<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 2000
REGISTRATION NO. 333-93047
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PEOPLES COMMUNITY BANCORP, INC.
Exact Name of Registrant as Specified in Its Charter
<TABLE>
<S> <C> <C>
DELAWARE 6306 31-1686242
(State or Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Identification No.)
Classification Code Number)
</TABLE>
------------------------------
11 S. BROADWAY
LEBANON, OHIO 45036
(513) 932-3876
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
------------------------------
JERRY D. WILLIAMS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PEOPLES COMMUNITY BANCORP, INC.
11 S. BROADWAY
LEBANON, OHIO 45036
(513) 932-3876
(Name, Address, and Telephone Number of Agent for Service)
COPIES TO:
<TABLE>
<S> <C> <C>
KEVIN M. HOULIHAN, ESQ. DAVID J. EYRICH, ESQ. KENNETH R. LEHMAN, ESQ.
HUGH T. WILKINSON, ESQ. KEPLEY, GILLIGAN & EYRICH LUSE LEHMAN GORMAN POMERENK & SCHICK
ELIAS, MATZ, TIERNAN & HERRICK L.L.P. 525 VINE STREET 5335 WISCONSIN AVENUE, N.W.,
734 15TH STREET, N.W., 12TH FLOOR SUITE 2200 SUITE 400
WASHINGTON, D.C. 20005 CINCINNATI, OHIO 45202 WASHINGTON, D.C. 20015
(202) 347-0300 (513) 241-5540 (202) 274-2000
</TABLE>
------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED TO BE REGISTERED PER SHARE OFFERING PRICE(1) FEE
<S> <C> <C> <C> <C>
Common Stock, par
value $.01 per share................ 2,715,713 shares $10.00 $27,157,130 $7,169.48(2)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously Paid
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS OF PEOPLES COMMUNITY BANCORP, INC.
PROXY STATEMENT OF HARVEST HOME FINANCIAL CORPORATION
The People's Building, Loan and Savings Company is converting from the
mutual to the stock form of organization. As part of this conversion, Peoples
Community Bancorp, Inc. is offering its shares of common stock in a subscription
offering. People's Savings will become a subsidiary of Peoples Community
Bancorp, Inc. Just prior to the conversion, People's Savings will merge with The
Oakley Improved Building and Loan Company. Immediately after the conversion,
Peoples Community Bancorp will merge with Harvest Home Financial Corporation,
the parent of Harvest Home Savings Bank.
IF YOU ARE A CURRENT OR FORMER DEPOSITOR OF PEOPLE'S SAVINGS (SEE PAGES 37
AND 66)--
- You may have priority rights to purchase shares at $10.00 per share.
- Generally, you may purchase up to 15,000 shares but may purchase no fewer
than 25 shares.
- The offering will end at 12:00 noon, eastern time, on March 15, 2000.
IF YOU ARE A CURRENT OR FORMER DEPOSITOR OF OAKLEY (SEE PAGES 46 AND 66)--
- You may have the same priority rights to purchase shares as current and
former depositors of People's Savings as a result of the merger of Oakley
with People's Savings.
IF YOU ARE CURRENTLY A STOCKHOLDER OF HARVEST HOME FINANCIAL (SEE PAGE 49)--
- Stockholders of Harvest Home Financial are being asked to approve the
proposed merger with Peoples Community Bancorp.
- Each of your shares will be exchanged for 0.9 of a share of Peoples
Community Bancorp common stock and $9.00 in cash as a result of the
proposed merger of Harvest Home Financial with People's Community Bancorp.
This document also constitutes the proxy statement of Harvest Home
Financial for its special meeting of stockholders.
- Stockholders of Harvest Home Financial will receive an aggregate of
787,760 shares of Peoples Community Bancorp common stock. Stockholders of
Harvest Home Financial will own between 29.0% and 39.8% of the common
stock of Peoples Community Bancorp after the merger.
- Stockholders of Harvest Home Financial generally will recognize capital
gains income tax on the cash, but not the stock, they receive in the
merger with Peoples Community Bancorp.
- As of February 15, 2000, the closing price for Harvest Home Financial
common stock was $17.50 per share.
SUBSCRIPTION OFFERING SUMMARY
<TABLE>
<CAPTION>
MINIMUM MAXIMUM, AS ADJUSTED
----------- --------------------
<S> <C> <C>
Number of shares............................................ 1,190,000 1,851,500
Gross offering proceeds..................................... $11,900,000 $18,515,000
Estimated offering expenses................................. $ 600,000 $ 600,000
Estimated net proceeds...................................... $11,300,000 $17,915,000
Estimated net proceeds per share............................ $9.50 $9.68
</TABLE>
Peoples Community Bancorp has applied to list its common stock on the Nasdaq
Stock Market's National Market under the symbol "PCBI." Peoples Community
Bancorp must sell a minimum of 1,190,000 shares of common stock or it will not
sell any shares. Peoples Community Bancorp will not sell more than 1,851,500
shares in the subscription offering. Peoples Community Bancorp is offering the
shares on a best efforts basis, and Keefe, Bruyette & Woods, Inc. is assisting
in the subscription offering on a best efforts basis. Peoples Community Bancorp
will hold funds received for stock purchases in a separate savings account at
People's Savings, and will pay interest at People's Savings' passbook rate on
those funds for the period the funds are held. In addition to the shares sold in
the subscription offering, Peoples Community Bancorp proposes to issue
approximately 787,760 shares of its common stock to the former stockholders of
Harvest Home Financial in exchange for their shares of common stock of Harvest
Home Financial.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS DOCUMENT. AN
INVESTMENT IN THE COMMON STOCK IS SUBJECT TO VARIOUS RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS-PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
KEEFE, BRUYETTE & WOODS, INC.
This Prospectus-Proxy Statement is dated February 11, 2000 and is first being
mailed to the stockholders of Harvest Home Financial on or about February 24,
2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Map of Market Area.......................................... iii
Questions and Answers About the Stock Offering and the
Mergers................................................... 1
Summary..................................................... 5
Risk Factors................................................ 11
Selected Financial and Other Data of People's Savings....... 15
Selected Financial and Other Data of Oakley................. 16
Selected Consolidated Financial and Other Data of Harvest
Home Financial............................................ 17
Recent Developments of People's Savings..................... 18
Recent Developments of Oakley............................... 20
Recent Developments of Harvest Home Financial............... 22
Proposed Management Purchases............................... 24
How Net Proceeds Will Be Used............................... 25
Peoples Community Bancorp Does Not Intend to Pay Quarterly
Cash Dividends............................................ 26
There May Be a Limited Market for the Common Stock.......... 26
People's Savings, Oakley and Harvest Home Savings Bank Meet
All of Their Regulatory Capital Requirements.............. 26
Capitalization.............................................. 28
Pro Forma Unaudited Combined Consolidated Financial
Information............................................... 30
The Conversion of People's Savings and The Mergers with
Oakley and Harvest Home Financial......................... 37
The Merger Between People's Savings and Oakley.............. 46
The Merger Between Peoples Community Bancorp and Harvest
Home Financial............................................ 49
The Subscription Offering................................... 66
The People's Building, Loan and Savings Company Statements
of Earnings............................................... 78
Management's Discussion and Analysis of Financial Condition
and Results of Operations of People's Savings............. 79
The Oakley Improved Building and Loan Company Statements of
Operations................................................ 87
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Oakley....................... 88
Harvest Home Financial Corporation Consolidated Statements
of Earnings............................................... 95
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Harvest Home Financial....... 96
Business of Peoples Community Bancorp....................... 106
Business of People's Savings and Oakley..................... 106
Business of Harvest Home Financial.......................... 128
Regulation.................................................. 145
Taxation.................................................... 152
Management.................................................. 155
Restrictions on Acquisition of Peoples Community Bancorp and
People's Savings.......................................... 164
Description of Peoples Community Bancorp Capital Stock...... 171
Experts..................................................... 172
Change in Auditors.......................................... 173
Legal and Tax Opinions...................................... 173
Additional Information...................................... 174
Index to Financial Statements............................... 175
</TABLE>
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
ii
<PAGE>
[MAP OF OHIO WITH DETAIL OF HAMILTON, WARREN AND CLINTON COUNTIES SHOWING
LOCATIONS OF BRANCH OFFICES OF PEOPLE'S SAVINGS, OAKLEY AND HARVEST HOME SAVINGS
TO BE PRODUCED HERE.]
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE SUBSCRIPTION OFFERING AND THE MERGERS
The following are frequently asked questions. You should read this entire
prospectus-proxy statement, including the Risk Factors beginning on page 11, for
more information.
QUESTIONS AND ANSWERS FOR DEPOSITOR-MEMBERS OF PEOPLE'S SAVINGS AND OAKLEY
Q. WHO IS PEOPLE'S SAVINGS MERGING WITH?
A. First, Oakley will be merged into People's Savings. After the merger with
Oakley, Oakley's members will be members of People's Savings and will be
able to buy stock of Peoples Community Bancorp in the subscription offering.
Immediately after People's Savings converts to stock-form, Harvest Home
Financial will be merged into Peoples Community Bancorp and Harvest Home
Savings will be merged into People's Savings.
Q. WHO MAY PURCHASE SHARES OF STOCK IN THE SUBSCRIPTION OFFERING?
A. Generally, rights to subscribe for the purchase of stock have been granted
under People's Savings plan of conversion to the following persons in the
following order of descending priority:
- depositors of People's Savings and Oakley with $50.00 or more on deposit
as of June 30, 1998
- the employee stock ownership plan
- depositors of People's Savings and Oakley with $50.00 or more on deposit
as of December 31, 1999
- depositors of People's Savings and Oakley as of January 31, 2000
- directors, officers and employees of People's Savings and Oakley.
Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A. Peoples Community Bancorp is offering for sale up to 1,610,000 shares of
common stock at a subscription price of $10.00 per share. Peoples Community
Bancorp must sell at least 1,190,000 shares. If the appraised market value
of the common stock changes due to market or financial conditions, Peoples
Community Bancorp may be required to sell up to 1,851,500 shares. Peoples
Community Bancorp also is offering to exchange 0.9 of a share of its common
stock plus $9.00 in cash to Harvest Home Financial stockholders for each
share of their Harvest Home Financial common stock.
Q. WHAT PARTICULAR FACTORS SHOULD DEPOSITORS CONSIDER WHEN DECIDING WHETHER TO
PURCHASE THE STOCK?
A. There are many important factors to consider before making an investment
decision. Therefore, you should read this entire prospectus-proxy statement
before making your investment decision.
Q. WILL DIVIDENDS INITIALLY BE PAID ON THE STOCK?
A. No. Peoples Community Bancorp does not expect to pay dividends on its common
stock initially after the offering.
Q. WILL I BE ABLE TO SELL MY PEOPLES COMMUNITY BANCORP STOCK AFTER I PURCHASE
IT?
A. Perhaps. Peoples Community Bancorp anticipates having the common stock quoted
on the Nasdaq Stock Market's National Market under the symbol "PCBI."
However, Peoples Community Bancorp expects the market for the stock will be
limited. There can be no assurance that someone will want to buy your
shares. You should consider the possibility that you may be unable to easily
sell your shares of stock. There may also be a wide spread between the bid
and asked price for the stock.
1
<PAGE>
Q. WILL THE STOCK BE COVERED BY DEPOSIT INSURANCE OR GUARANTEED BY ANY
GOVERNMENT AGENCY?
A. No. Unlike insured deposit accounts at People's Savings and Oakley, the stock
of Peoples Community Bancorp will not be insured or guaranteed by the
Federal Deposit Insurance Corporation, or FDIC, or any other government
agency.
Q. WHEN IS THE DEADLINE TO SUBSCRIBE FOR STOCK?
A. Peoples Community Bancorp must receive a properly completed and signed order
form with the required payment on or before 12:00 noon, eastern time, on
March 15, 2000.
Q. CAN THE OFFERING BE EXTENDED?
A. Yes. If Peoples Community Bancorp does not receive sufficient orders, Peoples
Community Bancorp can extend the offering beyond March 15, 2000. Peoples
Community Bancorp must complete any offering to general members of the
public within 45 days after the close of the subscription offering, unless
it receives regulatory approval to further extend the offering. No single
extension can exceed 90 days, and the extensions may not go beyond
March 24, 2002.
Q. HOW DO PEOPLE'S SAVINGS AND OAKLEY'S MEMBERS PURCHASE THE STOCK?
A. First, you should read this prospectus-proxy statement. Then, complete and
return the enclosed stock order and certification form, together with your
payment. Subscription orders may be delivered in person to People's offices
during regular banking hours, or by mail in the enclosed envelope marked
STOCK ORDER RETURN. If the stock offering is not completed by April 29, 2000
and is not extended, then all funds will be returned promptly with interest,
and all withdrawal authorizations will be cancelled.
Q. CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO SUBSCRIBE FOR STOCK?
A. No. After your stock order and certification form and payment are received,
you may not cancel or modify your order. However, if Peoples Community
Bancorp extends the offering beyond April 29, 2000 you will be able to
change or cancel your order. If you cancel your order, you will receive a
prompt refund plus interest.
Q. HOW CAN PEOPLE'S SAVINGS AND OAKLEY'S MEMBERS PAY FOR THE STOCK?
A. You have several options, including sending a check or money order to
People's Savings; or authorizing a withdrawal from your deposit account at
People's Savings or Oakley (without any penalty for early withdrawal).
Please do not send cash in the mail.
Q. WILL I RECEIVE INTEREST ON MY SUBSCRIPTION PAYMENT?
A. Yes. Subscription payments will be placed in an interest-bearing escrow
account at People's Savings, and will earn interest at the passbook rate.
Depositors who elect to pay by withdrawal will continue to receive interest
on their accounts until the funds are withdrawn.
Q. CAN I SUBSCRIBE FOR SHARES USING FUNDS IN MY INDIVIDUAL RETIREMENT ACCOUNT OR
IRA AT PEOPLE'S SAVINGS OR OAKLEY?
A. Yes. However, you must first establish a self-directed IRA with an outside
trustee to subscribe for stock using your IRA funds. Please call the Stock
Information Center (513-932-3750) to get more information. Please understand
that the transfer of IRA funds takes time, so please make arrangements as
soon as possible.
Q. WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES OF STOCK TO FILL ALL SUBSCRIPTION
ORDERS?
A. If there is an oversubscription, then you may not receive any or all of the
shares you want to purchase.
2
<PAGE>
Q. WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE SUBSCRIPTION
OFFERING?
A. For answers to other questions you are encouraged to read this
prospectus-proxy statement. Questions may also be directed to the People's
Savings Stock Information Center at (513) 932-3750 Monday through Friday,
between the hours of 9:00 a.m. and 4:30 p.m., eastern time.
TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS-PROXY STATEMENT AT LEAST
48 HOURS PRIOR TO THE EXPIRATION DATE OF MARCH 15, 2000 IN ACCORDANCE WITH
FEDERAL LAW, NO PROSPECTUS-PROXY STATEMENT WILL BE MAILED ANY LATER THAN FIVE
DAYS PRIOR TO MARCH 15, 2000 OR HAND DELIVERED ANY LATER THAN TWO DAYS PRIOR TO
MARCH 15, 2000.
QUESTIONS AND ANSWERS FOR STOCKHOLDERS OF HARVEST HOME FINANCIAL
Q. WHAT ARE HARVEST HOME FINANCIAL STOCKHOLDERS BEING ASKED TO APPROVE?
A. At a special meeting of stockholders, Harvest Home Financial stockholders at
the close of business on February 17, 2000 will be asked to vote on a
proposal to adopt the merger agreement between Harvest Home Financial and
Peoples Community Bancorp.
Q. WHY DO HARVEST HOME FINANCIAL AND PEOPLES COMMUNITY BANCORP WANT TO MERGE?
A. Harvest Home Financial believes that stockholder value will be maximized and
that its stockholders and customers will benefit through an affiliation with
Peoples Community Bancorp. People's Saving wants to better serve its
customers in Harvest Home Financial's service areas and to expand People's
Savings' presence in those markets.
Q. HOW WILL HARVEST HOME FINANCIAL STOCKHOLDERS BENEFIT?
A. The Harvest Home Financial Board of Directors believes that stockholders
benefit by receiving a fair value for their shares. The Board believes that
the cash portion will allow stockholders to diversify their investment and
the stock portion will allow stockholders to continue to participate as a
stockholder of a Cincinnati based thrift holding company.
Q. WHAT WILL HARVEST HOME FINANCIAL STOCKHOLDERS RECEIVE FOR THEIR HARVEST HOME
FINANCIAL SHARES?
A. If the merger with Peoples Community Bancorp is completed, stockholders of
Harvest Home Financial will receive 0.9 shares of Peoples Community Bancorp
common stock plus $9.00 in cash for each share of Harvest Home Financial
common stock.
Q. WHEN WILL THE HARVEST HOME MERGER BE COMPLETED?
A. We plan to complete the transaction as soon as possible after the Harvest
Home Financial special meeting, assuming Harvest Home Financial obtains the
required stockholder approval. The transaction is also subject to the
approval of federal and state banking regulatory authorities and the
satisfaction of other closing conditions, including the merger of Oakley and
People's Savings and the conversion by People's Savings from a mutual
savings and loan to a stock company. We expect to complete all of the
transactions in the second calendar quarter of 2000.
Q. WHEN AND WHERE WILL THE HARVEST HOME FINANCIAL SPECIAL MEETING TAKE PLACE?
A. Harvest Home Financial will hold the special meeting at 4:00 p.m., eastern
time, on Friday, March 24, 2000 at Dante's Restaurant, 5510 Rybolt Road,
Cincinnati, Ohio.
3
<PAGE>
Q. WHAT IS THE VOTE REQUIRED AT THE HARVEST HOME FINANCIAL SPECIAL MEETING?
A. Harvest Home Financial's stockholders must approve the merger agreement by a
vote of a majority of the outstanding shares.
Q. WHAT DO HARVEST HOME FINANCIAL STOCKHOLDERS NEED TO DO NOW?
A. Just mail your complete, signed and dated proxy card in the enclosed return
envelope as soon as possible so that your shares will be represented at the
special meeting.
Q. IF HARVEST HOME FINANCIAL SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL
MY BROKER VOTE MY SHARES FOR ME?
A. Your broker will vote your Harvest Home Financial shares only if you provide
instructions on how to vote. You should follow the directions provided by
your broker and instruct your broker as to how to vote your shares.
Q. MAY HARVEST HOME FINANCIAL STOCKHOLDERS CHANGE THEIR VOTE AFTER THEY HAVE
MAILED A SIGNED PROXY CARD?
A. Yes. Stockholders of Harvest Home Financial can change their vote at any time
before their proxy is voted at the special meeting. You can do this in three
ways. First, you can send Harvest Home Financial a written statement that
you would like to revoke your proxy. Second, you can send Harvest Home
Financial a new signed and later-dated proxy card. Third, you can attend the
special meeting and vote in person. However, your attendance at the special
meeting alone will not revoke your proxy.
Q. HOW WILL HARVEST HOME FINANCIAL SHARES BE VOTED IF I RETURN A BLANK PROXY
CARD?
A. If you sign and send in your proxy and do not indicate how you want to vote,
your proxy will be counted as a vote in favor of the merger.
Q. WHAT WILL BE THE EFFECT IF A HARVEST HOME FINANCIAL STOCKHOLDER DOES NOT
VOTE?
A. Not voting will have the same effect as voting against the merger.
Q. SHOULD HARVEST HOME FINANCIAL STOCKHOLDERS SEND IN STOCK CERTIFICATES NOW?
A. No. If the merger is completed, you will receive written instructions for
exchanging your stock certificates.
Q. WHO CAN ANSWER QUESTIONS OF HARVEST HOME FINANCIAL'S STOCKHOLDERS ABOUT THE
MERGER?
A. Stockholders of Harvest Home Financial Corporation who have questions about
the merger with Peoples Community Bancorp may call: John E. Rathkamp or
Dennis J. Slattery at Harvest Home Savings Bank (513) 661-6612.
4
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read this entire document carefully, including the
financial statements and the notes to financial statements of People's Savings,
Oakley and Harvest Home Financial.
PEOPLES COMMUNITY BANCORP, INC.
People's Savings formed Peoples Community Bancorp in December 1999 as a
Delaware corporation. Peoples Community Bancorp will be the holding company for
Peoples Community Bank following the conversion. Peoples Community Bancorp is
not an operating company and has not engaged in any significant business to
date. The executive offices of Peoples Community Bancorp are located at 11 S.
Broadway, Lebanon, Ohio 45036 and its telephone number is (513) 932-3876.
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
Founded in 1889, People's Savings is a community and customer oriented
mutual deposit savings and loan association organized under the laws of the
State of Ohio. People's Savings conducts business out of its main office in
Lebanon, Ohio, and one branch office in Blanchester, Ohio. People's Savings
acquired its Blanchester office through a merger with The Peoples Building &
Loan Company located in Blanchester, Ohio in November 1998.
People's Savings' business consists principally of attracting deposits from
the general public and using those funds to originate loans secured by one- to
four-family residential properties and, to a lesser extent, commercial real
estate loans and land loans, multi-family residential mortgage loans and other
loans. People's Savings' profitability depends primarily on its net interest
income, which is the difference between the income it receives on loans and
other assets and its cost of funds, which consists of the interest paid on
deposits and borrowings. At September 30, 1999, People's Savings had total
assets of $90.3 million, deposits of $77.7 million and total equity of
$11.8 million.
HARVEST HOME FINANCIAL CORPORATION
Harvest Home Financial is an Ohio corporation and the parent holding company
for Harvest Home Savings Bank. Harvest Home Savings Bank is an Ohio chartered,
stock-form savings bank which conducts business out of its main office in
Cheviot, Ohio and two branch offices in Cincinnati. Harvest Home Savings Bank is
a traditional savings bank. As of September 30, 1999, Harvest Home Financial had
total assets of $98.9 million, deposits of $66.2 million and stockholders'
equity of $9.7 million. The executive offices of Harvest Home Financial are
located at 3621 Harrison Avenue, Cheviot, Ohio, and its telephone number is
(513) 661-6612.
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
Oakley is an Ohio chartered mutual savings and loan association which
conducts business out of one office in Cincinnati. As of September 30, 1999,
Oakley had total assets of $17.0 million, total deposits of $13.3 million and
total equity of $2.9 million. Oakley's sole office is located at 3924 Isabella,
Cincinnati, Ohio and its telephone number is (513) 531-2212.
5
<PAGE>
STRUCTURE OF PEOPLE'S SAVINGS CORPORATE CHANGE AND THE MERGERS
People's Savings is undertaking three interdependent transactions.
- Initially, People's Savings will merge with Oakley. Oakley's depositors
will become People's Savings depositors and will be able to buy common
stock of Peoples Community Bancorp in the subscription offering with the
same priority and other rights as People's Savings' depositors.
[LOGO]
- Secondly, People's Savings will convert to a federally-chartered stock
savings bank and Peoples Community Bancorp will sell shares of its common
stock. As part of this transaction Peoples Community Bancorp will become
the holding company for People's Savings. People's Savings will not
complete its conversion to stock form unless it can also complete the
merger with Oakley and the merger with Harvest Home Financial.
[LOGO]
- Lastly, Harvest Home Financial will merge with Peoples Community Bancorp
and Harvest Home Savings Bank will merge with People's Savings.
Stockholders of Harvest Home Financial will become stockholders of Peoples
Community Bancorp and will receive $9.00 in cash plus 0.9 of share of
common stock of Peoples Community Bancorp in exchange for each of their
shares of Harvest Home Financial common stock.
[LOGO]
- Upon completion of these three transactions, Peoples Community Bancorp
will be a holding company for People's Savings. People's Savings will
continue its operations with the additional assets acquired from Oakley
and Harvest Home Savings Bank.
6
<PAGE>
PEOPLE'S SAVINGS' CONVERSION TO STOCK FORM
The conversion is a series of transactions by which People's Savings will
convert from its current status as a mutual savings and loan association to a
stock savings bank. Following the conversion, People's Savings will change its
name to Peoples Community Bank and will be a subsidiary of Peoples Community
Bancorp. As a stock savings bank, People's Savings will be subject to the
regulation and supervision of the Office of Thrift Supervision, the Federal
Deposit Insurance Corporation and the Securities and Exchange Commission.
With the holding company structure, People's Savings will be able to develop
long-term growth opportunities and access the capital markets more easily in the
future. The offering will increase People's Savings' capital and the amount of
funds available for lending and investment. This will give People's Savings
greater flexibility to diversify and expand operations in its current market
area and neighboring communities. In addition, People's Savings will be able to
compensate its directors, officers and employees in the form of stock.
HOW PEOPLE'S SAVINGS DETERMINED THE PRICE PER SHARE AND THE OFFERING RANGE
The offering range is based on an independent appraisal of People's Savings'
pro forma market value following the conversion by RP Financial, LC, an
appraisal firm experienced in appraisals of savings institutions. The pro forma
market value is the estimated market value of People's Savings assuming the
completion of the two mergers and the sale of shares in this offering. RP
Financial has estimated that in its opinion as of December 10, 1999, of People's
Savings' estimated market value was between $11,900,000 and $16,100,000, with a
midpoint of $14,000,000. The appraisal was based in part upon People's Savings'
financial condition and operations, the financial condition and operations of
Oakley and Harvest Home Financial, the effects of the mergers with Oakley and
Harvest Home Financial and the effect of the additional capital People's Savings
will raise from the sale of common stock.
Subject to regulatory approval, Peoples Community Bancorp may increase the
amount of common stock offered by up to 15%. Accordingly, at the minimum of the
offering range, Peoples Community Bancorp is offering 1,190,000 shares, and at
the maximum, as adjusted, of the offering range Peoples Community Bancorp is
offering 1,851,500 shares in the subscription offering. The appraisal will be
updated before People's Savings completes the conversion. If the pro forma
market value of the common stock at that time is either below $11,900,000 or
above $18,515,000, Peoples Community Bancorp will notify subscribers, and
subscribers will have the opportunity to modify or cancel their order. See "The
Subscription Offering--How People's Savings Determined the Price Per Share and
the Offering Range" for a description of the factors and assumptions used in
determining the stock price and offering range.
The measures investors use to analyze whether a stock might be a good
investment include the ratio of the offering price to the issuer's "book value,"
the ratio of the offering price to the issuer's "tangible book value" and the
ratio of the offering price to the issuer's annual net income. RP Financial
considered these ratios, among other factors, in preparing its appraisal. Book
value is the same as total equity, and represents the difference between the
issuer's assets and liabilities. Tangible book value is total equity minus any
intangible assets, such as goodwill.
The following table presents these ratios and multiples applied to People's
Savings on a pro forma basis at or for the year ended September 30, 1999 at the
minimum and adjusted maximum of the offering range compared to those of People's
Savings' peer group as selected by RP Financial. See "Pro
7
<PAGE>
Forma Unaudited Combined Consolidated Financial Information" for a description
of the assumptions used in making these calculations.
<TABLE>
<CAPTION>
PEOPLES COMMUNITY
BANCORP
----------------------
MAXIMUM
MINIMUM AS ADJUSTED PEER GROUP
-------- ----------- ----------
<S> <C> <C> <C>
Price to book ratio......................................... 64.94% 72.73% 96.02%
Price to tangible book ratio................................ 76.80% 83.54% 97.54%
Price to earnings multiple.................................. 21.74x 25.64x 19.57x
</TABLE>
People's Savings' independent appraiser determined that its value should be
lower than the ratios for the peer group would suggest. RP Financial reduced
People's Savings' value because the offering is for a new issue of stock,
because of its plans to use some of the proceeds for new offices, because its
return on equity as a stock company will be significantly lower than its peer
group and because several other recently converted institutions are trading
below their initial offering prices. For its services in preparing the appraisal
and assistance in preparing a business plan, RP Financial's fees and out-of-
pocket expenses are estimated to be $40,000.
USE OF PROCEEDS FROM THE SALE OF COMMON STOCK
Peoples Community Bancorp will use the $13.4 million of the estimated net
proceeds assuming the sale of shares at the midpoint of the offering range as
follows:
- 8% or $1.1 million will be loaned to the employee stock ownership plan to
fund its purchase of common stock;
- 50% or $6.7 million will be invested in People's Savings; and
- 42% or $5.6 million will be retained by Peoples Community Bancorp for
general corporate purposes.
The proceeds to be invested in People's Savings will be available for
general corporate purposes, including the construction and opening of a new
headquarters office and additional branches, and the purchase of investment
securities. People's Savings projects that it may spend approximately
$5.0 million of the net proceeds to build a new headquarters office as well as
two new branch offices and make capital improvements to existing offices.
People's Savings believes that the improvements and the new offices will assist
in attracting new customers. The remaining $1.7 million of net proceeds will
initially be used to purchase investment securities.
Peoples Community Bancorp intends to use $4.5 million of the $5.6 million of
net proceeds retained by it to partially fund the cash consideration of $8.3
million to be paid to former stockholders of Harvest Home Financial, as a result
of the merger with Harvest Home Financial. The remaining $3.8 million in cash
consideration will be funded from cash in Harvest Home Financial on the date of
the merger. The remaining $1.1 million of net proceeds retained by Peoples
Community Bancorp will initially be used to purchase investment securities.
THE AMOUNT OF STOCK OAKLEY'S AND PEOPLE'S SAVINGS' MEMBERS MAY PURCHASE
The minimum purchase is 25 shares. Generally, members may purchase no more
than 15,000 shares. In addition, a member's total purchases, when combined with
those of associates, cannot exceed 45,000 shares. For instance, if any of the
following persons purchase stock, then their purchases when combined with a
member's purchases cannot exceed $450,000:
- persons on joint accounts with the member;
8
<PAGE>
- relatives living in a member's house;
- other persons who have the same address as a member on Oakley's or
People's Savings' records;
- companies, trusts or other entities in which a member has an interest or
holds a position; or
- other persons who may be acting together with a member.
