levels at the Association for a full year for 1999. 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 various
miscellaneous items.
Income Tax Expense. The volatility of income tax expense is primarily
attributable to the change in income before income taxes. Income tax expense
totaled $354,000 for the year ended June 30, 1999 compared to $706,000 for the
year ended June 30, 1998, a decrease of $352,000, or 49.9%. The effective tax
rates were 40.9% and 36.4% for the years ended June 30, 1999 and 1998,
respectively. The increase in the effective tax rate primarily relates to the
Corporation's stock-based benefit plans and their relative tax impact resulting
from lower pretax earnings.
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 was delayed until the first taxable year
beginning after December 31, 1997, provided the institution met certain
residential lending requirements. At June 30, 1999, the Association had
approximately $484,000 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 1999, $97,000 of bad debt reserves were
recaptured.
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
<PAGE>
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.
(Continued)
12
<PAGE>
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.
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.
Provision for Loan Losses. 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 was reflective of the fact that the Corporation did not experience
significant charge-offs during 1998. Charge-offs experienced by the Corporation
have primarily related to consumer and other non-real estate loans. As indicated
previously, such loans make up a small portion of the Corporation's total loan
portfolio.
Noninterest income. Noninterest income 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.
<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, which resulted in expense of $20,000 for fiscal 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
(Continued)
13
<PAGE>
increases in 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 is scheduled to be reduced to
$.024 per $100 in deposits no later than January 2000.
Income Tax Expense. The volatility of income tax expense is primarily
attributable to the change in income before income taxes. Income tax expense
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.
Yields Earned and Rates Paid. The following table sets forth certain information
relating to the Corporation's average balance sheet 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,
-----------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------- -------------------------------- -------------------------------
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>
ASSETS:
Interest-earning assets:
Interest-earning
deposits $ 2,853 $ 117 4.10% $ 5,919 $ 295 4.98% $ 3,467 $ 194 5.60%
Securities available
for sale (1) 3,635 229 6.31 3,013 199 6.65 308 21 6.84
Securities held to
maturity - - - 958 53 5.53 2,138 120 5.61
Loans receivable (2) 97,702 7,697 7.88 92,208 7,463 8.09 84,421 6,805 8.06
FHLB stock 870 62 7.13 789 57 7.22 698 49 7.02
--------- ------- -------- ------- -------- -----
Total interest-
earning assets 105,060 8,105 7.72 102,887 8,067 7.84 91,032 7,189 7.90
--------- ------- -------- ------- -------- -----
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-earning
assets:
Cash and due from
banks 725 536 498
Premises and
equipment, net 1,809 817 775
Accrued interest and
other assets 950 920 1,014
--------- -------- --------
Total noninterest-
earning assets 3,484 2,273 2,287
--------- -------- --------
Total assets $ 108,544 $105,160 $ 93,319
========= ======== ========
</TABLE>
(Continued)
14
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------- -------------------------------- ------------------------------
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>
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest-bearing
liabilities:
Savings deposits $ 18,939 $ 571 3.01% $ 18,236 $ 557 3.05% $ 17,973 $ 555 3.09%
Demand and NOW
deposits 5,591 152 2.72 3,911 95 2.43 4,313 105 2.43
Certificate accounts 56,415 3,160 5.60 55,737 3,286 5.90 56,085 3,326 5.93
---------- -------- -------- ------- ------ -----
Total deposits 80,945 3,883 4.80 77,884 3,938 5.06 78,371 3,986 5.09
Borrowed funds 7,764 470 6.05 96 6 6.25 1,163 65 5.59
--------- ------- -------- ------- -------- -----
Total interest-
bearing liabilities 88,709 4,353 4.91 77,980 3,944 5.06 79,534 4,051 5.09
--------- ------- -------- ------- -------- -----
Noninterest-bearing
liabilities
Demand deposits 440 493 1,281
Accrued interest
payable and other
liabilities 681 825 493
--------- -------- --------
Total noninterest-
bearing
liabilities 1,121 1,318 1,774
--------- -------- --------
Total liabilities 89,830 79,298 81,308
Total shareholders'
equity 18,714 25,862 12,011
--------- -------- --------
Total liabilities and
shareholders'
equity $ 108,544 $105,160 $ 93,319
========= ======== ========
Net interest income;
interest rate
spread (3) $ 3,752 2.81% $ 4,123 2.78% $3,138 2.81%
======= ==== ======= ==== ====== ====
Net earning assets $ 16,351 $ 24,907 $ 11,498
========= ======== ========
Net interest margin (4) 3.57% 4.01% 3.45%
==== ==== ====
Average interest-earning
assets to interest-
bearing liabilities 1.18x 1.32x 1.14x
</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.
(Continued)
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,
----------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
-------------------------------- -----------------------------
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
--------- -------- --------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-earning deposits $ (133) $ (45) $ (178) $ 124 $ (23) $ 101
Securities available for sale 39 (9) 30 180 (2) 178
Securities held to maturity (53) - (53) (65) (2) (67)
Loans receivable 436 (202) 234 630 28 658
FHLB stock 6 (1) 5 7 1 8
--------- -------- --------- ------- -------- -------
Total interest-earning assets $ 295 $ (257) 38 $ 876 $ 2 878
========= ======== --------- ======= ======== -------
Interest expense attributable to:
Savings deposits $ 21 $ (7) 14 $ 8 $ (6) 2
Demand and NOW deposits 37 20 57 (10) - (10)
Certificates accounts 40 (166) (126) (21) (19) (40)
Borrowed funds 464 - 464 (66) 7 (59)
--------- -------- --------- -------- -------- -------
Total interest-bearing liabilities $ 562 $ (153) 409 $ (89) $ (18) (107)
========= ======== --------- ======= ======== -------
Net interest income $ (371) $ 985
========= =======
</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.
<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.
(Continued)
16
<PAGE>
At March 31, 1999, the most recent date with available data, 2% of the present
value of the Association's assets was $2,203,000. 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 $2,905,000 at March
31, 1999, the Association would have been required to make additional deductions
from its capital of $351,000 in determining whether the Association met its
risk-based capital requirement. Even with the deduction, the Association would
have still exceeded its risk-based capital requirement.
Presented below, as of March 31, 1999, 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 declining rates than rising rates. Since the
Association is primarily a residential mortgage lender, the mortgage portfolio
makes up nearly 90% of total assets. Faster prepayment speeds under a falling
rate environment, along with the large percentage of adjustable-rate loans, make
the Association more sensitive when interest rates fall. Additionally, the
Association has significant long-term fixed-rate FHLB advances that increase the
Association's sensitivity to a falling rate environment.