In the event that a member of People's Savings or Oakley is also a
stockholder of Harvest Home Financial, then he will receive shares of Peoples
Community Bancorp common stock in exchange for his shares of Harvest Home
Financial common stock. The total amount of common stock that a member may buy
in the conversion when added to the shares of common stock that a member will
receive from the merger of Peoples with Harvest Home Financial may not exceed
$450,000.
People's Savings may decrease or increase the maximum purchase limitation
without notifying you.
HOW PEOPLE'S SAVINGS WILL PRIORITIZE ORDERS IF IT RECEIVES ORDERS FOR MORE
SHARES THAN ARE AVAILABLE FOR SALE
Members might not receive any or all of the shares ordered. If People's
Savings receives orders for more shares than are available, it will allocate
stock to the following persons or groups in order of priority:
- ELIGIBLE ACCOUNT HOLDERS--Depositors of People's Savings, or Oakley with a
balance of at least $50 at the close of business on June 30, 1998. Any
remaining shares will be offered to:
- EMPLOYEE STOCK OWNERSHIP PLAN. Any remaining shares will be offered to:
- SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS--Depositors of People's Savings or
Oakley with a balance of at least $50 at the close of business on
December 31, 1999. Any remaining shares will be offered to:
- OTHER MEMBERS--Depositors of People's Savings or Oakley at the close of
business on January 31, 2000. Any remaining shares will be offered to:
- Directors, officers and employees of People's Savings or Oakley--These
individuals may also be entitled to purchase stock in the above
categories.
If the above persons do not subscribe for all of the shares offered, Peoples
Community Bancorp will offer the remaining shares to the general public, giving
preference to persons who reside in Hamilton, Clinton and Warren Counties, Ohio.
SUBSCRIPTION RIGHTS ARE NOT TRANSFERABLE
Members of People's Savings and Oakley may not assign or sell their
subscription rights. Any transfer of subscription rights is prohibited by law.
Members of Oakley and People's Savings who exercise their subscription rights
will be required to certify that they are purchasing shares solely for their own
account and that they have no agreement or understanding regarding the sale or
transfer of shares. People's intends to pursue any and all legal and equitable
remedies if it learns of the transfer of any subscription rights. People's will
reject orders that it determines to involve the transfer of subscription rights.
BENEFITS TO MANAGEMENT FROM THE OFFERING
People's full-time employees will benefit from the offering through the
employee stock ownership plan. This plan will buy shares of stock with a portion
of the net proceeds of the offering and then allocate the stock to employees
over a period of time, at no cost to the employees. You can find more
9
<PAGE>
information about the employee stock ownership plan by reading the section of
this document entitled "Management--New Stock Benefit Plans--Employee Stock
Ownership Plan." Following the conversion, People's also intends to implement a
restricted stock plan and a stock option plan, which will benefit directors,
officers and selected employees. These two plans will not be implemented unless
Peoples Community Bancorp receives stockholder approval of the plans at least
six months after the conversion. If the restricted stock plan is approved by
stockholders, executive officers, directors and selected employees of People's
will be awarded shares of common stock at no cost to them. If the stock option
plan is approved by stockholders, stock options will be granted at no cost to
participants, but such persons will be required to pay the applicable exercise
price at the time of exercise in order to receive the shares of common stock.
The following table summarizes the benefits that directors, officers and
employees of People's may receive from the conversion at the midpoint of the
offering range:
<TABLE>
<CAPTION>
% OF VALUE OF SHARES
INDIVIDUALS ELIGIBLE SHARES SOLD IN THE BASED ON MIDPOINT
PLAN TO RECEIVE AWARDS OFFERING(1) OF OFFERING RANGE
- ---- ----------------------------- ------------------ -----------------
<S> <C> <C> <C>
Employee stock ownership All employees 8.0% $1,120,000
plan.......................
Restricted stock plan........ Directors, officers and 4.0 560,000
selected employees
Stock option plan............ Directors, officers and 10.0 (2)
selected employees
</TABLE>
- ------------------------
(1) Does not include shares to be exchanged for Harvest Home Financial common
stock.
(2) Stock options will be granted with a per share exercise price at least equal
to the market price of the common stock on the date of grant. The value of a
stock option will depend upon increases, if any, in the price of the stock
during the life of the stock option.
People's intends to enter into three-year employment agreements with Jerry
D.Williams, Thomas J. Noe, John E. Rathkamp and Dennis J. Slattery, all of whom
will be executive officers of Peoples Community Bancorp after the conversion.
The agreements provide that the officers would receive severance payments equal
to three times their average compensation if Peoples Community Bancorp is
acquired and they lose their jobs after the acquisition. If severance was
required to be paid in 2000 after completion of the conversion, then
Messrs. Williams, Noe, Rathkamp and Slattery would receive severance payments of
approximately $300,000, $225,000, $225,000, and $225,000, respectively.
In addition, People's intends to enter into one-year change in control
agreements with certain other officers. The agreements provide that the officers
would receive severance payments equal to one times their average compensation
if Peoples Community Bancorp is acquired and they lose their jobs after the
acquisition.
10
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS DOCUMENT, YOU SHOULD CONSIDER
CAREFULLY THE FOLLOWING RISK FACTORS IN DECIDING WHETHER TO PURCHASE PEOPLES
COMMUNITY BANCORP COMMON STOCK.
HIGHER INTEREST RATES WOULD HURT PEOPLE'S SAVINGS' PROFITABILITY
People's ability to earn a profit depends on net interest income, which is
the difference between the interest income it earns on interest-earning assets,
such as mortgage loans, and the interest expense it pays on interest-bearing
liabilities, such as deposits and borrowings. Because loans generally have fixed
interest rates, People's net interest income could be adversely affected when
the rates it pays on deposits and borrowings are increasing. In addition, the
market value of fixed-rate assets would decline if interest rates increase.
After the conversion, People's plans to increase borrowings and to use the
proceeds from borrowings to originate additional loans and to buy
mortgage-backed securities. As People's pursues this strategy to leverage its
balance sheet, it may become even more sensitive to increases in market rates of
interest.
PEOPLE'S FUTURE SUCCESS DEPENDS ON THE SUCCESS OF THE MERGERS
People's is undertaking three interdependent transactions consisting of its
conversion to stock form and the planned mergers with Oakley and Harvest Home
Financial. People's success after the conversion depends in part on its ability
to successfully complete the mergers and manage the combined operation after the
mergers. For the mergers to be successful, People's will have to succeed in
combining the different corporate cultures and operations of the three
institutions. Unlike most recent mergers of financial institutions, People's
will not focus its efforts at reducing expenses at the combined institutions. In
fact, People's expects minimal cost savings from the mergers with Oakley and
Harvest Home Financial. Instead, People's plans to combine the resources of the
three institutions and to increase its loan originations in general and in
commercial real estate loans, in particular, and to continue to expand its
physical presence in the Cincinnati market area. People's cannot assure you that
its plan to integrate and operate the three merging institutions will be
successful.
PEOPLE'S PLANS FOR FUTURE EXPANSION WILL INCREASE EXPENSES
People's plans for future expansion will increase future expenses. People's
plans to build a new headquarters office and two additional branches. People's
also plans to improve its existing facilities. These expansion efforts will
increase expenses after the conversion. In addition to construction costs, the
new branches will entail start-up expenses, increases in personnel costs,
increases in real estate taxes and increases in other operating costs. People's
projects spending approximately $5.0 million to build a new headquarters and new
branches and to make capital improvements to its existing offices. People's
cannot assure you that it will realize an acceptable return on these additional
capital expenses.
GOODWILL WILL REDUCE PEOPLE'S NET EARNINGS
People's will record approximately $4.7 million in goodwill as a result of
the merger with Harvest Home Financial. People's will amortize this goodwill
over 15 years. As a result, People's net earnings will be reduced by
approximately $314,000 a year during the amortization period. People's cannot
assure you that its earnings after the effect of goodwill costs, as well as
anticipated increase in other costs due to planned capital improvements,
increases in personnel and costs from stock benefit plans, will be sufficient to
produce returns deemed acceptable by investors.
THERE MAY BE A LIMITED MARKET FOR PEOPLES COMMUNITY BANCORP COMMON STOCK
Since this is an initial public offering of shares of common stock of
Peoples Community Bancorp, there is no market for the common stock at this time.
Investors could have difficulty disposing of their
11
<PAGE>
shares on short notice and should not view the common stock as a short term
investment. Accordingly, investors should consider the possibility that they may
be unable to easily sell shares of Peoples Community Bancorp common stock. The
limited market for the stock may depress trading prices to an amount below the
$10.00 per share price.
PEOPLES COMMUNITY BANCORP DOES NOT INTEND TO PAY QUARTERLY CASH DIVIDENDS
Initially, Peoples Community Bancorp does not intend to pay quarterly cash
dividends on the common stock. Instead Peoples Community Bancorp plans to use
its resources to continue its growth and expand the products it offers.
Investors should not purchase shares of common stock of Peoples Community
Bancorp if they need dividend income from this investment.
PEOPLE'S SAVINGS' COMMERCIAL REAL ESTATE AND LAND LOANS ARE RISKIER THAN ITS
RESIDENTIAL LOANS
At September 30, 1999, People's Savings, Oakley and Harvest Home Financial
had an aggregate of $9.7 million in commercial real estate and land loans. After
the conversion and mergers, People's expects to significantly increase its
commercial real estate lending efforts. These loans generally involve a higher
degree of credit risk than residential mortgages due primarily to the large
amounts loaned to individual borrowers. Losses incurred on loans to a small
number of borrowers could have a material adverse impact on People's income and
financial condition. In addition, unlike residential mortgage loans, commercial
real estate loans depend on the cash flow from the property or the business to
service the debt. Cash flow may be significantly affected by general economic
conditions.
PEOPLES COMMUNITY BANCORP'S STOCK VALUE MAY SUFFER FROM ITS ABILITY TO IMPEDE
POTENTIAL TAKEOVERS
Provisions in People's corporate documents and in Delaware corporate law, as
well as certain federal regulations, may make it difficult, and expensive, to
pursue a tender offer, change in control or takeover attempt that People's board
of directors opposes. As a result, People's stockholders may not have an
opportunity to participate in such a transaction, and the trading price of
People's stock may not rise to the level of other institutions that are more
vulnerable to hostile takeovers. Anti-takeover provisions contained in People's
certificate of incorporation also will make it more difficult for an outsider to
remove its current board of directors or management.
PEOPLES COMMUNITY BANCORP'S DIRECTORS AND OFFICERS MAY HAVE EFFECTIVE VOTING
CONTROL
People's employee stock ownership plan and restricted stock plan will give
control of 12% of the stock sold in the conversion to People's directors,
officers and employees at no cost to them, assuming the restricted stock plan is
subsequently approved by stockholders. In addition, People's current and
proposed directors and officers intend to purchase 250,000 shares in the
conversion, or 21.0% at the minimum and 15.5% at the maximum of the offering.
The above benefit plans and purchases will give People's directors, officers
and employees control of greater than 20% of People's stock. Holders of 20% of
People's stock can block the removal of directors without cause, the approval of
certain business combinations and amendments to People's certificate of
incorporation. These ownership levels, along with potential exercises of future
stock options, could make it difficult to obtain majority support for
stockholder proposals People's opposes.
If stockholders subsequently approve People's proposed stock option plan,
People's directors, officers and employees may be granted options to purchase up
to 10% of the stock People's sells in the subscription offering. These options
will generally be for 10 years, with a per share exercise price equal to the
market price of the stock on the date of grant. Directors, officers and
employees will benefit if the stock price increases after the date of grant, and
they may be able to exercise their options at prices that are less than the
market price on the date of exercise.
12
<PAGE>
PEOPLE'S EMPLOYEE STOCK BENEFIT PLANS WILL INCREASE ITS COSTS
People's anticipates that its employee stock ownership plan will purchase 8%
of the common stock sold in the offering, with funds borrowed from Peoples
Community Bancorp. The cost of acquiring the employee stock ownership plan
shares will be between $952,000 at the minimum of the offering range and
$1,288,000 at the adjusted maximum of the offering range. People's will record
annual employee stock ownership plan expenses in an amount equal to the fair
value of shares committed to be released to employees. Based on the assumptions
described at pages 34 to 36, People's expects its annual employee stock
ownership expense to be $74,000 if People's sells $14.0 million of its common
stock in the conversion. If shares of common stock appreciate in value over
time, compensation expense relating to the employee stock ownership plan will
increase. People's also intends to submit a restricted stock plan to its
stockholders for approval at least six months after completion of the
conversion. People's officers and directors could be awarded (at no cost to
them) under the restricted stock plan up to an aggregate of 4% of the shares
sold in the offering. Assuming the shares of common stock to be awarded under
the plan cost the same as the purchase price in the conversion, the reduction to
stockholders' equity from the plan would be between $476,000 and $644,000. The
substantial increase in costs as a result of these employee stock benefit plans
may cause People's stock price to decline. See "Pro Forma Unaudited Combined
Consolidated Financial Information" for a discussion of the increased benefit
costs after the conversion and how these costs could decrease People's return on
equity.
PEOPLE'S EMPLOYEE STOCK BENEFIT PLANS MAY BE DILUTIVE
If the conversion is completed and stockholders subsequently approve a
restricted stock plan and a stock option plan, People's will issue stock to its
employees, officers and directors through these plans. If the shares for the
restricted stock plan are issued from authorized but unissued stock, the
ownership percentage of stockholders of Peoples Community Bancorp could be
diluted by approximately 2.5% (based on the midpoint of the offering and the
issuance of 787,760 shares of People's common stock to stockholders of Harvest
Home Financial) and the trading price of the common stock may be reduced. The
ownership percentage would also decrease by approximately 6.0% if all potential
stock options are exercised (based on the midpoint of the offering and the
issuance of 787,760 shares of People's common stock to stockholders of Harvest
Home Financial). See "Pro Forma Unaudited Combined Consolidated Financial
Information" for data on the dilutive effect of the restricted stock plan. These
plans will also involve additional expense.
THE ISSUANCE OF SHARES TO HARVEST HOME FINANCIAL STOCKHOLDERS WILL BE DILUTIVE
Peoples Community Bancorp will issue approximately 787,760 shares of its
common stock to the former stockholders of Harvest Home Financial in exchange
for their shares of common stock of Harvest Home Financial. Assuming the sale of
1,610,000 shares of People's common stock in the conversion, the issuance of
787,760 shares of People's common stock to former stockholders of Harvest Home
Financial will dilute the voting interests of subscribers in the conversion by
approximately 32.9%.
PEOPLE'S VALUATION IS NOT INDICATIVE OF THE FUTURE PRICE OF PEOPLE'S COMMON
STOCK
People's cannot assure you that if you purchase common stock in the offering
you will later be able to sell it at or above the purchase price in the
offering. The final aggregate purchase price of the common stock in the
conversion will be based upon an independent appraisal of People's estimated
market value assuming the completion of the two mergers and the sale of shares
in the offering. The appraisal is not intended, and should not be construed, as
a recommendation of any kind as to the advisability of purchasing shares of
common stock. The valuation is based on estimates and projections of a number of
matters, all of which are subject to change from time to time.
13
<PAGE>
The shares of common stock offered by this document are not savings accounts
or deposits, are not insured or guaranteed by the Federal Deposit Insurance
Corporation, the Savings Association Insurance Fund or any other governmental
agency, and involve investment risk, including the possible loss of principal.
PEOPLES COMMUNITY BANCORP'S STOCK PRICE MAY DECLINE
Following the conversion, People's cannot assure you that the trading price
of People's common stock will be at or above the initial per share offering
price. Publicly traded stocks, including stocks of financial institutions, have
recently experienced substantial market price volatility. In several cases,
common stock issued by recently converted financial institutions has traded at a
price that is below the price at which such shares were sold in the initial
offerings of those companies. The purchase price of People's common stock in the
offering is based on the independent appraisal by RP Financial. After People's
shares begin trading, the trading price of People's common stock will be
determined by the marketplace, and may be influenced by many factors, including
prevailing interest rates, investor perceptions and general industry and
economic conditions.
People's intends to remain independent for the foreseeable future. People's
business plan is to continue to increase its presence in the Cincinnati region
as an independent savings bank. People's does not plan on seeking possible
acquirors, and People's believes that it is unlikely that it will be acquired in
the foreseeable future. Accordingly, investors should not purchase People's
common stock with any expectation that a takeover premium will be paid to you in
the near term.
PEOPLE'S MAY BE UNABLE TO MAKE TECHNOLOGICAL ADVANCES
People's industry is experiencing rapid changes in technology. In addition
to improving customer services, effective use of technology increases efficiency
and enables financial institutions to reduce costs. People's future success will
depend in part on its ability to address its customers' needs by using
technology. People's cannot assure you that it will be able to effectively
develop new technology-driven products and services or be successful in
marketing these products to its customers. Many of People's competitors have far
greater resources than it has to invest in technology.
PEOPLE'S SAVINGS' OPERATIONS ARE SUBJECT TO REGULATORY AND LEGISLATIVE CHANGES
People's is subject to extensive government regulation, supervision and
examination. The regulatory authorities have extensive discretion in connection
with their supervisory and enforcement activities. Any change in regulation,
whether by the Office of Thrift Supervision, the FDIC or the U.S. Congress,
could have a significant impact on People's and its operations.
14
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF PEOPLE'S SAVINGS
(DOLLARS IN THOUSANDS)
The following selected historical financial data for the five years ended
September 30, 1999 is derived in part from the audited financial statements of
People's Savings. The selected historical financial data as of September 30,
1999 and 1998 and for each of the three years in the period ended September 30,
1999, should be read in conjunction with, and is qualified in its entirety by,
the historical financial statements of People's Savings, including the related
notes, included elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.............................................. $90,299 $89,638 $89,298 $84,421 $74,629
Cash and cash equivalents................................. 2,020 4,392 4,998 5,546 3,429
Investment securities available for sale.................. 798 1,303 1,702 1,496 1,290
Loans receivable, net..................................... 83,927 79,747 78,722 73,390 65,538
Mortgage-backed securities available for sale............. 1,110 1,419 1,398 1,378 2,218
Deposits.................................................. 77,691 73,691 72,289 69,811 64,954
Federal Home Loan Bank advances........................... -- 4,000 6,000 4,000 --
Retained earnings......................................... 11,787 11,025 10,246 9,369 8,899
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income........................................... $ 6,781 $ 6,802 $ 6,637 $ 6,012 $ 5,655
Interest expense.......................................... 3,913 4,165 4,092 3,740 3,302
------- ------- ------- ------- -------
Net interest income....................................... 2,868 2,637 2,545 2,272 2,353
Provision for losses on loans............................. 150 48 -- 8 --
------- ------- ------- ------- -------
Net interest income after provision for losses on loans... 2,718 2,589 2,545 2,264 2,353
Other income.............................................. 16 20 24 160 85
General, administrative and other expense................. 1,573 1,413 1,264 1,733(1) 1,612
------- ------- ------- ------- -------
Earnings before income taxes.............................. 1,161 1,196 1,305 691 826
Federal income taxes...................................... 395 406 454 221 271
------- ------- ------- ------- -------
Net earnings.............................................. $ 766 $ 790 $ 851 $ 470 $ 555
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS:
PERFORMANCE RATIOS:(2)
Return on average assets.................................. 0.85% 0.88% 0.98% 0.59% 0.76%
Return on average equity.................................. 6.72 7.43 8.68 5.15 6.44
Average interest-earning assets to average
interest-bearing liabilities............................ 113.62 112.82 111.90 112.25 112.66
Interest rate spread(3)................................... 2.69 2.39 2.41 2.33 2.62
Net interest margin(3).................................... 3.30 3.00 2.98 2.92 3.23
General and administrative expenses to average assets..... 1.75 1.58 1.46 2.18 2.21
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of
period(4)............................................... 1.15% 0.79% 1.11% 0.69% 0.61%
Allowance for losses on loans to nonperforming loans at
end of period........................................... 35.06 30.54 18.29 31.28 40.35
Allowance for losses on loans to total loans at end of
period.................................................. 0.43 0.27 0.23 0.25 0.28
CAPITAL AND OTHER RATIOS:
Average equity to average assets.......................... 12.68% 11.89% 11.29% 11.49% 11.94%
Tangible equity to tangible assets at end of period....... 13.04 12.32 11.47 11.10 11.92
Total capital to risk-weighted assets..................... 24.38 23.58 22.31 21.64 23.76
</TABLE>
- ------------------------------
(1) Includes a one-time assessment to the Savings Association Insurance Fund of
$372,000.
(2) With the exception of end of period ratios, all ratios are based on average
monthly balances during the respective periods.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(4) Nonperforming assets consist of non-accrual loans, loans past due 90 days or
more and still accruing interest and real estate acquired through
foreclosure or by deed-in-lieu thereof.
15
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF OAKLEY
(DOLLARS IN THOUSANDS)
The following selected historical financial data for the five years ended
September 30, 1999 is derived in part from the audited financial statements of
Oakley. The selected historical financial data as of September 30, 1999 and 1998
and for each of the three years in the period ended September 30, 1999, should
be read in conjunction with, and is qualified in its entirety by, the historical
financial statements of Oakley, including the related notes, included elsewhere
herein.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.............................................. $17,027 $17,386 $16,218 $15,479 $ 14,956
Cash and cash equivalents................................. 3,163 3,356 2,236 2,328 1,601
Investment securities available for sale.................. 2,452 2,442 2,164 1,760 1,934
Mortgage-backed securities available for sale............. 81 110 131 174 205
Loans receivable, net..................................... 10,624 10,701 11,178 11,012 11,002
Deposits.................................................. 13,327 13,633 13,145 12,887 12,744
Retained earnings......................................... 2,890 2,915 2,419 2,015 1,777
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......................................... $ 1,091 $ 1,171 $ 1,138 $ 1,118 $ 1,096
Interest expense........................................ 668 726 685 694 655
------- ------- ------- ------- ---------
Net interest income..................................... 423 445 453 424 441
Provision for losses on loans........................... 25 -- 1 4 --
------- ------- ------- ------- ---------
Net interest income after provision for losses on
loans................................................. 398 445 452 420 441
Other income............................................ 4 96 6 34 87
General, administrative and other expense............... 457 325 309 408(1) 373
------- ------- ------- ------- ---------
Earnings (loss) before income taxes (credits)........... (55) 216 149 46 155
Federal income taxes (credits).......................... (24) 69 22 8 50
------- ------- ------- ------- ---------
Net earnings (loss)..................................... $ (31) $ 147 $ 127 $ 38 $ 105
======= ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS:
PERFORMANCE RATIOS:(2)
Return (loss) on average assets........................... (0.18)% 0.87% 0.80% 0.25% 0.71%
Return (loss) on average equity........................... (1.07) 5.51 5.73 2.00 6.91
Average interest-earning assets to average
interest-bearing liabilities............................ 126.04 123.91 120.53 117.34 112.85
Interest rate spread(3)................................... 1.47 1.64 1.99 1.87 2.03
Net interest margin(3).................................... 2.49 2.68 2.89 2.75 2.98
General and administrative expenses to average assets..... 2.66 1.93 1.95 2.68 2.53
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of
period(4)............................................... 0.22% --% 0.09% 0.04% 0.01%
Allowance for losses on loans to nonperforming loans at
end of period........................................... 131.58 N/A 166.67 342.86 1,000.00
Allowance for losses on loans to total loans at end of
period.................................................. 0.47 0.23 0.22 0.22 0.18
CAPITAL AND OTHER RATIOS:
Average equity to average assets.......................... 16.87% 15.87% 13.99% 12.46% 10.29%
Tangible equity to tangible assets at end of period....... 10.80 10.74 10.22 9.58 9.46
Total capital to risk-weighted assets..................... 26.30 26.10 24.08 22.36 22.41
</TABLE>
- ------------------------------
(1) Includes a one-time assessment to the Savings Association Insurance Fund of
$82,000.
(2) With the exception of end of period ratios, all ratios are based on average
monthly balances during the respective periods.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(4) Nonperforming assets consist of non-accrual loans and real estate acquired
through foreclosure or by deed-in-lieu thereof.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF HARVEST HOME FINANCIAL
(DOLLARS IN THOUSANDS)
The following selected historical financial data for the five years ended
September 30, 1999 is derived in part from the audited consolidated financial
statements of Harvest Home Financial. The selected historical financial data set
forth below should be read in conjunction with, and is qualified in its entirety
by, the historical consolidated financial statements of Harvest Home Financial,
including the related notes, included elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL CONDITION AND OTHER DATA:
Total assets.............................................. $98,935 $96,894 $93,832 $78,718 $69,532
Cash and cash equivalents(1).............................. 2,849 2,887 5,264 1,708 2,313
Investment securities held to maturity.................... -- -- -- -- 18,032
Investment securities available for sale.................. 5,951 4,032 8,039 12,105 --
Mortgage-backed securities held to maturity............... -- -- -- -- 9,009
Mortgage-backed securities available for sale............. 33,711 37,864 32,466 20,429 --
Loans receivable, net..................................... 52,790 48,797 45,229 42,267 38,245
Total deposits............................................ 66,220 60,225 58,786 57,958 56,425
Advances from the Federal Home Loan Bank.................. 22,600 25,850 24,000 10,000 --
Stockholders' equity...................................... 9,653 9,977 10,344 9,725 12,706
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OPERATING DATA:
Interest income........................................... $ 6,482 $ 6,367 $ 5,983 $ 5,209 $ 4,872
Interest expense.......................................... 4,211 4,143 3,689 2,969 2,569
------- ------- ------- ------- -------
Net interest income....................................... 2,271 2,224 2,294 2,240 2,303
Provision for losses on loans............................. 12 12 9 1 12
------- ------- ------- ------- -------
Net interest income after provision for losses on loans... 2,259 2,212 2,285 2,239 2,291
Other income.............................................. 92 109 64 74 50
General, administrative and other expense................. 1,572 1,516 1,409 2,136(2) 1,372
------- ------- ------- ------- -------
Earnings before income taxes.............................. 779 805 940 177 969
Federal income taxes...................................... 265 264 313 45 329
------- ------- ------- ------- -------
Net earnings.............................................. $ 514 $ 541 $ 627 $ 132 $ 640
======= ======= ======= ======= =======
Earnings per share:
Basic................................................... $ 0.60 $ 0 .63 $ 0.71 $ 0.16 $ 0.73
======= ======= ======= ======= =======
Diluted................................................. $ 0.59 $ 0.60 $ 0.70 $ 0.16 $ 0.73
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED PERFORMANCE RATIOS(3):
Interest rate spread(4)................................... 1.96% 1.95% 2.17% 2.24% 2.48%
Net yield on average interest-earning assets(4)........... 2.35 2.45 2.76 3.07 3.27
Return on average equity.................................. 5.14 5.28 6.09 1.05 5.09
Return on average assets.................................. 0.51 0.58 0.73 0.18 0.89
Equity-to-assets ratio.................................... 10.01 11.05 12.06 16.94 17.56
Loan loss allowance as a percentage of non-performing
loans(5)................................................ 556.00% 259.18% 121.05% 67.68% 76.92%
</TABLE>
- ------------------------------
(1) Includes cash and due from banks, federal funds sold and interest-bearing
deposits in other financial institutions.
(2) Includes a one-time assessment to the Savings Association Insurance Fund of
$368,000.
(3) With the exception of end of period ratios, all ratios are based on average
monthly balances during the respective periods.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(5) Nonperforming assets consist of non-accrual loans, loans past due 90 days or
more and still accruing interest and real estate acquired through
foreclosure or by deed-in-lieu thereof.
17
<PAGE>
RECENT DEVELOPMENTS OF PEOPLE'S SAVINGS
(DOLLARS IN THOUSANDS)
The selected and other data of People's Savings set forth below does not
purport to be complete and is qualified in its entirety by reference to the more
detailed financial information contained elsewhere herein. In the opinion of
management, the unaudited financial information at December 31, 1999 and for the
three months ended December 31, 1999 and 1998 reflects all adjustments
(consisting only of normal recurring accruals) which are necessary for a fair
presentation of the information as of such date and for such periods. The
operating and other data for the three months ended December 31, 1999 may not be
indicative of the operations of People's Savings on an annualized basis.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.............................................. $92,487 $90,299
Cash and cash equivalents................................. 2,086 2,020
Investment securities available for sale.................. 600 798
Loans receivable, net..................................... 86,402 83,927
Mortgage-backed securities available for sale............. 1,045 1,110
Deposits.................................................. 79,007 77,691
Federal Home Loan Bank advances........................... 700 --
Retained earnings......................................... 12,009 11,787
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income........................................... $ 1,740 $ 1,715
Interest expense.......................................... 973 1,032
------- -------
Net interest income....................................... 767 683
Provision for losses on loans............................. 30 10
------- -------
Net interest income after provision for losses on loans... 737 673
Other income.............................................. 5 5
General, administrative and other expenses................ 396 379
------- -------
Earnings before income taxes.............................. 346 299
Federal income taxes...................................... 117 88
------- -------
Net earnings.............................................. $ 229 $ 211
======= =======
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
KEY OPERATING RATIOS:
PERFORMANCE RATIOS:(1)
Return on average assets.................................. 1.00% .94%
Return on average equity.................................. 7.70 7.58
Average interest-earning assets to average
interest-bearing liabilities............................ 113.14 113.04
Interest rate spread(2)................................... 2.70 2.47
Net interest margin(2).................................... 3.31 3.08
General and administrative expenses to average assets..... 1.73 1.68
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of
period(3)............................................... .55% 1.02%
Allowance for losses on loans to nonperforming loans at
end of
period(3)............................................... 77.15 24.32
Allowance for losses on loans to total loans at the end of
period.................................................. .46 .27
CAPITAL AND OTHER RATIOS:
Average equity to average assets.......................... 13.02% 12.34%
Tangible and core equity to tangible and core assets at
end of period........................................... 12.98 12.36
Total capital to risk-weighted assets..................... 24.02 23.68
Tier I leveraged capital.................................. 10.18 9.98
Total capital to risk-weighted assets..................... 23.48 24.70
</TABLE>
- ------------------------------
(1) With the exception of end of period ratios, all ratios are based on average
monthly balances during the respective period and are annualized where
appropriate.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(3) Nonperforming assets consist of non-accrual loans, loans past due 90 days or
more and still accruing interest and real estate acquired through
foreclosure or by deed-in-lieu thereof.