<TABLE>
<CAPTION>
NPV as % of
Portfolio Target Limit Under
Change Net Portfolio Value Value of Asset/Liability
in Rates $ Amount $ Change % Change Assets Management Policy
-------- -------- -------- -------- ------ -----------------
<S> <C> <C> <C> <C> <C>
+400 $13,256 $(2,938) (18.2)% 13.18% (75)%
+300 14,496 (1,699) (10.5) 14.03 (45)
+200 15,721 (473) (2.9) 14.80 (20)
+100 16,193 (1) (0.0) 14.94 (10)
STATIC 16,194 0 0.0 14.70 0
(100) 14,753 (1,441) (8.9) 13.34 (10)
(200) 13,289 (2,905) (17.9) 11.96 (20)
(300) 11,913 (4,281) (26.4) 10.65 (45)
(400) 10,809 (5,385) (33.2) 9.60 (75)
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making risk calculations.
(Continued)
17
<PAGE>
Liquidity and Capital Resources
The Corporation's liquidity, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities. These
activities are summarized below for the years ended June 30, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Net income $ 510 $ 1,233 $ 564
Adjustments to reconcile net income to net
cash from operating activities 824 83 134
------------- ------------ ------------
Net cash from operating activities 1,334 1,316 698
Net cash from investing activities (14,237) (602) (16,140)
Net cash from financing activities 9,889 1,437 15,517
------------- ------------ ------------
Net change in cash and cash equivalents (3,014) 2,151 75
Cash and cash equivalents at beginning of period 4,947 2,796 2,721
------------- ------------ ------------
Cash and cash equivalents at end of period $ 1,933 $ 4,947 $ 2,796
============= ============ ============
</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, 1999, the Association's regulatory liquidity was 7.47%. At
such date, the Corporation had commitments to originate fixed-rate commercial
and residential real estate loans totaling $375,000, and variable-rate
commercial and residential real estate mortgage loans totaling $394,000. 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 the federal regulatory agencies. 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. Failure to meet minimum capital requirements can initiate certain
mandatory actions that, if undertaken, could have a direct material effect on
the Corporation's financial statements. At June 30, 1999 and 1998, 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, 1999 and 1998. No conditions or events have occurred subsequent to the last
notification by regulators that management believes would have changed the
Association's category.
(Continued)
18
<PAGE>
The following table summarizes the Association's minimum regulatory capital
requirements and actual capital at June 30, 1999.
<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 $ 13,634 18.0% $ 6,069 8.0% $ 7,565 10.0% $ 75,864
Tier 1 risk-based
capital 13,152 17.3 3,035 4.0 10,117 13.3 75,864
Core capital 13,152 11.2 4,677 4.0 8,475 7.2 116,935
Tangible capital 13,152 11.2 1,754 1.5 11,398 9.7 116,935
</TABLE>
Impact of New Accounting Standards
Statement of Financial Accounting Standards (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, as amended by SFAS 137, is effective for
fiscal years beginning after June 15, 2000 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.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
- - SFAS 134 changes the way companies involved in mortgage banking activities
account for certain securities and other interests they retain after
securitizing mortgage loans that were held for sale. SFAS 134 allows any
retained mortgage-backed securities after a securitization of mortgage loans
held for sale to be classified based on holding intent in accordance with SFAS
115, except in cases where the retained mortgage-backed security is committed to
be sold before or during the securitization process, in which case it must be
classified as trading. Previously, all retained mortgage-backed securities were
required to be classified as trading. SFAS 134 was effective as of July 1, 1999,
and did not have a significant impact on the Corporation's financial statements.
<PAGE>
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.
(Continued)
19
<PAGE>
Year 2000 ("Y2K") Issue
The Corporation's lending and deposit activities are almost entirely dependent
upon computer systems which process and record transactions, although the
Corporation can effectively operate with manual systems for brief periods when
its electronic systems malfunction or cannot be accessed. The Corporation uses
the services of a nationally-recognized data processing service bureau that
specializes in data processing for financial institutions. In addition to its
basic operating activities, the Corporation's facilities and infrastructure,
such as security systems and communications equipment, are dependent, to varying
degrees, upon computer systems.
The Corporation began by identifying mission critical systems in the fourth
quarter of 1997. Every system was reviewed and inventoried and determined to be
"mission critical" or "nonmission critical." Mission critical systems are those
critical to providing service to the customers by maintaining customer records,
general accounting functions and those that would impact the Corporation's
liquidity if they should fail.
The following systems were identified as mission critical by management. A brief
description on the status of each system is listed below.
1. File servers and Novell network
2. Teller equipment and NCR BMS teller and new accounts software
3. Other personal computers
4. NCR Starcom account processing including ACH items and EDS (Jeannie)
5. IPS accounting software
6. Federal Home Loan Bank
7. Bankers Systems, Inc. new loan software
8. EDS
File Servers and Novell Network
Due to two new branches, two new Compaq file servers were purchased in 1998 and
have been verified as Y2K compliant. The Novell operating software was either
upgraded or purchased and has been verified as Y2K compliant. One file server at
a branch location will not rollover the date into the next century, but can be
manually set and will correctly handle dates forward including leap year. The
file server and software were tested at the Sidney location in August 1998 by
advancing the date to the next century and performing daily teller functions.
Teller Equipment and NCR Software
All personal computer-based equipment and NCR software were updated and then
tested in August 1998. The testing included running of transactions in Year 2000
environment against an on-line test file. Review of the results showed the
processing operated correctly and is Y2K compliant.
Other Personal Computers
All other personal computers have been tested by an outside vendor and found to
be Y2K compliant or will have the date loaded form the file server as noted by
the manufacturer and tested by the Corporation. All operating software and
office software were installed with the most recent Y2K versions and are Y2K
compliant.
(Continued)
20
<PAGE>
NCR Starcom Account Processing
The Starcom account processing was tested in August 1998 in conjunction with the
teller equipment and software. The results of these tests were reviewed and
showed that the system operated as expected and is Y2K compliant. An additional
test was performed in July 1999 for items that had been added since the previous
test. The results of this test indicate these items will operate as expected.
NCR also tested with EDS (Jeannie) and the ACH networks on a proxy basis and
have certified that they are compliant.
IPS Accounting Software
The IPS accounting was presented as being Y2K compliant by the manufacturer and
was tested in December 1998 by the Corporation. The test results were as
expected and showed the system to be compliant.
Federal Home Loan Bank
The FHLB is the primary correspondent of the Corporation and provides the
Corporation with liquidity through advances, and cash and also acts as
settlement agent with the Federal Reserve Bank. The FHLB has reported completion
of all mission-critical testing.
Bankers Systems, Inc. Loan Processing Software
The Bankers Systems, Inc. loan processing software has been certified as Y2K
compliant by the manufacturer and was tested in December 1998 by the
Corporation. All tests showed the software to be compliant.
EDS
EDS provides the Corporation with on-us check clearing, statement mailing, check
encoding and depositing. They have reported being Y2K compliant.