18
<PAGE>
Total assets increased by $2.2 million or 2.4% to $92.5 million at
December 31, 1999 compared to $90.3 million at September 30, 1999. This increase
in assets was primarily due to a $2.5 million or 2.9% increase in loans
receivable as a result of an increase in commercial real estate loan
originations. Deposits increased $1.3 million or 1.7% to $79.0 million at
December 31, 1999 compared to $77.7 million at September 30, 1999. Total equity
amounted to $12.0 million or 13.0% of total assets at December 31, 1999 compared
to $11.8 million or 13.1% of total assets at September 30, 1999. The increase of
$222,000 or 1.9% was due to continued net earnings during the three months ended
December 31, 1999.
People's Savings' net earnings amounted to $229,000 for the three months
ended December 31, 1999 compared to $211,000 for the same period in 1998. The
increase of $18,000 or 8.5% was primarily due to an increase in net interest
income partially offset by increases in the provision for losses on loans,
general, administrative and other expenses and income taxes.
Net interest income increased $84,000 or 12.3% to $767,000 for the three
months ended December 31, 1999 compared to the three months ended December 31,
1998. This increase was due to an increase in interest income and a decrease in
interest expense. In addition, the interest rate spread increased to 2.70% for
the December 1999 quarter compared to the 2.47% for the December 1998 quarter.
The net interest margin also increased to 3.31% for the December 1999 quarter
compared to 3.08% for the comparable 1998 quarter.
Interest income increased $25,000 or 1.5% to $1.7 million for the three
months ended December 31, 1999 compared to the same period in 1998. This
increase was primarily due to an increase in the average outstanding balance of
loans receivable as a result of increased originations of commercial real estate
loans.
Interest expense decreased $59,000 or 5.7% to $973,000 for the three months
ended December 31, 1999 compared to the same period in 1998. The decrease in
interest expense was primarily due to a decrease in the average rate paid on
deposits.
The provision for losses on loans amounted to $30,000 and $10,000 for the
quarters ended December 31, 1999 and 1998. The increase in the provision for
losses on loans was primarily due to increased originations of commercial real
estate loans which generally involve a higher degree of risk than one-to-four
family residential lending.
Noninterest income and general, administrative and other expenses remained
stable during the three months ended December 31, 1999 compared to the same
period in 1998.
Income taxes amounted to $117,000 and $88,000 for the three months ended
December 31, 1999 and 1998, respectively, resulting in effective tax rates of
33.8% and 29.4%, respectively. The higher income taxes during the 1999 quarter
were due to greater earnings before income taxes.
People's Savings has not encountered any significant disruptions in its
business or operations as a result of the turn of the century on January 1,
2000.
19
<PAGE>
RECENT DEVELOPMENTS OF OAKLEY
(DOLLARS IN THOUSANDS)
The selected and other data of Oakley set forth below does not purport to be
complete and is qualified in its entirety by reference to the more detailed
financial information contained elsewhere herein. In the opinion of management,
the unaudited financial information at December 31, 1999 and for the three
months ended December 31, 1999 and 1998 reflects all adjustments (consisting
only of normal recurring accruals) which are necessary for a fair presentation
of the information as of such date and for such periods. The operating and other
data for the three months ended December 31, 1999 may not be indicative of the
operations of Oakley on an annualized basis.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.............................................. $19,372 $17,027
Cash and cash equivalents................................. 2,938 3,163
Investment securities available for sale.................. 2,282 2,452
Mortgage-backed securities available for sale............. 78 81
Loans receivable, net..................................... 12,731 10,624
Deposits.................................................. 15,872 13,327
Retained earnings......................................... 2,579 2,890
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income........................................... $ 287 $ 285
Interest expense.......................................... 169 178
------- -------
Net interest income....................................... 118 107
Provision for losses on loans............................. 3 --
------- -------
Net interest income after provision for losses on loans... 115 107
Other income.............................................. 24 1
General, administrative and other expenses................ 118 93
------- -------
Earnings before income taxes.............................. 21 15
Federal income taxes...................................... 3 4
------- -------
Net earnings.............................................. $ 18 $ 11
======= =======
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
KEY OPERATING RATIOS:
PERFORMANCE RATIOS:(1)
Return on average assets.................................. .40% .25%
Return on average equity.................................. 2.55 1.42
Average interest-earning assets to average
interest-bearing liabilities............................ 124.98 125.89
Interest rate spread(2)................................... 2.30 1.60
Net interest margin(2).................................... 3.35 2.64
General and administrative expenses to average assets..... 2.59 2.11
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of
period(3)............................................... --% --%
Allowance for losses on loans to nonperforming loans at
end of period(3)........................................ N/A N/A
Allowance for losses on loans to total loans at the end of
period.................................................. .42 .25
CAPITAL AND OTHER RATIOS:
Average equity to average assets.......................... 15.52% 17.54%
Tangible and core equity to tangible and core assets at
end of period........................................... 9.16 10.84
Total capital to risk-weighted assets..................... 26.83 44.63
</TABLE>
- ------------------------------
(1) With the exception of end of period ratios, all ratios are based on average
monthly balances during the respective periods and are annualized where
appropriate.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(3) Nonperforming assets consist of non-accrual loans and real estate acquired
through foreclosure or by deed-in-lieu thereof.
20
<PAGE>
Total assets increased $2.3 million or 13.8% to $19.4 million at
December 31, 1999 compared to $17.0 million at September 30, 1999. This increase
in assets was primarily due to a $2.1 million or 19.8% increase in loans
receivable as a result of an increase in commercial real estate loan
originations. Deposits increased $2.5 million or 19.1% to $15.9 million at
December 31, 1999 compared to $13.3 million at September 30, 1999. Total equity
amounted to $2.8 million or 14.2% of total assets at December 31, 1999 compared
to $2.9 million or 17.0% of assets at September 30, 1999. The decrease in total
equity was due to a decrease in the market value of Oakley's Federal Home Loan
Mortgage Corporation stock.
Oakley's net earnings amounted to $18,000 for the three months ended
December 31, 1999 compared to $11,000 for the same period in 1998. This increase
was due to increases in net interest income and noninterest income,
substantially offset by increases in general, administrative and other expenses
and income taxes.
Net interest income increased slightly to $118,000 for the December 1999
quarter compared to $111,000 for the December 1998 quarter. This was due to a
slight increase in interest income and a decrease in interest expense. In
addition, the interest rate spread and net interest margin increased from 1.60%
and 2.64% for the three months ended December 31, 1998 to 2.30% and 3.35% for
the comparable period in 1999.
Interest income increased $2,000 to $287,000 for the three months ended
December 31, 1999 compared to the same period in 1998.
Interest expense decreased $9,000 to $169,000 for the December 1999 quarter
compared to $178,000 for the December 1998 quarter. This decrease was primarily
due to a decrease in the average rate paid on deposits.
The provision for losses on loans was relatively stable, amounting to $3,000
for the quarter ended December 31, 1999 and nothing for the comparable 1998
quarter.
Noninterest income amounted to $24,000 for the December 1999 quarter
compared to $1,000 for the December 1998 quarter. This increase was due to
increased fees associated with the increase in commercial real estate loan
originations.
General, administrative and other expenses increased $25,000 or 26.9% to
$118,000 for the quarter ended December 31, 1999 compared to the same period in
1998. This increase was primarily due to the hiring of Oakley's managing officer
in August 1999.
Income taxes amounted to $3,000 and $4,000 for the three months ended
December 31, 1998, respectively, resulting in effective tax rates of 14.3% and
26.6%, respectively.
21
<PAGE>
RECENT DEVELOPMENTS OF HARVEST HOME FINANCIAL
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected and other data of Harvest Home Financial set forth below does
not purport to be complete and is qualified in its entirety by reference to the
more detailed financial information contained elsewhere herein. In the opinion
of management, the unaudited financial information at December 31, 1999 and for
the three months ended December 31, 1999 and 1998 reflect all adjustments
(consisting only of normal recurring accruals) which are necessary for a fair
presentation of the information as of such date and for such periods. The
operating and other data for the three months ended December 31, 1999 may not be
indicative of the operations of Harvest Home Financial on an annualized basis.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
<S> <C> <C>
SELECTED CONSOLIDATED FINANCIAL CONDITION AND OTHER DATA:
Total assets.............................................. $99,703 $ 98,935
Cash and cash equivalents(1).............................. 1,982 2,849
Investment securities held to maturity.................... -- --
Investment securities available for sale.................. 5,936 5,951
Mortgage-backed securities held to maturity............... -- --
Mortgage-backed securities available for sale............. 32,678 33,711
Loans receivable, net..................................... 55,430 52,790
Total deposits............................................ 64,561 66,220
Advances from the Federal Home Loan Bank.................. 24,800 22,600
Stockholders' equity...................................... 9,916 9,653
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
SUMMARY OPERATING DATA:
Interest income........................................... $ 1,651 $ 1,624
Interest expense.......................................... 1,037 1,046
------- -------
Net interest income....................................... 614 578
Provision for losses on loans............................. 3 3
------- -------
Net interest income after provision for losses on loans... 611 575
Other income.............................................. 34 20
General, administrative and other expenses................ 414 388
------- -------
Earnings before income taxes.............................. 231 207
Federal income taxes...................................... 78 70
------- -------
Net earnings.............................................. $ 153 $ 137
======= =======
Earnings per share:
Basic................................................... $ 0.18 $ 0.16
======= =======
Diluted................................................. $ 0.17 $ 0.15
======= =======
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
SELECTED PERFORMANCE RATIOS:(2)
Interest rate spread(3)................................... 2.16% 2.06%
Net yield on average interest-earning assets(3)........... 2.54 2.47
Return on average equity.................................. 6.25 5.47
Return on average assets.................................. .62 .57
Equity-to-assets ratio.................................... 9.95 10.74
Loan loss allowance as a percentage of non-performing
loans(4)................................................ 48.63 1,857.14
</TABLE>
- ------------------------------
(1) Includes cash and due from banks, federal funds sold and interest-bearing
deposits in other financial institutions.
(2) With the exception of end of period ratios, all ratios are based on average
monthly balances during the respective periods and are annualized where
appropriate.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(4) Nonperforming assets consist of non-accrual loans, loans past due 90 days or
more and still accruing interest and real estate acquired through
foreclosure or by deed-in-lieu thereof.
22
<PAGE>
Harvest Home Financial reported total assets of $99.7 million at
December 31, 1999, an increase of $768,000, or .8%, over the total at
September 30, 1999. The increase was funded by a $2.2 million increase in
advances from the Federal Home Loan Bank, partially offset by a decline in
deposits of $1.7 million. Loans receivable totaled $55.3 million at
December 31, 1999, an increase of $2.6 million, or 5.0%, over September 30, 1999
levels. Loan originations were funded by the net increase in borrowings, as well
as by proceeds from repayments of mortgage-backed securities and excess
liquidity.
Net earnings for the three months ended December 31, 1999 amounted to
$153,000, an increase of $16,000, or 11.7%, over the $137,000 in net earnings
reported for the three month period ended December 31, 1998. The increase in
earnings was due primarily to a $37,000 increase in net interest income, coupled
with a $15,000 increase in other operating income, which were partially offset
by a $27,000 increase in general, administrative and other expense and a $9,000
increase in the provision for federal income taxes.
Net interest income increased by $37,000, or 6.4%, for the three month
period ended December 31, 1999, compared to the same period in 1998, due
primarily to a $33,000, or 3.5%, increase in interest income on loans, coupled
with a $10,000, or 1.0%, decrease in interest expense. Harvest Home Financial's
interest rate spread amounted to 2.17% and 2.06% for the three month periods
ended December 31, 1999 and 1998, respectively, and the net interest margin
totaled 2.55% and 2.47% for the respective 1999 and 1998 three month periods.
Other operating income increased by $15,000, or 75.0%, during the three
month period ended December 31, 1999, compared to the same quarter in 1998, due
primarily to an increase in the volume of fees on deposit accounts and on
automated teller machine transactions.
General, administrative and other expense increased by approximately
$27,000, or 7.0%, during the three months ended December 31, 1999, compared to
the same quarter in 1998. This increase was primarily the result of an $11,000,
or 4.9%, increase in employee compensation and benefits, a $7,000, or 14.3%,
increase in occupancy and equipment expense, and a $9,000, or 42.9%, increase in
data processing expense. The increase in employee compensation and benefits
resulted primarily from normal merit increases and increased health insurance
premiums. The increase in occupancy and equipment and processing costs was due
primarily to depreciation and other expenses related to the teller operating
system upgrade completed in mid-1999.
The federal income tax provision increased by $9,000, or 12.9%, due
primarily to a $25,000, or 12.1%, increase in pretax earnings year to year. The
effective tax rates were 34.1% and 33.8% for the three month periods ended
December 31, 1999 and 1998, respectively.
23
<PAGE>
PROPOSED MANAGEMENT PURCHASES
The following table sets forth, for each of People's Savings' current
directors and executive officers (and their associates) and for all of the
directors and executive officers as a group, the proposed purchases of common
stock, assuming sufficient shares are available to satisfy their subscriptions.
The following table also sets forth the proposed purchases of common stock by
Thomas J. Noe who will become a director and the Chief Financial Officer of
Peoples Community Bank and Peoples Community Bancorp. The amounts include shares
that may be purchased through individual retirement accounts.
<TABLE>
<CAPTION>
NUMBER OF
NAME AND TITLE SHARES AMOUNT PERCENT(1)
- -------------- --------- ---------- ----------
<S> <C> <C> <C>
Paul E. Hasselbring,
Chairman of the Board..................... 30,000 $ 300,000 2.14%
Jerry D. Williams, Director,
President and Chief Executive Officer..... 45,000 450,000 3.22
Thomas J. Noe, Director,
Chief Financial Officer................... 45,000 450,000 3.22
Lori Henn, Vice President................... 12,000 120,000 0.86
David Cook, Vice President.................. 3,000 30,000 0.21
Beth Pennington,
Vice President and Treasurer.............. 15,000 150,000 1.07
Zane M. Brant, Director..................... 10,000 100,000 0.71
John L. Buchanan, Director.................. 30,000 300,000 2.14
Donald L. Hawke, Director................... 10,000 100,000 0.71
Richard S. Johnston, Director............... 5,000 50,000 0.36
Nicholas N. Nelson, Director................ 15,000 150,000 1.07
James R. Van DeGrift, Director.............. 30,000 300,000 2.14
------- ---------- -----
All directors and executive officers as a
group
(twelve persons)(2)....................... 250,000 $2,500,000 17.85%
======= ========== =====
</TABLE>
- ------------------------
(1) Based upon the midpoint of the offering range.
(2) This category does not include Messrs. Rathkamp and Slattery or Ms. O'Quinn
who will become directors and/or executive officers of Peoples Community
Bancorp and/or Peoples Community Bank after the conversion and the mergers.
None of these individuals are eligible account holders or supplemental
account holders or other members for purposes of purchasing shares of common
stock in the conversion. Based on the ownership of Harvest Home Financial
common stock by Messrs. Rathkamp and Slattery and Ms. O'Quinn as of
January 31, 2000 and the exchange of 0.9 of a share of Peoples Community
Bancorp common stock for each share of Harvest Home Financial common stock,
Messrs. Rathkamp and Slattery and Ms. O'Quinn would receive 24,294, 15,336
and 1,125 shares of Peoples Community Bancorp common stock. Based upon the
sale of 1,400,000 shares of common stock in the conversion, the issuance of
787,760 shares of Peoples Community Bancorp common stock to the former
stockholders of Harvest Home Financial, the proposed purchases of Peoples
Community Bancorp common stock set forth above and the issuance of 24,294,
15,336 and 1,125 shares of Peoples Community Bancorp common stock to
Messrs. Rathkamp and Slattery and Ms. O'Quinn, all directors and executive
officers of Peoples Community Bancorp as a group, including
Messrs. Rathkamp, Slattery and O'Quinn would own approximately 290,755
shares or 13.3% of Peoples Community Bancorp common stock.
In addition, the employee stock ownership plan currently intends to purchase
8% of the common stock sold in the offering for the benefit of officers and
employees. Stock options and restricted stock
24
<PAGE>
awards may also be granted in the future to directors, officers and employees
upon the receipt of stockholder approval of Peoples Community Bancorp's proposed
stock benefit plans. See "Management--New Stock Benefit Plans" for a description
of these plans.
HOW NET PROCEEDS WILL BE USED
Although the actual net proceeds from the sale of Peoples Community
Bancorp's common stock cannot be determined until the conversion is completed,
it is presently anticipated that the net proceeds from the sale of the common
stock will be between $11.3 million and $15.5 million ($17.9 million assuming an
increase in the offering range by 15%). See "Pro Forma Unaudited Combined
Consolidated Financial Information" as to the assumptions used to arrive at such
amounts.
The $13.4 million of the estimated net proceeds assuming the sale of shares
at the midpoint of the offering range will be used as follows:
- 8% or $1.1 million will be loaned to the employee stock ownership plan to
fund its purchase of common stock;
- 50% or $6.7 million will be used to purchase all of the common stock of
People's Savings; and
- 42% or $5.6 million will be retained by Peoples Community Bancorp for
general corporate purposes.
The loan to the employee stock ownership plan will be $1,120,000 at the
midpoint of the offering range. The employee stock ownership plan will
distribute the shares it purchases to employees as the loan is repaid over
10 years.
The $6.7 million of net proceeds which are used to purchase the capital
stock of People's Savings will be used for general corporate purposes, including
the construction and opening of a new headquarters office and additional
branches and the purchase of investment securities. The net proceeds received by
People's Savings will further strengthen its capital position, which already
exceeds all regulatory requirements. After the conversion and the mergers,
People's Savings' tangible capital ratio will be 9.70%, based upon the midpoint
of the offering range. As a result, People's Savings will continue to be a
well-capitalized institution.
People's Savings projects that it may spend approximately $5.0 million of
the net proceeds to build a new headquarters office as well as two new branch
offices and make capital improvements to existing offices. People's Savings
believes that the improvements and the new offices will assist in attracting new
customers. However, there can be no assurance that any new branch office will
generate sufficient business to be profitable. The remaining $1.7 million of net
proceeds will be initially used to purchase investment securities.
Peoples Community Bancorp intends to use $4.5 million of the $5.6 million of
net proceeds retained by them to partially fund the cash consideration of
$8.3 million to be paid to former stockholders of Harvest Home Financial as a
result of the merger with Harvest Home Financial. The remaining $3.8 million in
cash consideration will be funded from cash in Harvest Home Financial on the
date of the merger. The remaining $1.1 million of net proceeds retained by
Peoples Community Bancorp will be initially used to purchase investment
securities.
NET PROCEEDS MAY VARY BECAUSE TOTAL EXPENSES OF THE CONVERSION MAY BE MORE
OR LESS THAN THOSE ESTIMATED. The net proceeds will also vary if the number of
shares to be issued in the conversion is adjusted to reflect a change in the
estimated pro forma market value of People's Savings. Payments for shares made
through withdrawals from existing deposit accounts at People's Savings will not
result in the receipt of new funds for investment by People's Savings but will
result in a reduction of People's Savings' interest expense and liabilities as
funds are transferred from interest-bearing certificates or other deposit
accounts.
25
<PAGE>
PEOPLES COMMUNITY BANCORP DOES NOT INTEND TO PAY QUARTERLY CASH DIVIDENDS
After the conversion is completed, the Board of Directors will have the
authority to declare dividends on the common stock, subject to statutory and
regulatory requirements. Initially, Peoples Community Bancorp does not intend to
pay quarterly cash dividends on the common stock. Instead, Peoples Community
Bancorp plans to use its resources to continue its growth and expand the
products it offers. Any dividends paid in the future will depend upon a number
of factors, including the amount of net proceeds retained in the conversion,
available investment opportunities, capital requirements, Peoples Community
Bancorp's financial condition and results of operations, tax considerations,
statutory and regulatory limitations, and general economic conditions. No
assurances can be given that any dividends will be paid or that, if paid, will
not be reduced or eliminated in future periods. In addition, Peoples Community
Bancorp has committed to the Office of Thrift Supervision that it will take no
action to further the payment of any return of capital during the one-year
period following completion of the conversion.
THERE MAY BE A LIMITED MARKET FOR THE COMMON STOCK
Because this is an initial public offering, there is no market for the
common stock at this time. After the offering is completed, Peoples Community
Bancorp anticipates that the common stock will be traded on the over-the-counter
market with quotations available through the Nasdaq Stock Market's National
Market. Keefe, Bruyette & Woods, Inc. has indicated its intention to make a
market in the common stock.
Making a market may include the solicitation of potential buyers and sellers
in order to match buy and sell orders. However, Keefe, Bruyette & Woods, Inc.
will not be subject to any obligation with respect to such efforts. The
development of a liquid public market depends upon the existence of willing
buyers and sellers, the presence of which is not within the control of Peoples
Community Bancorp or of any market maker. Investors could have difficulty
disposing of their shares on short notice and should not view the common stock
as a short-term investment. Accordingly, investors should consider the
possibility that they may be unable to easily sell the common stock.
Furthermore, there can be no assurance that investors will be able to sell their
shares at or above the initial per share offering price.
Peoples Community Bancorp has applied to have the common stock listed on the
Nasdaq National Market under the symbol "PCBI." If the application is not
approved, Peoples Community Bancorp expects that the common stock will be listed
on the Nasdaq Small Cap Market.
PEOPLE'S SAVINGS, OAKLEY AND HARVEST HOME SAVINGS BANK MEET
ALL OF THEIR REGULATORY CAPITAL REQUIREMENTS
At September 30, 1999, People's Savings, Oakley and Harvest Home Savings
Bank each exceeded all of the regulatory capital requirements applicable to it.
The table on the following page sets forth the historical regulatory capital of
People's Savings, Oakley and Harvest Home Savings Bank under generally accepted
accounting principles and regulatory capital at September 30, 1999 and the pro
forma capital after giving effect to the conversion and the mergers, based upon
the sale of the number of shares shown in the table. The pro forma capital
amounts reflect the receipt by Peoples Community Bank of 50% of the net
conversion proceeds, minus the amounts to be loaned to the employee stock
ownership plan and to be contributed to the proposed restricted stock plan. The
pro forma risk-based capital amounts assume the investment of the net proceeds
received by Peoples Community Bank in assets which have a risk-weight of 20%
under applicable regulations, as if such net proceeds had been received and so
applied at September 30, 1999.
26
<PAGE>
<TABLE>
<CAPTION>
HARVEST HOME
SAVINGS PRO FORMA
PEOPLE'S SAVINGS OAKLEY BANK(1) COMBINED
HISTORICAL AT HISTORICAL AT HISTORICAL AT HISTORICAL AT
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
--------------------- --------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital:
Actual............... $11,791 13.05% $1,635 10.82% $9,737 9.76% $14,629 7.45%
Requirement.......... 1,355 1.50% 227 1.50% 1,497 1.50% 2,947 1.50%
------- ----- ------ ----- ------ ----- ------- -----
Excess............... $10,436 11.55% $1,408 9.32% $8,240 8.26% $11,682 5.95%
======= ===== ====== ===== ====== ===== ======= =====
Core capital(3):
Actual............... $11,791 13.05% $1,635 10.82% $9,737 9.76% $14,629 7.45%
Requirement.......... 2,710 3.00% 453 3.00% 2,994 3.00% 5,894 3.00%
------- ----- ------ ----- ------ ----- ------- -----
Excess............... $ 9,081 10.05% $1,182 7.82% $6,743 6.76% $ 8,735 4.45%
======= ===== ====== ===== ====== ===== ======= =====
Risk-based capital(3):
Actual............... $12,156 24.40% $1,685 26.25% $9,876 23.48% $15,183 16.22%
Requirement.......... 3,985 8.00% 513 8.00% 3,365 8.00% 7,487 8.00%
------- ----- ------ ----- ------ ----- ------- -----
Excess............... $ 8,171 16.40% $1,172 18.25% $6,511 15.48% $ 7,696 8.22%
======= ===== ====== ===== ====== ===== ======= =====
<CAPTION>
PRO FORMA COMBINED CONSOLIDATED FOR PEOPLE'S COMMUNITY BANK
AT SEPTEMBER 30, 1999 BASED ON
---------------------------------------------------------------------------------------------
1,190,000 1,400,000 1,610,000 1,851,500
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 PER SHARE AT $10.00 PER SHARE AT $10.00 PER SHARE AT $10.00 PER SHARE
--------------------- --------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital:
Actual............... $18,851 9.35% $19,649 9.70% $20,447 10.04% $21,365 10.44%
Requirement.......... 3,025 1.50% 3,039 1.50% 3,064 1.50% 3,070 1.50%
------- ----- ------- ----- ------- ----- ------- -----
Excess............... $15,826 7.85% $16,610 8.20% $17,393 8.54% $18,295 8.94%
======= ===== ======= ===== ======= ===== ======= =====
Core capital(3):
Actual............... $18,851 9.35% $19,649 9.70% $20,447 10.04% $21,365 10.44%
Requirement.......... 6,049 3.00% 6,078 3.00% 6,107 3.00% 6,141 3.00%
------- ----- ------- ----- ------- ----- ------- -----
Excess............... $12,802 6.35% $13,571 6.70% $14,340 7.04% $15,224 7.44%
======= ===== ======= ===== ======= ===== ======= =====
Risk-based capital(3):
Actual............... $19,405 20.51% $20,203 21.31% $21,001 22.10% $21,919 23.02%
Requirement.......... 7,570 8.00% 7,585 8.00% 7,601 8.00% 7,618 8.00%
------- ----- ------- ----- ------- ----- ------- -----
Excess............... $11,835 12.51% $12,618 13.31% $13,400 14.10% $14,301 15.02%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ----------------------------------
(1) Although Harvest Home Savings Bank is subject to the FDIC's capital
regulations, for purposes of this table, Harvest Home Savings Bank is
assumed to be subject to Office of Thrift Supervision capital requirements.
(2) Adjusted total or adjusted risk-weighted assets, as appropriate. As of
September 30, 1999, the adjusted total and risk-weighted assets of People's
Savings were $90.3 million and $49.8 million, respectively, the adjusted
total and risk-weighted assets of Oakley were $15.1 million and
$6.4 million, respectively, and the adjusted total and risk-weighted assets
of Harvest Home Savings Bank were $99.8 million and $42.1 million,
respectively.
(3) Does not reflect the interest rate risk component to be added to the
risk-based capital requirements or, in the case of the core capital
requirement, the 4.0% requirement to be met in order for an institution to
be "adequately capitalized" under applicable laws and regulations. Also,
tangible, core and risk-based capital are reflected net of goodwill of
$4.7 million arising from the acquisition of Harvest Home Financial by
Peoples Community Bancorp. See "Regulation--People's Savings--Regulatory
Capital Requirements."
27
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of People's
Savings at September 30, 1999, and the pro forma combined consolidated
capitalization of Peoples Community Bancorp after giving effect to the
conversion and the mergers, based upon the sale of the number of shares shown
below and the other assumptions set forth under "Pro Forma Unaudited Combined
Consolidated Financial Information--Additional Pro Forma Data."