Bank Security
All security systems have been certified as Y2K compliant or do not use a date
function in the operation of the system.
Other Nonmission Critical Systems
All nonmission critical systems have been reviewed and made Y2K ready or will be
removed from service prior to year-end.
Y2K Costs
The total direct cost of upgrading equipment and software, personnel and testing
associated fees will be approximately $21,000. Some other indirect costs were
incurred due to upgrading equipment that would have needed to be replaced over
the coming year.
(Continued)
21
<PAGE>
Business Resumption Contingency Plan
The Corporation's contingency plans have been reviewed and updated. A special
Y2K addendum was also added to cover special concerns and needs of the century
change. These included liquidity and cash needs of the Association. The
Corporation has secured a guaranteed Y2K line from the FHLB to be used in
addition to the normal line of credit that has been recently renewed. The
Corporation plans to maintain higher levels of liquidity the remainder of 1999
through maturing investments, normal cash flows and FHLB advances. As part of
the contingency plan, however, the Corporation has determined that if such
service providers were to have their systems fail, the Corporation would
implement manual systems until such systems could be re-established. The
Corporation does not anticipate that such short term manual systems would have a
material adverse effect on the Corporation's operations. The expense of any
change in suppliers or servicers is not expected to be material to the
Corporation.
In addition to the possible expense related to its own systems, the Corporation
could incur losses if loan payments are delayed due to Year 2000 problems
affecting any of the Corporation's significant borrowers or impairing the
payroll systems of large employers in the Corporation's primary market area.
Because the Corporation's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Corporation's primary
market area is not significantly dependent on one employer or industry, the
Corporation does not expect any significant or prolonged Year 2000 related
difficulties will affect net earnings or cash flow.
22
<PAGE>
[GRAPHIC-CROWE CHIZEK LETTERHEAD]
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, 1999 and 1998, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1999, in conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
July 9, 1999
23
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,298,357 $ 655,188
Interest-bearing deposits in other financial institutions 634,621 2,292,065
Overnight deposits -- 2,000,000
------------- -------------
Total cash and cash equivalents 1,932,978 4,947,253
Time deposits in other financial institutions 400,000 100,000
Securities available for sale 7,858,111 4,015,890
Federal Home Loan Bank stock 907,700 846,500
Loans receivable, net 102,802,845 94,052,531
Accrued interest receivable 759,913 722,401
Premises and equipment, net 1,985,608 973,403
Other assets 235,104 245,339
------------- -------------
Total assets $ 116,882,259 $ 105,903,317
============= =============
LIABILITIES
Deposits $ 84,310,492 $ 79,053,686
Borrowed funds 14,800,000 7,000,000
Accrued interest payable and other liabilities 409,550 223,615
------------- -------------
Total liabilities 99,520,042 86,277,301
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 17,854 17,854
Additional paid-in capital 10,779,941 10,717,991
Retained earnings 10,643,040 10,581,096
Treasury stock, 120,753 shares at cost (1,766,399) --
Unearned employee stock ownership plan shares (1,520,139) (1,702,114)
Unearned management recognition plan shares (746,692) --
Accumulated other comprehensive income (45,388) 11,189
------------- -------------
Total shareholders' equity 17,362,217 19,626,016
------------- -------------
Total liabilities and shareholders' equity $ 116,882,259 $ 105,903,317
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1999, 1998 and 1997
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income
Loans, including fees $7,697,298 $7,463,234 $6,804,933
Securities 228,786 252,271 140,604
Interest-bearing demand, time and overnight deposits 117,218 294,440 194,226
Dividends on Federal Home Loan Bank stock 61,386 57,204 49,055
---------- ---------- ----------
Total interest income 8,104,688 8,067,149 7,188,818
Interest expense
Deposits 3,883,143 3,938,606 3,985,995
Borrowed funds 469,997 5,878 64,640
---------- ---------- ----------
Total interest expense 4,353,140 3,944,484 4,050,635
---------- ---------- ----------
Net interest income 3,751,548 4,122,665 3,138,183
Provision for loan losses 103,803 41,240 102,743
---------- ---------- ----------
Net interest income after provision for loan losses 3,647,745 4,081,425 3,035,440
Noninterest income
Service fees and other charges 88,729 62,912 63,048
Noninterest expense
Compensation and benefits 1,499,573 1,090,237 873,749
Director fees 120,000 129,000 83,800
Occupancy and equipment 285,073 156,676 137,027
Computer processing expense 185,542 156,470 152,318
FDIC deposit insurance premiums 47,627 49,096 559,660
State franchise taxes 283,863 213,864 133,639
Other 450,555 409,197 281,909
---------- ---------- ----------
Total noninterest expense 2,872,233 2,204,540 2,222,102
---------- ---------- ----------
Income before income taxes 864,241 1,939,797 876,386
Income tax expense 353,865 706,488 311,941
---------- ---------- ----------
Net income $ 510,376 $1,233,309 $ 564,445
========== ========== ==========
Earnings per common share - basic $ .32 $ .74 $ .09
========== ========== ==========
Earnings per common share - diluted $ .32 $ .74 $ .09
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended June 30, 1999, 1998 and 1997
Additional Unearned Unearned
Common Paid-In Retained Treasury ESOP MRP
Stock Capital Earnings Stock Shares Shares
-------- ------------- ------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 $ - $ - $ 9,212,537 $ - $ - $ -
Comprehensive income:
Net income for the year ended
June 30, 1997 - - 564,445 - - -
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects - - - - - -
Total comprehensive income
Sale of 1,785,375 shares of $.01 par
common stock, net of
conversion costs 17,854 17,200,090 - - - -
142,830 shares purchased under
employee stock ownership plan - - - - (1,428,300) -
Commitment to release 10,202
employee stock ownership
plan shares - 33,997 - - 102,020 -
-------- ------------- ------------- ------------ ------------ ----------
Balance, June 30, 1997 $ 17,854 $ 17,234,087 $ 9,776,982 $ - $ (1,326,280) $ -
======== ============= ============= ============ ============ ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income Total
--------- --------------
<S> <C> <C>
Balance, July 1, 1996 $ - $ 9,212,537
Comprehensive income:
Net income for the year ended
June 30, 1997 - 564,445
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects 9,070 9,070
--------------
Total comprehensive income 573,515
Sale of 1,785,375 shares of $.01 par
common stock, net of
conversion costs - 17,217,944
142,830 shares purchased under
employee stock ownership plan - (1,428,300)
Commitment to release 10,202
employee stock ownership
plan shares - 136,017
--------- --------------
Balance, June 30, 1997 $ 9,070 $ 25,711,713
========= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
Years Ended June 30, 1999, 1998 and 1997
Additional Unearned Unearned
Common Paid-In Retained Treasury ESOP MRP
Stock Capital Earnings Stock Shares Shares
-------- ------------- ------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997 $ 17,854 $ 17,234,087 $ 9,776,982 $ - $ (1,326,280) $ -
Comprehensive income:
Net income for the year ended
June 30, 1998 - - 1,233,309 - - -
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects - - - - - -
Total comprehensive income
Cash dividends - $.26 per share - - (429,195) - - -
$4.00 per share special dividend of
which $3.99 was a return of capital
distribution - (6,602,996) - - (538,504) -
Commitment to release 13,920 employee
stock ownership plan shares - 86,900 - - 162,670 -
-------- ------------- ------------- ------------ ------------ ----------
Balance, June 30, 1998 $ 17,854 $ 10,717,991 $ 10,581,096 $ - $ (1,702,114) $ -
======== ============= ============= ============ ============ ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income Total
--------- --------------
<S> <C> <C>
Balance, July 1, 1997 $ 9,070 $ 25,711,713
Comprehensive income:
Net income for the year ended
June 30, 1998 - 1,233,309
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects 2,119 2,119
--------------
Total comprehensive income 1,235,428
Cash dividends - $.26 per share - (429,195)
$4.00 per share special dividend of
which $3.99 was a return of capital
distribution - (7,141,500)
Commitment to release 13,920 employee
stock ownership plan shares - 249,570
--------- --------------
Balance, June 30, 1998 $ 11,189 $ 19,626,016
========= ==============
</TABLE>
(Continued)
27
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION 29.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
Years Ended June 30, 1999, 1998 and 1997
Additional Unearned Unearned
Common Paid-In Retained Treasury ESOP MRP
Stock Capital Earnings Stock Shares Shares
-------- ------------- ------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1998 $ 17,854 $ 10,717,991 $ 10,581,096 $ - $ (1,702,114) $ -
Comprehensive income:
Net income for the year ended
June 30, 1999 - - 510,376 - - -
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects - - - - - -
Total comprehensive income
Cash dividends - $.28 per share - - (448,432) - - -
Commitment to release 15,248 employee
stock ownership plan shares - 61,950 - - 181,975 -
Purchase of 177,881 treasury shares,
at cost - - - (2,719,692) - -
Transfer of 57,128 shares from treasury
stock to management recognition plan - - - 953,293 - (953,293)
12,378 shares earned under
management recognition plan - - - - - 206,601
-------- ------------- ------------- ------------ ------------ ----------
Balance, June 30, 1999 $ 17,854 $ 10,779,941 $ 10,643,040 $ (1,766,399) $ (1,520,139) $ (746,692)
======== ============= ============= ============ ============ ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income Total
--------- --------------
<S> <C> <C>
Balance, July 1, 1998 $ 11,189 $ 19,626,016
Comprehensive income:
Net income for the year ended
June 30, 1999 - 510,376
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects (56,577) (56,577)
--------------
Total comprehensive income 453,799
Cash dividends - $.28 per share - (448,432)
Commitment to release 15,248 employee
stock ownership plan shares - 243,925
Purchase of 177,881 treasury shares,
at cost - (2,719,692)
Transfer of 57,128 shares from treasury
stock to management recognition plan - -
12,378 shares earned under
management recognition plan - 206,601
--------- --------------
Balance, June 30, 1999 $ (45,388) $ 17,362,217
========= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 510,376 $ 1,233,309 $ 564,445
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 124,252 51,399 53,973
Provision for loan losses 103,803 41,240 102,743
Gain on sale of real estate owned (3,086) -- --
FHLB stock dividends (61,200) (57,000) (48,900)
Deferred taxes (56,025) (1,101) (12,778)
Compensation expense for ESOP shares 243,925 249,570 136,017
Compensation expense for MRP shares 186,601 -- --
Change in:
Accrued interest receivable and
other assets (28,444) (212,755) (127,860)
Accrued interest payable and other
liabilities 291,106 (25,707) 41,393
Deferred loan fees 22,600 37,183 (11,400)
------------ ------------ ------------
Net cash from operating activities 1,333,908 1,316,138 697,633
Cash flows from investing activities
Purchase of securities available for sale (7,926,777) (2,499,141) (1,998,974)
Proceeds from maturities of securities
available for sale 4,000,000 500,000 --
Proceeds from maturities of securities
held to maturity -- 2,000,000 600,000
Purchase of time deposits in other financial
institutions (900,000) (3,100,000) (5,000,000)
Proceeds from maturities of time deposits
in other financial institutions 600,000 8,000,000 1,100,000
Purchase of Federal Home Loan Bank stock -- (27,000) (46,600)
Net increase in loans (8,939,161) (5,206,615) (10,825,674)
Premises and equipment expenditures (1,136,457) (269,516) (11,588)
Proceeds from sale of real estate owned 65,530 -- 42,652
------------ ------------ ------------
Net cash from investing activities (14,236,865) (602,272) (16,140,184)
</TABLE>
(Continued)
29
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended June 30, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits $ 5,256,806 $ 2,008,256 $ (272,076)
Proceeds from long-term borrowings 5,000,000 7,000,000 --
Net change in short-term borrowings 2,800,000 -- --
Proceeds from issuance of common stock,
net of conversion costs -- -- 17,217,944
Cash provided to ESOP -- -- (1,428,300)
Return of capital distribution -- (7,141,500) --
Cash dividends paid (448,432) (429,195) --
Purchase of treasury shares (2,719,692) -- --
------------ ------------ ------------
Net cash from financing activities 9,888,682 1,437,561 15,517,568
Net change in cash and cash equivalents (3,014,275) 2,151,427 75,017
Cash and cash equivalents at beginning
of period 4,947,253 2,795,826 2,720,809
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,932,978 $ 4,947,253 $ 2,795,826
============ ============ ============
Supplemental disclosures of
cash flow information
Cash paid during the year for
Interest $ 4,343,587 $ 3,946,041 $ 4,096,411
Income taxes 191,000 951,000 240,000
Noncash transactions
Transfer from loans to
real estate owned 62,444 -- 42,652
Transfer of treasury stock to MRP 953,293 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
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 ("Peoples") and its
wholly-owned subsidiary, Peoples Federal Savings and Loan Association (the
"Association"), a federal stock savings and loan association, together referred
to as the Corporation. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Nature of Operations: The Corporation provides financial services through its
main office in Sidney, Ohio, and branch offices in Anna and Jackson Center,
Ohio. Its primary deposit products are checking, savings and term certificate
accounts, and its primary lending products are residential mortgage, commercial
and installment loans. Substantially all loans are secured by specific items of
collateral including business assets, consumer assets and real estate.
Commercial loans are expected to be repaid from cash flow from operations of
businesses. Real estate loans are secured by both residential and commercial
real estate. Substantially all revenues and services are derived from financial
institution products and services in Shelby County and contiguous counties.