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
HARVEST HOME PURCHASE CONSOLIDATED
PEOPLE'S SAVINGS-- OAKLEY-- FINANCIAL-- ACCOUNTING REFLECTING
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS PURCHASE
------------------ ---------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Goodwill............................... $ -- $ -- $ -- $ 4,705 $ 4,705
======= ========
Deposits(2)............................ $77,691 $13,327 $66,220 (13) $157,225
Borrowings............................. -- -- 22,600 (77) 22,523
------- ------- ------- ------- --------
Total deposits and borrowings.......... $77,691 $13,327 $88,820 $ (90) $179,748
======= ======= ======= ======= ========
Stockholders' equity:
Preferred Stock, $0.01 par value,
1,000,000 shares authorized; none
issued or to be issued............. $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value,
10,000,000 shares authorized;
shares issued or to be issued as
reflected(3)....................... -- -- -- 8 8
Additional paid-in capital............. -- -- 6,887 (987) 5,900
Treasury stock(4)...................... -- -- (1,451) 1,451 --
Retained earnings(5)................... 11,791 1,635 5,329 (5,329) 13,426
Net unrealized gain (loss) on available
for sale securities, net of taxes.... (4) 1,255 (694) 694 1,251
Less:
Common Stock held by the Harvest Home
Financial employee stock ownership
plan............................... -- -- (224) 224 --
Common Stock held by the Harvest Home
Financial recognition plan......... -- -- (194) 194 --
Less:
Common Stock held or to be acquired
by the People's employee stock
ownership plan(6).................. -- -- -- -- --
Common Stock to be acquired by the
People's recognition plan(7)....... -- -- -- -- --
------- ------- ------- ------- --------
Total equity........................... $11,787 $ 2,890 $ 9,653 $ 3,745 $ 20,585
======= ======= ======= ======= ========
Equity to assets ratio................. 13.05% 16.97% 9.76% -- 10.17%
<CAPTION>
PEOPLES COMMUNITY BANCORP--PRO FORMA CONSOLIDATED
BASED UPON SALE AT $10.00 PER SHARE
---------------------------------------------------------
1,851,500
1,190,000 1,400,000 1,610,000 SHARES(1)
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
RANGE) RANGE) RANGE) RANGE)
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Goodwill............................... $ 4,705 $ 4,705 $ 4,705 $ 4,705
======== ======== ======== ========
Deposits(2)............................ $157,225 $157,225 $157,225 $157,225
Borrowings............................. 22,523 22,523 22,523 22,523
-------- -------- -------- --------
Total deposits and borrowings.......... $179,748 $179,748 $179,748 $179,748
======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $0.01 par value,
1,000,000 shares authorized; none
issued or to be issued............. $ -- $ -- $ -- $ --
Common Stock, $.01 par value,
10,000,000 shares authorized;
shares issued or to be issued as
reflected(3)....................... 20 22 24 26
Additional paid-in capital............. 17,188 19,286 21,384 23,797
Treasury stock(4)...................... -- -- -- --
Retained earnings(5)................... 13,426 13,426 13,426 13,426
Net unrealized gain (loss) on available
for sale securities, net of taxes.... 1,251 1,251 1,251 1,251
Less:
Common Stock held by the Harvest Home
Financial employee stock ownership
plan............................... -- -- -- --
Common Stock held by the Harvest Home
Financial recognition plan......... -- -- -- --
Less:
Common Stock held or to be acquired
by the People's employee stock
ownership plan(6).................. (952) (1,120) (1,288) (1,481)
Common Stock to be acquired by the
People's recognition plan(7)....... (476) (560) (644) (741)
-------- -------- -------- --------
Total equity........................... $ 30,457 $ 32,305 $ 34,153 $ 36,278
======== ======== ======== ========
Equity to assets ratio................. 14.35% 15.09% 15.81% 16.63%
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
28
<PAGE>
- ------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% to reflect
changes in market and financial conditions before the conversion is
completed or to fill the order of the employee stock ownership plan.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of shares in the conversion plus the issuance of
787,760 shares to Harvest Home Financial stockholders. People's has not
given any effect to the issuance of additional shares of common stock
pursuant to the proposed stock option plan. Peoples Community Bancorp
intends to adopt a stock option plan and to submit such plan to stockholders
at a meeting of stockholders to be held at least six months following
completion of the conversion. If the plan is approved by stockholders, an
amount equal to 10% of the shares of common stock sold in the conversion
will be reserved for issuance under such plan.
(4) Assumes the cancellation of Harvest Home Financial's treasury shares at the
time of the consummation of the merger.
(5) The retained earnings of Peoples Community Bank will be substantially
restricted after the conversion. See "The Conversion of People's Savings and
the Mergers with Oakley and Harvest Home Financial--Liquidation Rights of
Certain Depositors."
(6) People's has assumed that 8% of the common stock will be purchased by the
employee stock ownership plan. The common stock acquired by the employee
stock ownership plan is reflected as a reduction of stockholders' equity.
People's has assumed that the funds used to acquire the employee stock
ownership plan shares will be borrowed from Peoples Community Bancorp. See
Note 1 to the table set forth under "Pro Forma Unaudited Combined
Consolidated Financial Information" and "Management--New Stock Benefit
Plans--Employee Stock Ownership Plan."
(7) Gives effect to the recognition plan which People's Community Bancorp
expects to adopt after the conversion and present to stockholders for
approval at a meeting of stockholders to be held at least six months after
the conversion is completed. No shares will be purchased by the recognition
plan in the conversion, and the recognition plan cannot purchase any shares
until stockholder approval has been obtained. If the recognition plan is
approved by Peoples Community Bancorp's stockholders, the plan intends to
acquire an amount of common stock equal to 4% of the shares of common stock
sold in the offering, or 47,600, 56,000, 64,400 and 74,060 shares at the
minimum, midpoint, maximum and 15% above the maximum of the offering range,
respectively. The table assumes that stockholder approval has been obtained
and that such shares are purchased in the open market at $10.00 per share.
The common stock so acquired by the recognition plan is reflected as a
reduction in stockholders' equity. If the shares are purchased at prices
higher or lower than the initial purchase price of $10.00 per share, such
purchases would have a greater or lesser impact, respectively, on
stockholders' equity. If the recognition plan purchases authorized but
unissued shares from Peoples Community Bancorp, such issuance would dilute
the voting interests of existing stockholders by approximately 2.4%, 2.5%,
2.6% and 2.7% at the minimum, midpoint, maximum and 15% above the maximum,
respectively.
29
<PAGE>
PRO FORMA UNAUDITED COMBINED CONSOLIDATED FINANCIAL INFORMATION
The following Pro Forma Unaudited Combined Consolidated Statement of
Financial Condition at September 30, 1999 and the Pro Forma Unaudited Combined
Consolidated Statements of Earnings for each of the years ended September 30,
1999, 1998 and 1997 give effect to the proposed conversion and the mergers based
on the assumptions set forth below. The pro forma unaudited combined
consolidated financial statements are based on the audited financial statements
of People's Savings, Oakley and Harvest Home Financial for the years ended
September 30, 1999, 1998 and 1997. The pro forma unaudited combined consolidated
financial statements give effect to the conversion, the merger between People's
Savings and Oakley using the pooling of interests method and the merger between
Peoples Community Bancorp and Harvest Home Financial using the purchase method
of accounting.
The pro forma adjustments in the tables assume the sale of 1,400,000 shares
of common stock in the offering at a price of $10.00 per share. In addition, the
pro forma adjustments in the tables assume the issuance of 787,760 shares in the
merger with Harvest Home Financial. The net proceeds are based upon the
following assumptions: (1) all shares of common stock will be sold in the
subscription offering; and (2) total expenses, including the marketing fees to
be paid to Keefe, Bruyette & Woods, will be $600,000. Actual expenses may vary
from those estimated and the number of shares sold and the actual purchase price
may be more or less than the assumptions set forth above. For the effects of
such possible changes, see "--Additional Pro Forma Data."
The pro forma unaudited combined consolidated statement of financial
condition assumes the conversion and the mergers were completed on
September 30, 1999. The pro forma unaudited combined consolidated statements of
earnings assume that the conversion and the mergers were completed on the first
day of each indicated period. People's calculated historical and pro forma per
share amounts by dividing historical and pro forma amounts by the indicated
number of shares of common stock.
People's has provided the pro forma unaudited combined consolidated
financial statements for informational purposes only. The pro forma financial
information presented is not necessarily indicative of the actual results that
People's would have achieved had the conversion and the mergers been completed
on September 30, 1999 or at the beginning of the periods presented, and is not
indicative of its future results. Purchasers should read the pro forma unaudited
combined consolidated financial statements in conjunction with the financial
statements and the notes thereto of People's Savings, Oakley and Harvest Home
Financial contained elsewhere herein.
The stockholders' equity represents the combined book value of the common
stockholders' ownership of People's Savings, Oakley and Harvest Home Financial
computed in accordance with generally accepted accounting principles. This
amount is not intended to represent fair market value nor does it represent any
amount that would be available for distribution to stockholders in the event of
liquidation. The book value for People's Savings, Oakley and Harvest Home
Financial on a historical and pro forma basis has not been changed to reflect
any difference between the carrying value of investments held to maturity or
loans held in portfolio and their market value.
THE UNAUDITED PRO FORMA COMBINED CONSOLIDATED NET EARNINGS AND COMMON
STOCKHOLDERS' EQUITY DERIVED FROM THE ABOVE ASSUMPTIONS ARE QUALIFIED BY THE
STATEMENTS SET FORTH UNDER THIS CAPTION AND SHOULD NOT BE CONSIDERED INDICATIVE
OF THE MARKET VALUE OF THE COMMON STOCK OR THE ACTUAL RESULTS OF OPERATIONS OF
PEOPLE'S SAVINGS, OAKLEY AND HARVEST HOME FINANCIAL FOR ANY PERIOD. THE PRO
FORMA DATA PRESENTED MAY BE MATERIALLY AFFECTED BY THE ACTUAL GROSS PROCEEDS
FROM THE SALE OF COMMON STOCK IN THE CONVERSION AND THE MERGERS AND THE ACTUAL
EXPENSES INCURRED IN CONNECTION WITH THE CONVERSION AND THE MERGERS. SEE "HOW
NET PROCEEDS WILL BE USED."
30
<PAGE>
PRO FORMA UNAUDITED COMBINED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PEOPLE'S PRO FORMA
PEOPLE'S SAVINGS/OAKLEY CONVERSION
SAVINGS OAKLEY COMBINED(1) ADJUSTMENTS(2)
-------- -------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Cash............................. $ 70 $ 101 $ 171 $ --
Interest-bearing deposits........ 1,950 2,762 4,712 11,720
Federal funds sold............... -- 700 700 --
------- ------- -------- -------
Cash and cash equivalents........ 2,020 3,563 5,583 11,720
Investment securities available
for sale....................... 798 1,950 2,748 --
Mortgage-backed securities
available for sale............. 1,110 -- 1,110 --
Mortgage-backed securities held
to maturity.................... -- 81 81 --
Investment securities held to
maturity....................... -- 502 502 --
Loans receivable, net............ 83,927 10,624 94,551 --
Federal Home Loan Bank stock, at
cost........................... 850 171 1,021 --
Office properties and
equipment...................... 1,037 25 1,062
Accrued interest receivable...... 383 72 455 --
Goodwill......................... -- -- -- --
Other assets..................... 174 39 213 --
------- ------- -------- -------
Total Assets................... $90,299 $17,027 $107,326 $11,720
======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Deposits......................... $77,691 $13,327 $ 91,018 $ --
Total borrowings................. -- -- -- --
Advances by borrowers for
insurance and taxes............ 6 -- 6 --
Other liabilities................ 815 810 1,625 --
------- ------- -------- -------
Total liabilities.............. 78,512 14,137 92,649 --
------- ------- -------- -------
Stockholders' equity:
Common Stock..................... -- -- -- 14
Additional paid-in capital....... -- -- -- 13,386
Retained earnings partially
restricted..................... 11,791 1,635 13,426 --
Employee stock ownership plan
shares......................... -- -- -- (1,120)
Recognition plan shares.......... -- -- -- (560)
Treasury stock................... -- -- -- --
Unrealized gains (losses) on
securities..................... (4) 1,255 1,251 --
------- ------- -------- -------
Total stockholders' equity..... 11,787 2,890 14,677 11,720
------- ------- -------- -------
Total liabilities and
stockholders' equity....... $90,299 $17,027 $107,326 $11,720
======= ======= ======== =======
<CAPTION>
PEOPLE'S
SAVINGS, HARVEST PRO FORMA
AS HOME MERGER PRO FORMA
CONVERTED FINANCIAL ADJUSTMENTS CONSOLIDATED
--------- --------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Cash............................. $ 171 $ 1,347 $ -- $ 1,518
Interest-bearing deposits........ 4,712 1,402 (8,286)(3) 9,548
Federal funds sold............... 700 100 -- 800
-------- ------- ------- --------
Cash and cash equivalents........ 5,583 2,849 (8,286)(3) 11,866
Investment securities available
for sale....................... 2,748 5,951 -- 8,699
Mortgage-backed securities
available for sale............. 12,830 33,711 -- 34,821
Mortgage-backed securities held
to maturity.................... 81 -- -- 81
Investment securities held to
maturity....................... 502 -- -- 502
Loans receivable, net............ 94,551 52,790 (338)(3) 147,003
Federal Home Loan Bank stock, at
cost........................... 1,021 1,723 -- 2,744
Office properties and
equipment...................... 1,062 1,236 -- 2,298
Accrued interest receivable...... 455 502 -- 957
Goodwill......................... -- -- 4,705 (4) 4,705
Other assets..................... 213 173 84 (3) 470
-------- ------- ------- --------
Total Assets................... $119,046 $98,935 $(3,835) $214,146
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Deposits......................... $ 91,018 $66,220 $ (13)(3) $157,225
Total borrowings................. -- 22,600 (77)(3) 22,523
Advances by borrowers for
insurance and taxes............ 6 105 -- 111
Other liabilities................ 1,625 357 -- 1,982
-------- ------- ------- --------
Total liabilities.............. 92,649 89,282 (90) 181,841
-------- ------- ------- --------
Stockholders' equity:
Common Stock..................... 14 -- 8 (4) 22
Additional paid-in capital....... 13,386 6,887 (987)(4) 19,286
Retained earnings partially
restricted..................... 13,426 5,329 (5,329)(4) 13,426
Employee stock ownership plan
shares......................... (1,120) (224) 224 (3) (1,120)
Recognition plan shares.......... (560) (194) 194 (560)
Treasury stock................... -- (1,451) 1,451 (4) --
Unrealized gains (losses) on
securities..................... 1,251 (694) 694 1,251
-------- ------- ------- --------
Total stockholders' equity..... 26,397 9,653 (3,745) 32,305
-------- ------- ------- --------
Total liabilities and
stockholders' equity....... $119,046 $98,935 $(3,835) $214,146
======== ======= ======= ========
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
31
<PAGE>
- ------------------------------
(1) Reflects the merger of People's Savings and Oakley utilizing the pooling of
interests method of accounting. Accordingly, the historical basis of
People's Savings' and Oakley's assets, liabilities and equity accounts have
been carried forward and added together at historical cost.
(2) Reflects gross proceeds of $14.0 million from the sale of common stock in
the conversion, minus (i) estimated expenses of the conversion equal to
$600,000, (ii) the purchase of $1.12 million of shares of common stock by
the employee stock ownership plan, funded internally by a loan from Peoples
Community Bancorp and (iii) the proposed purchase of $560,000 of common
stock by the recognition plan, funded internally by Peoples Community
Bancorp.
(3) Reflects the cash consideration of $9.00 per common share or $7.7 million,
capitalized merger costs of $220,000 and cash payments related to Harvest
Home Financial's stock option plan at an after-tax cost of $478,000. These
costs and payments are partially offset by retirement of the Harvest Home
Financial employee stock ownership plan in the amount of $224,000 and the
Harvest Home Financial recognition plan tax benefits amounting to $66,000.
Also reflects fair value adjustments related to the loan portfolio, deposit
accounts and borrowings net of related tax effects totalling $332,000.
(4) Reflects the issuance of shares at fair value based on the exchange of each
share of Harvest Home Financial common stock previously held for 0.9 of a
share of Peoples Community Bancorp common stock with a par value of $.01
(assuming no additional exercises of options to acquire Harvest Home
Financial common stock) and the retirement of Harvest Home Financial shares
previously held in treasury totalling $1.5 million. Also reflects the
goodwill inherent in the Harvest Home Financial acquisition totalling
$4.7 million.