Use of 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 Flows: Cash and cash equivalents are defined as cash, deposits with
financial institutions, overnight deposits and time deposits with original
maturities of 90 days or less. Overnight deposits are sold for one-day periods.
Net cash flows are reported 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 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 in other comprehensive income.
Interest and dividend income, adjusted by amortization of premiums and accretion
of discounts, is included in earnings. 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.
<PAGE>
Loans Receivable: Loans are reported at the principal balance outstanding, less
net deferred loan fees and the allowance for loan losses.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees over the loan term. Interest income is not reported when
full loan repayment is in doubt, typically when the loan is impaired or payments
are past due over 90 days. Payments received on such loans are reported as
principal reductions.
(Continued)
31
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, 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 nature and volume of 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 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.
Real Estate Owned: Real estate acquired in collection of a loan is initially
recorded at fair value at acquisition, establishing a new cost basis. 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 1999 or 1998.
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 total 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 basis 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
and its contiguous counties. Mortgage loans comprise approximately 96% and 98%
of the Corporation's loan portfolio at June 30, 1999 and 1998. The remainder of
the portfolio consists of consumer and other loans secured by automobiles,
deposit balances at the Association and various other assets.
<PAGE>
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.
(Continued)
32
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per Common Share: Basic earnings per share ("EPS") are based on net
income divided by the weighted average number of shares outstanding during the
period. Unallocated ESOP shares are not considered outstanding for this
calculation. Management recognition plan ("MRP") shares are considered
outstanding as they become vested. Diluted EPS shows the dilutive effect of 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
through June 30, 1997 of $150,298.
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.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as a separate
component of equity. The accounting standard that requires reporting
comprehensive income first applies for 1999, with prior information restated to
be comparable.
Reclassification: Reclassification of certain amounts in the prior year
consolidated financial statements have been made to conform to the 1999
presentation.
NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS AND
LOAN ASSOCIATION WITH THE CONCURRENT FORMATION OF A HOLDING
COMPANY
On November 8, 1996, the Board of Directors of the Association unanimously
adopted a Plan of Conversion to convert from a federally chartered mutual
savings and loan association to a federally chartered stock savings and loan
association with the concurrent formation of a holding company, Peoples-Sidney
Financial Corporation. The conversion was consummated on April 25, 1997 by
amending the Association's charter and the sale of the holding company's common
stock in an amount equal to the pro forma 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. 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.
<PAGE>
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.
(Continued)
33
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 3 - SECURITIES
Securities at year-end were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1999
Securities available for sale
U.S. Government agencies $ 2,998,229 $ - $ (41,509) $ 2,956,720
Mortgage-backed securities 4,928,652 - (27,261) 4,901,391
--------------- ---------- ----------- --------------
Total $ 7,926,881 $ - $ (68,770) $ 7,858,111
=============== ========== =========== ==============
1998
Securities available for sale
U.S. Government agencies $ 3,998,936 $ 21,459 $ (4,505) $ 4,015,890
=============== ========== =========== ==============
</TABLE>
Contractual maturities of securities at year-end 1999 were as follows. Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Securities available for sale
Due after one year through five years $ 2,998,229 $ 2,956,720
Mortgage-backed securities 4,928,652 4,901,391
-------------- ---------------
$ 7,926,881 $ 7,858,111
============== ===============
</TABLE>
No securities were pledged as collateral at year-end 1999 or 1998. No securities
were sold during the years ended June 30, 1999, 1998 and 1997.
(Continued)
34
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 4 - LOANS RECEIVABLE
Year-end loans receivable were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Mortgage loans:
1-4 family residential $ 84,165,483 $ 79,690,787
Multi-family residential 1,358,906 654,871
Commercial real estate 9,407,998 6,608,207
Real estate construction and
development 5,930,241 6,776,389
Land 866,988 867,755
Total mortgage loans 101,729,616 94,598,009
Consumer and other loans 4,131,469 2,154,474
--------------- ----------------
Total loans receivable 105,861,085 96,752,483
Less:
Allowance for loan losses (528,898) (425,642)
Loans in process (2,311,369) (2,078,937)
Deferred loan fees (217,973) (195,373)
--------------- ----------------
$ 102,802,845 $ 94,052,531
=============== ================
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 425,642 $ 397,159 $ 307,308
Provision for losses 103,803 41,240 102,743
Charge-offs (22,621) (15,037) (21,645)
Recoveries 22,074 2,280 8,753
------------ ------------ ------------
Balance at end of year $ 528,898 $ 425,642 $ 397,159
============ ============ ============
</TABLE>
As of and for the years ended June 30, 1999, 1998 and 1997, 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 $315,000
and $713,000 at June 30, 1999 and 1998.
<PAGE>
Loans to executive officers, directors and companies with which they are
affiliated aggregating $60,000 or more to any one related party for the year
ended June 30, 1999, were as follows.
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of period $ 311,168
New loans 98,482
Principal repayments (94,423)
--------------
Balance at end of period $ 315,227
==============
</TABLE>
(Continued)
35
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Year-end accrued interest receivable was as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loans $ 684,767 $ 655,509
Securities 72,296 66,579
Interest-bearing deposits in other
financial institutions 2,850 313
------------ ------------
$ 759,913 $ 722,401
============ ============
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Year-end premises and equipment was as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 225,166 $ 225,166
Buildings and improvements 1,769,702 995,468
Furniture and equipment 1,148,856 590,421
Construction in progress - 196,212
------------ ------------
Total cost 3,143,724 2,007,267
Accumulated depreciation 1,158,116 1,033,864
------------ ------------
$ 1,985,608 $ 973,403
============ ============
</TABLE>
The Jackson Center branch facility is leased under an operating lease which
began in September 1998. The lease term is for ten years. At the conclusion of
the fifth year, the rent shall be adjusted by the cumulative increase in the
Consumer Price Index over the previous five years with a maximum increase of 15%
for the remaining five years of the lease term. Total rental expense was $20,226
for the year ended June 30, 1999. The lease agreement includes an option to
purchase the property at any time during the lease term.
<PAGE>
Rental commitments under this noncancelable operating lease, assuming a maximum
increase of 15% after year five, were:
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
2000 $ 24,271
2001 24,271
2002 24,271
2003 24,271
2004 25,784
Thereafter 108,692
-----------
$ 231,560
===========
</TABLE>
36
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 7 - FEDERAL INCOME TAXES
Income tax expense was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current $ 409,890 $ 707,589 $ 324,719
Deferred (56,025) (1,101) (12,778)
----------- ----------- -----------
$ 353,865 $ 706,488 $ 311,941
=========== =========== ===========
</TABLE>
Year-end deferred tax assets and deferred tax liabilities were due to the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Items giving rise to deferred tax assets
Deferred loan fees $ 55,688 $ 43,422
Reserve for delinquent interest 2,132 7,607
Allowance for loan losses 15,198 -
Accrued ESOP expense 12,385 3,620
Accrued MRP expense 5,401 6,800
Unrealized loss on securities available for sale 23,381 -
----------- -----------
Total deferred tax assets 114,185 61,449
Items giving rise to deferred tax liabilities
Depreciation (50,663) (45,387)
Federal Home Loan Bank
stock dividends (114,240) (93,432)
Allowance for loan losses - (52,754)
Unrealized gain on securities available for sale - (5,764)
----------- -----------
Total deferred tax liabilities (164,903) (197,337)
----------- -----------
Net deferred tax liability $ (50,718) $ (135,888)
=========== ===========
</TABLE>
<PAGE>
Effective tax rates differ from Federal statutory rates applied to financial
statement income due to the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at the statutory
tax rate on pretax income $ 293,842 $ 659,531 $ 297,971
Add tax effect of:
ESOP fair value in excess of cost 39,481 46,546 11,559
MRP cost in excess of fair value 19,884 - -
Nondeductible expenses and other 658 411 2,411
----------- ----------- -----------
$ 353,865 $ 706,488 $ 311,941
=========== =========== ===========
Statutory tax rate 34.0% 34.0% 34.0%
=========== ========== ===========
Effective tax rate 40.9% 36.4% 35.6%
=========== ========== ===========
</TABLE>
(Continued)
37
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 7 - FEDERAL INCOME TAXES (Continued)
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 was delayed until the first taxable year
beginning after December 31, 1997, because the Association met certain
residential lending requirements. At June 30, 1999, the Association had
approximately $484,000 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 1999, $97,000 bad debt reserves were
recaptured.
Retained earnings at June 30, 1999 and 1998 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, 1999
and 1998. 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
Year-end deposits were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Noninterest-bearing
demand deposits $ 649,972 $ 168,836
NOW accounts 4,873,938 3,362,538
Money market accounts 1,845,923 981,958
Savings accounts 19,544,387 18,455,589
Certificates of deposit 57,396,272 56,084,765
--------------- ----------------
$ 84,310,492 $ 79,053,686
=============== ================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $4,463,000 and $4,057,000 at June 30, 1999 and 1998, respectively.
Deposits more than $100,000 are not insured by the FDIC.
<PAGE>
The scheduled maturities of certificates of deposit as of June 30, 1999 were as
follows:
Year ended June 30,
2000 $ 31,603,351
2001 16,393,941
2002 4,169,384
2003 3,555,442
2004 1,674,154
------------
$ 57,396,272
============
(Continued)
38
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 9 - BORROWED FUNDS
At June 30, 1999, the Association had a cash management line of credit enabling
it to borrow up to $5,360,000 from the Federal Home Loan Bank of Cincinnati
("FHLB"). All cash management advances have an original maturity of 90 days. The
line of credit must be renewed on an annual basis. Borrowings outstanding on
this line of credit at June 30, 1999 were $2,800,000 with interest rates of
4.90% and 6.02%. There were no borrowings outstanding on this line of credit at
June 30, 1998.
As a member of the FHLB system, the Association has the ability to obtain
borrowings up to a maximum total of $18,154,000, including the cash management
line-of-credit. Advances from the Federal Home Loan Bank at year-end were as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
4.90% FHLB cash management advance,
due September 17, 1999 $ 2,300,000 $ -
4.90% FHLB cash management advance,
due September 22, 1999 300,000 -
6.02% FHLB cash management advance,
due September 28, 1999 200,000 -
6.13% FHLB advance, due June 25, 2008 7,000,000 7,000,000
6.00% FHLB advance, due June 11, 2009 5,000,000 -
--------------- ----------------
$ 14,800,000 $ 7,000,000
=============== ================
</TABLE>
The maximum month-end balance of advances outstanding was $14,800,000 in 1999
and $7,000,000 in 1998. Average balances of borrowings outstanding during 1999
and 1998 were $7,764,000 and $96,000. 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.
(Continued)
39
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 11 - RETIREMENT PLANS
The Corporation adopted a 401(k) profit sharing plan on April 1, 1997. With
certain exceptions, all employees who have attained the age of 21 and who have
completed one year of employment, during which they worked at least 1,000 hours,
are eligible to participate in the plan. The Corporation provides a matching
contribution on behalf of participants who make elective compensation deferrals
at the rate of 50% of the first 6% of participant contributions up to a maximum
match of 3% of the participant's compensation. The Corporation may also
contribute additional amounts at its discretion. Employee contributions are
vested at all times and the Corporation's matching contributions vest evenly
over 5 years of service. The cash contribution and related expense included in
salaries and employee benefits was $15,951, $18,440 and $5,219 for the years
ended June 30, 1999, 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. 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.
The ESOP borrowed funds from Peoples in order to acquire common shares of
Peoples. 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. When loan
payments are made, ESOP shares are allocated to participants based on relative
compensation.
During fiscal 1998, the Corporation declared and paid a $4.00 per share
distribution of which $3.99 was a tax-free return of capital distribution. The
ESOP received approximately $539,000 on 134,262 unallocated shares from the
return of capital distribution. The ESOP used the proceeds to purchase 26,000
additional shares. The additional shares are held in suspense and allocated to
participants in a manner similar to the shares originally in the ESOP.
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 $243,925,
$249,570 and $136,017 for the years ended June 30, 1999, 1998 and 1997.
<PAGE>
Year-end ESOP shares were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Allocated shares 39,279 24,122
Unreleased shares 129,551 144,708
---------- ----------
Total ESOP shares 168,830 168,830
========== ==========
Fair value of unreleased shares $1,295,510 $2,568,567
========== ==========
</TABLE>
(Continued)
40
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 13 - STOCK OPTION AND INCENTIVE PLAN
The Stock Option and Incentive Plan was approved by the shareholders of the
Corporation on May 22, 1998. The Board of Directors has granted options to
purchase shares of common stock at an exercise price ranging from $16.01 to
$18.75 to certain employees, officers and directors of the Corporation. The
exercise price for options granted prior to June 10, 1998, were reduced by the
$3.99 return of capital distribution. 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.
A summary of the activity in the plan was as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C>
Outstanding at beginning of year 142,824 $ 16.03 - $ -
Granted - - 142,824 16.03
Exercised - - - -
Forfeited (1,000) 16.01 - -
----------- --------- ----------- ----------
Outstanding at end of year 141,824 $ 16.03 142,824 $ 16.03
=========== ========= =========== ==========
Options exercisable at year-end 28,365 $ 16.03 - -
Remaining shares available for grant 36,714 35,714
</TABLE>
Options outstanding at year-end 1999 were as follows:
<TABLE>
<CAPTION>
Weighted Average
Remaining
Exercise Number Contractual Number
Prices Outstanding Life Exercisable
------ ----------- ---- -----------
<S> <C> <C> <C>
$16.01 140,579 8.90 yrs 28,116
$18.75 1,245 8.95 yrs 249
----------- ----------- ----------
Outstanding at year-end 141,824 8.90 yrs 28,365
=========== =========== ==========
</TABLE>
<PAGE>
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.
(Continued)
41
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 13 - STOCK OPTION AND INCENTIVE PLAN (Continued)
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 1999 and 1998 had the Standard's fair value
method been used to measure compensation cost for stock option plans. No
compensation expense was recognized for the year ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income as reported $ 510,376 $ 1,233,309
Pro forma net income 344,046 1,219,735
Basic earnings per share as reported .32 .74
Pro forma basic earnings per share .22 .74
Diluted earnings per share as reported .32 .74
Pro forma diluted earnings per share .22 .74
</TABLE>
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 to purchase
71,415 common shares, which is equal to 4% of the common shares sold in
connection with the conversion. The MRP will be used as a means of providing
directors and certain key employees of the Corporation with an ownership
interest in the Corporation in a manner designed to compensate such directors
and key employees for services to the Corporation.
In conjunction with the adoption of the MRP on May 22, 1998, the Board of
Directors awarded 57,128 shares to certain directors, officers and employees of
the 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. At June 30, 1999, 11,426 shares have vested. 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 earned and
nonforfeitable upon such date. At June 30, 1999, there were 14,287 shares
reserved for future awards and held as treasury stock. Compensation expense
related to MRP shares is based upon the cost of the shares, which approximates
fair value at the date of grant. For the years ended June 30, 1999 and 1998,
compensation expense totaled $186,601 and $20,000.
(Continued)
42
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 15 - REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal regulatory agencies. 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. 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. At June 30, 1999 and 1998, 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, 1999 and 1998. No conditions or events have occurred subsequent to the last
notification by regulators that management believes would have changed the
Association's category.
At year-end 1999 and 1998, 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>
1999
Total capital (to risk-weighted assets) $ 13,634 18.0% $ 6,069 8.0% $ 7,586 10.0%
Tier 1 (core) capital (to risk-weighted
assets) 13,152 17.3 3,035 4.0 4,552 6.0
Tier 1 (core) capital (to adjusted
total assets) 13,152 11.2 4,677 4.0 5,847 5.0
Tangible capital (to adjusted total assets) 13,152 11.2 1,754 1.5 N/A
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
</TABLE>
<PAGE>
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)
43
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 15 - REGULATORY CAPITAL REQUIREMENTS (Continued)
OTS regulations applicable to all savings and loan associations provide that a
savings association may make capital distributions in a calendar year without
prior notice to the OTS as long as the distributions do not exceed an amount
equal to the savings association's net income for that year to date plus the
savings association's retained net income for the preceding two years. An
application and approval from the OTS must be obtained if the proposed
distribution would cause total distributions for that year to exceed net income
for that year to date plus the savings association's retained net income for the
preceding two years. Savings associations would be required to file a notice
with the OTS whenever an application would not be required based on the above
and: (1) The savings association will not be at least adequately capitalized
following the capital distribution; (2) The capital distribution would reduce
the amount of, or retire any part of the savings association's common or
preferred stock, or retire any part of debt instruments such as notes or
debentures included in capital; (3) The proposed distribution would violate a
prohibition contained in any applicable statute, regulation or agreement between
the savings association and the OTS (or the FDIC), or a condition imposed on the
savings association in an OTS-approved application or notice; or, (4) The
savings association is a subsidiary of a savings and loan holding company.
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 in excess of 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.
<PAGE>
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)
44
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 16 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK (Continued)
As of year-end 1999 and 1998, the Corporation had commitments to make fixed-rate
commercial and residential real estate mortgage loans at current market rates
approximating $375,000 and $621,000, and variable-rate commercial and
residential real estate mortgage loans at current market rates approximating
$394,000 and $687,000. Loan commitments are generally for 30 days. The interest
rates on fixed-rate commitments ranged from 7.00% to 7.75% at June 30, 1999 and
ranged from 7.50% to 8.25% at June 30, 1998. The interest rates on variable-rate
commitments ranged from 7.00% to 7.75% at June 30, 1999 and 7.25% to 8.00% at
June 30, 1998.
The Corporation also had unused lines of credit approximating $1,434,000 and
$548,000 at year-end 1999 and 1998.
At June 30, 1999 and 1998, the Association was required to have $532,000 and
$299,000 on deposit with its correspondent banks as a compensating clearing
requirement.
The Association entered into employment agreements with certain officers of the
Corporation. 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
Financial instruments at year-end were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,932,978 1,933,000 $ 4,947,253 $ 4,947,000
Time deposits in other
financial institutions 400,000 400,000 100,000 100,000
Securities available for sale 7,858,111 7,858,000 4,015,890 4,016,000
Federal Home Loan Bank stock 907,700 908,000 846,500 847,000
Loans receivable, net 102,802,845 102,621,000 94,052,531 93,954,000
Accrued interest receivable 759,913 760,000 722,401 722,000
Financial liabilities:
Deposits (84,310,492) (84,877,000) (79,053,686) (79,500,000)
Borrowed funds (14,800,000) (13,659,000) (7,000,000) (7,000,000)
Accrued interest payable (44,091) (44,000) (34,538) (35,000)
</TABLE>
(Continued)
45
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair value approximates carrying amounts 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 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the computation of
the basic earnings per common share and diluted earnings per common share is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic Earnings Per Common Share
Numerator
Net income $ 510,376 $ 1,233,309 $ 150,298
=========== =========== ===========
Denominator
Weighted average common shares
outstanding 1,777,192 1,785,375 1,785,375
Less: Average unallocated ESOP shares (137,176) (127,831) (140,394)
Less: Average nonvested MRP shares (50,463) - -
----------- ----------- -----------
Weighted average common shares
outstanding for basis earnings per
common share 1,589,553 1,657,544 1,644,981
=========== =========== ===========
Basic earnings per common share $ .32 $ .74 $ .09
=========== =========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Diluted Earnings Per Common Share
Numerator
Net income $ 510,376 $ 1,233,309 $ 150,298
=========== =========== ===========
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,589,553 1,657,544 1,644,981
Add: Dilutive effects of average
nonvested MRP shares - - -
Add: Dilutive effects of assumed
exercises of stock options - - -
----------- ----------- -----------
Weighted average common shares
and dilutive potential common
shares outstanding 1,589,553 1,657,544 1,644,981
=========== =========== ===========
Diluted earnings per common share $ .32 $ .74 $ .09
=========== =========== ==========
</TABLE>
(Continued)
46
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 18 - EARNINGS PER SHARE (Continued)
Stock options granted did not have a dilutive effect on EPS for the years ended
June 30, 1999 and 1998, as the exercise price of outstanding options was greater
than the average market price for the period. No options were outstanding at
June 30, 1997. Unearned MRP shares did not have a dilutive effect on EPS for the
year ended June 30, 1999, as the fair value of MRP shares on the date of grant
was greater than the average market price for the period. No MRP shares had been
purchased as of June 30, 1998 and 1997.
NOTE 19 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains and (losses) on
available-for-sale securities $ (85,724) $ 3,212 $ 13,742
Reclassification adjustments for (gains) and
losses later recognized in income - - -
----------- ----------- -----------
Net unrealized gains and losses (85,724) 3,212 13,742
Tax effect 29,147 (1,093) (4,672)
----------- ----------- -----------
Other comprehensive income (loss) $ (56,577) $ 2,119 $ 9,070
=========== =========== ===========
</TABLE>
<PAGE>
NOTE 20 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Peoples-Sidney Financial Corporation as of
June 30, 1999 and 1998, and for the periods ended June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
June 30, 1999 and 1998
1999 1998
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,154,168 $ 47,373
Investment in subsidiary 13,107,093 18,341,302
Loans receivable from ESOP 1,122,236 1,224,257
Other assets 16,145 13,084
----------- -----------
Total assets $17,399,642 $19,626,016
=========== ===========
Liabilities
Other liabilities $ 37,425 $ --
Shareholders' Equity 17,362,217 19,626,016
----------- -----------
Total liabilities and shareholders' equity $17,399,642 $19,626,016
=========== ===========
</TABLE>
(Continued)
47
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 20 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Period from
Year Year April 25, 1997
Ended Ended through
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Income:
Dividend income from subsidiary $ 5,250,000 $ - $ -
Interest on loans 85,399 515,584 23,006
-------------- ------------- -----------
5,335,399 515,584 23,006
Other expenses 122,303 100,294 14,884
-------------- ------------- -----------
Income before taxes and undistributed earnings
of subsidiary 5,213,096 415,290 8,122
Income tax expense (benefit) (12,548) 139,211 2,761
-------------- ------------- -----------
Income before undistributed earnings
of subsidiary 5,225,644 276,079 5,361
Equity in undistributed earnings of subsidiary
(distributions in excess of earnings) (4,715,268) 957,230 144,937
-------------- ------------- -----------
Net income $ 510,376 $ 1,233,309 $ 150,298
============== ============= ===========
</TABLE>
(Continued)
48
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE 20 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Period from
April 25, 1997
Year Ended Year Ended through
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 510,376 $ 1,233,309 $ 150,298
Adjustments to reconcile net income to cash
provided by operations:
(Equity in undistributed income of subsidiary)
distributions in excess of earnings 4,715,268 (957,230) (144,937)
Net change in other assets and liabilities 34,365 (15,845) 2,762
------------- ------------- --------------
Net cash from operating activities 5,260,009 260,234 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 102,021 7,102,022 102,020
------------- ------------- --------------
Net cash from investing activities 102,021 7,102,022 (16,935,252)
Cash flows from financing activities
Proceeds from issuance of common stock, net of
conversion costs - - 17,217,944
Return of capital distribution - (7,141,500) -
Purchase of treasury shares (2,719,692) - -
57,128 shares contributed to MRP from treasury 953,293 - -
Cash dividends paid (448,432) (429,195) -
Dividends on unallocated ESOP shares (40,404) (35,003) -
------------- ------------- --------------
Net cash from financing activities (2,255,235) (7,605,698) 17,217,944
------------- ------------- --------------
Net change in cash and cash equivalents 3,106,795 (243,442) 290,815
Cash and cash equivalents at beginning of year 47,373 290,815 -
------------- ------------- --------------
Cash at end of year $ 3,154,168 $ 47,373 $ 290,815
============= ============= ==============
</TABLE>
49
<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 8, 1999 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, 1999, 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.
50
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CORPORATE INFORMATION
CORPORATION AND ASSOCIATION ADDRESS
101 East Court Street
P.O. Box 727
Sidney, Ohio 45365-3021
DIRECTORS OF THE BOARD
Douglas Stewart
President and Chief Executive Officer of
Peoples Federal Savings and Loan Association
Robert W. Bertsch
Retired Treasurer of Peoples Federal
John W. Sargeant
Part Owner of Sidney Tool and Die Co. and
BenSar Development, a warehouse provider
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
- ---------------
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005-3934
<PAGE>
Telephone: (937) 492-6129
Fax: (937) 498-4554
Richard T. Martin (Chairman of the Board)
Certified Public Accountant, in private practice
Harry N. Faulkner
Partner in the law firm of Faulkner, Garmhausen,
Keister & Shenk LPA
James W. Kerber
Owner of James W. Kerber CPA, a private practice
accounting firm
Independent Auditors
--------------------
Crowe, Chizek and Company LLP
One Columbus
10 West Broad Street
Columbus, Ohio 43215
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>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in these
Registration Statements on Form S-8 for Peoples-Sidney Financial Corporation;
the Peoples Federal Savings & Loan Association of Sidney 401(k) Retirement Plan
(Registration No. 333-37301), Peoples-Sidney Financial Corporation 1998 Stock
Option and Incentive Plan (Registration No. 333-73395), and Peoples-Sidney
Financial Corporation 1998 Management Recognition Plan (Registration No.
333-73393), of our report dated July 9, 1999 relating to the consolidated
balance sheets of Peoples-Sidney Financial Corporation as of June 30, 1999 and
1998 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1999, which report is incorporated by reference in the Annual Report on Form
10-KSB of Peoples-Sidney Financial Corporation for the year ended June 30, 1999.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
Columbus, Ohio
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
annual report on Form 10-KSB or the fiscal year ended June 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,298
<INT-BEARING-DEPOSITS> 1,035
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,766
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 102,803
<ALLOWANCE> 529
<TOTAL-ASSETS> 116,882
<DEPOSITS> 84,310
<SHORT-TERM> 0
<LIABILITIES-OTHER> 410
<LONG-TERM> 14,800
18
0
<COMMON> 0
<OTHER-SE> 17,344
<TOTAL-LIABILITIES-AND-EQUITY> 116,882
<INTEREST-LOAN> 7,697
<INTEREST-INVEST> 291
<INTEREST-OTHER> 117
<INTEREST-TOTAL> 8,105
<INTEREST-DEPOSIT> 3,883
<INTEREST-EXPENSE> 4,353
<INTEREST-INCOME-NET> 3,752
<LOAN-LOSSES> 104
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,872
<INCOME-PRETAX> 864
<INCOME-PRE-EXTRAORDINARY> 510
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 510
<EPS-BASIC> 0.32
<EPS-DILUTED> 0.32
<YIELD-ACTUAL> 3.57
<LOANS-NON> 315
<LOANS-PAST> 440
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 426
<CHARGE-OFFS> 23
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 529
<ALLOWANCE-DOMESTIC> 529
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