32
<PAGE>
PRO FORMA UNAUDITED COMBINED CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------------------------
PEOPLE'S
SAVINGS/OAKLEY
PEOPLE'S PRO FORMA HARVEST HOME PURCHASE PRO FORMA
SAVINGS OAKLEY COMBINED FINANCIAL ADJUSTMENTS CONSOLIDATED
-------- -------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest income............... $6,781 $1,091 $7,872 $ 6,482 $(429)(2) $13,925
Interest expense.............. (3,913) (668) (4,581) (4,211) -- (8,792)
------ ------ ------ ------- ----- -------
Net interest income before
provision for losses on
loans....................... 2,868 423 3,291 2,271 (429) 5,133
Provision for losses on
loans....................... (150) (25) (175) (12) -- (187)
------ ------ ------ ------- ----- -------
Net interest income after
provision for losses on
loans..................... 2,718 398 3,116 2,259 (429) 4,946
Non-interest income........... 16 4 20 92 -- 112
Non-interest expense.......... (1,573) (457) (2,030) (1,572) (103)(3) (3,705)
------ ------ ------ ------- ----- -------
Earnings (loss) before
income taxes.............. 1,161 (55) 1,106 779 (532) 1,353
(Income taxes) credits........ (395) 24 (371) (265) 74 (562)
------ ------ ------ ------- ----- -------
Net earnings................ $ 766 $ (31) $ 735 $ 514 $(458) $ 791
====== ====== ====== ======= ===== =======
Basic earnings per share
(1)......................... N/A N/A N/A $ 0.60 (1) N/A --
======= =======
Diluted earnings per share
(1)......................... N/A N/A N/A $ 0.59 (1) N/A --
======= =======
</TABLE>
- ------------------------
(1) Reflects diluted earnings per share and basic earnings per share for Harvest
Home Financial on a historical basis.
(2) Reflects loss of interest revenue on $8.3 million of cash outflows related
to Harvest Home Financial acquisition at 5.18%, which represents the yield
on one-year U.S. government securities.
(3) Reflects amortization of $4.7 million of goodwill over a fifteen year life
using the straight line method, less annual compensation savings of
$215,000. The amortization will approximate $315,000 per year on a pre-tax
basis.
33
<PAGE>
ADDITIONAL PRO FORMA DATA
The actual net proceeds from the sale of Peoples Community Bancorp's common
stock cannot be determined until the conversion is completed. However, net
proceeds are currently estimated to be between $11.3 million and $15.5 million
(or $17.9 million in the event the offering range is increased by 15%) based
upon the following assumptions: (1) all shares of common stock will be sold in
the subscription offering; and (2) total expenses, including the marketing fees
to be paid to Keefe, Bruyette & Woods, will be $600,000. Actual expenses may
vary from those estimated.
People's calculated pro forma net earnings and stockholders' equity for the
year ended September 30, 1999 as if the common stock to be issued in the
offering had been sold at the beginning of the period. The table assumes that
the net proceeds had been invested at 5.18% for the year ended September 30,
1999, which represents the yield on one-year U.S. Government securities at
September 30, 1999. The effect of withdrawals from deposit accounts for the
purchase of common stock has not been reflected. People's assumed a federal
income tax rate of 34%, resulting in an after-tax yield of 3.42% for the year
ended September 30, 1999. People's calculated historical and pro forma per share
amounts by dividing historical and pro forma amounts by the indicated number of
shares of common stock, as adjusted to give effect to the shares purchased by
the employee stock ownership plan and the recognition plan with respect to the
earnings per share calculations. See Notes 2 and 4 to the tables below. No
effect has been given in the pro forma stockholders' equity calculations for the
assumed earnings on the net proceeds utilized to purchase fixed assets. As
discussed under "How Net Proceeds Will Be Used," Peoples Community Bancorp
intends to retain 50% of the net conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the conversion and the mergers at the date on which the
conversion and the mergers actually occur and should not be taken as indicative
of Peoples Community Bancorp's future results of operations. Pro forma
stockholders' equity represents the difference between the stated amount of
Peoples Community Bancorp's assets and liabilities computed in accordance with
generally accepted accounting principles. The pro forma stockholders' equity is
not intended to represent the fair market value of the common stock and may be
different than amounts that would be available for distribution to stockholders
in the event of liquidation. People's did not reflect in the table the possible
issuance of additional shares equal to 10% of the common stock to be reserved
for future issuance pursuant to its proposed stock option plan, nor does book
value give any effect to the liquidation account to be established or to bad
debt reserves. See "Management--New Stock Benefit Plans" and "The Conversion of
People's Savings and the Mergers with Oakley and Harvest Home
Financial--Liquidation Rights of Certain Depositors." The table does give effect
to the recognition plan, which Peoples Community Bancorp expects to adopt
following the conversion and present (together with the stock option plan) to
stockholders for approval no earlier than the first meeting of stockholders. If
the recognition plan is approved by stockholders, it will acquire an amount of
common stock equal to 4% of the shares of common stock sold in the offering,
either through open market purchases, if permissible, or from authorized but
unissued shares of common stock. The table assumes that stockholder approval has
been obtained and that the shares acquired by the recognition plan are purchased
in the open market at $10.00 per share. There can be no assurance that
stockholder approval of the recognition plan will be obtained, that the shares
will be purchased in the open market or that the purchase price will be $10.00
per share.
The table on the following page summarizes historical consolidated data of
People's Savings, Oakley and Harvest Home Financial and pro forma data of
Peoples Community Bancorp at or for the date and period indicated based on the
assumptions set forth above and in the table and should not be used as a basis
for projection of the market value of the common stock following the conversion.
34
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30, 1999
--------------------------------------------------------
1,851,500
1,190,000 1,400,000 1,610,000 SHARES SOLD
SHARES SOLD SHARES SOLD SHARES SOLD AT $10.00
AT $10.00 AT $10.00 AT $10.00 PER SHARE
PER SHARE PER SHARE PER SHARE (15% ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM
OF RANGE) OF RANGE) OF RANGE) OF RANGE)(8)
----------- ----------- ----------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds........................................... $ 11,900 $ 14,000 $ 16,100 $ 18,515
Less offering expenses................................... (600) (600) (600) (600)
--------- --------- --------- ---------
Estimated net conversion proceeds........................ $ 11,300 $ 13,400 $ 15,500 $ 17,915
Less People's employee stock ownership plan............ (952) (1,120) (1,288) (1,481)
Less People's recognition plan......................... (476) (560) (644) (741)
Less People's investment in fixed assets............... (5,000) (5,000) (5,000) (5,000)
--------- --------- --------- ---------
Estimated adjusted net proceeds(1)....................... $ 4,872 $ 6,720 $ 8,568 $ 10,693
========= ========= ========= =========
Net income:
Historical(2).......................................... $ 791 $ 791 $ 791 $ 791
Pro forma adjustments:
Income on adjusted net proceeds(1)................... 167 230 293 366
Employee stock ownership plan(3)..................... (63) (74) (85) (98)
recognition plan(4).................................. (63) (74) (85) (98)
--------- --------- --------- ---------
Pro forma............................................ $ 832 $ 873 $ 914 $ 961
========= ========= ========= =========
Earnings per share(5):
Historical(2).......................................... $ 0.43 $ 0.39 $ 0.35 $ 0.32
Pro forma adjustments:
Income on adjusted net proceeds(1)................... 0.09 0.11 0.13 0.15
Employee stock ownership plan(3)..................... (0.03) (0.04) (0.04) (0.04)
recognition plan (4)................................. (0.03) (0.04) (0.04) (0.04)
--------- --------- --------- ---------
Pro forma basic and diluted earnings per share....... $ 0.46 $ 0.42 $ 0.40 $ 0.39
========= ========= ========= =========
Pro forma basic P/E ratio(4)............................. 21.74x 23.81x 25.00x 25.64x
========= ========= ========= =========
Number of shares used in calculating net income
per share(4):.......................................... 1,854,000 2,042,160 2,230,320 2,446,704
========= ========= ========= =========
Stockholders' equity:
Historical............................................. $ 20,585 $ 20,585 $ 20,585 $ 20,585
Estimated net conversion proceeds...................... 11,300 13,400 15,500 17,915
Less People's employee stock ownership plan(2)......... (952) (1,120) (1,288) (1,481)
Less People's recognition plan(3)...................... (476) (560) (644) (741)
--------- --------- --------- ---------
Pro forma stockholders' equity(5)(6)................. $ 30,457 $ 32,305 $ 34,153 $ 36,278
========= ========= ========= =========
Less goodwill.......................................... (4,705) (4,705) (4,705) (4,705)
--------- --------- --------- ---------
Pro forma stockholders' equity(5)(6)................. $ 25,752 $ 27,600 $ 29,448 $ 31,574
========= ========= ========= =========
Stockholders' equity per share(7):
Historical............................................. $ 10.41 $ 9.41 $ 8.59 $ 7.80
Estimated net conversion proceeds...................... 5.71 6.12 6.46 6.79
Less People's employee stock ownership plan(2)......... (0.48) (0.51) (0.54) (0.56)
Less People's recognition plan(3)...................... (0.24) (0.26) (0.27) (0.28)
--------- --------- --------- ---------
Pro forma stockholders' equity per share(3)(5)(6).... $ 15.40 $ 14.76 $ 14.24 $ 13.75
========= ========= ========= =========
Less goodwill.......................................... (2.38) (2.15) (1.96) (1.78)
--------- --------- --------- ---------
Pro forma stockholders' equity per share(3)(5)(6).... $ 13.02 $ 12.61 $ 12.28 $ 11.97
========= ========= ========= =========
Pro forma price to book ratio(7)....................... 64.94% 67.75% 70.22% 72.73%
========= ========= ========= =========
Pro forma price to tangible book ratio................. 76.80% 79.30% 81.43% 83.54%
========= ========= ========= =========
Number of shares used in equity per share
calculations(7)........................................ 1,977,760 2,187,760 2,397,760 2,639,260
========= ========= ========= =========
</TABLE>
- ------------------------------
(1) Estimated adjusted net proceeds consist of the estimated net conversion
proceeds, minus (i) the proceeds attributable to the purchase by People's
employee stock ownership plan, (ii) the value of the shares to be purchased
by People's recognition plan after the conversion, subject to stockholder
approval, at an assumed purchase price of $10.00 per share and (iii) the
estimated investment in fixed assets. For the purposes of this presentation,
the fixed asset investment of $5.0 million, which is expected to be made
during calendar year 2000, is reflected as an adjustment to net proceeds for
purposes of the pro forma earnings and pro forma earnings per share
information. See also Note 4 to the prior presentation of the Pro Forma
Unaudited Combined Consolidated Statement of Financial Condition at
September 30, 1999.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
35
<PAGE>
(2) Reflects the historical fiscal 1999 net earnings of People's Savings, Oakley
and Harvest Home Financial, adjusted for purchase price adjustments. See
"--Pro Forma Unaudited Combined Consolidated Statements of Earnings."
(3) People's assumed that 8% of the shares of common stock issued in the
conversion will be purchased by the employee stock ownership plan. People's
also assumed that the funds used to acquire such shares will be borrowed by
the employee stock ownership plan from Peoples Community Bancorp. People's
intends to make quarterly contributions to the employee stock ownership plan
over a ten-year period in an amount at least equal to the principal and
interest requirement of the debt. The pro forma earnings assumes (a) that
the loan to the employee stock ownership plan is payable over ten years,
with the employee stock ownership plan shares having an average fair value
of $10.00 per share; (b) that the loan to the employee stock ownership plan
bears a fixed interest rate of 8.5%; (c) that the employee stock ownership
plan expense for the period is equivalent to the principal payment for the
period and was made at the end of the period; (d) that 9,520, 11,200, 12,880
and 14,812 shares were committed to be released with respect to the year
ended September 30, 1999, at the minimum, midpoint, maximum and 15% above
the maximum of the offering range, respectively; (e) only the employee stock
ownership plan shares committed to be released during the period were
considered outstanding for purposes of the earnings per share calculations;
and (f) the effective tax rate was 34% for the period.
(4) People's assumed that the recognition plan purchases 47,600, 56,000, 64,400
and 74,060 shares at the minimum, midpoint, maximum and 15% above the
maximum of the offering range, assuming that: (a) stockholder approval of
the recognition plan is received; (b) the shares were acquired by the
recognition plan at the beginning of the period presented in open market
purchases at $10.00 per share; (c) the amortized expense for the year ended
September 30, 1999 was 20% of the amount contributed; and (d) the effective
tax rate applicable to such employee compensation expense was 34%. Unvested
shares under the recognition plan are excluded from the basic earnings per
share calculation and included in the diluted earnings per share calculation
only if they are dilutive under the treasury stock method. People's assumed
that 20% of the recognition plan shares vested at the beginning of the
period. If the recognition plan purchases authorized but unissued shares
instead of making open market purchases, then (a) the voting interests of
existing stockholders would be diluted by approximately 2.4%, 2.5%, 2.6% and
2.7% at the minimum, midpoint, maximum and 15% above the maximum,
respectively, and (b) the pro forma earnings per share for the year ended
September 30, 1999 would be $0.45, $0.43, $0.41 and $0.39, and pro forma
stockholders' equity per share at September 30, 1999 would be $15.27,
$14.65, $14.13 and $13.64, in each case at the minimum, midpoint, maximum
and 15% above the maximum of the offering range, respectively.
(5) Basic earnings per share calculations are determined by (a) starting with
the number of shares assumed to be sold in the conversion, (b) subtracting
the employee stock ownership plan shares which have not been committed for
release, and (c) subtracting the recognition plan shares which have not
vested. The unvested recognition plan shares were deemed to be for future
services and not dilutive under the treasury stock method.
Set forth below is a reconciliation of the number of shares used in making
the earnings per share calculations:
<TABLE>
<CAPTION>
MAXIMUM,
MINIMUM MIDPOINT MAXIMUM AS ADJUSTED
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Total shares issued.................................... 1,190,000 1,400,000 1,610,000 1,851,500
Less shares sold to employee stock ownership plan...... (95,200) (112,000) (128,800) (148,120)
Less recognition plan shares........................... (47,600) (56,000) (64,400) (74,060)
--------- --------- --------- ---------
Subtotal............................................. 1,047,200 1,232,000 1,416,800 1,629,320
Plus employee stock ownership plan shares assumed
committed to be released............................. 9,520 11,200 12,880 14,812
Plus recognition plan shares assumed vested............ 9,520 11,200 12,880 14,812
Plus shares issued to Harvest Home Financial
shareholders......................................... 787,760 787,760 787,760 787,760
--------- --------- --------- ---------
Number of shares used in calculating basic and diluted
earnings per share................................... 1,854,000 2,042,160 2,230,320 2,446,704
========= ========= ========= =========
</TABLE>
People's did not give any effect to the issuance of additional shares of
common stock pursuant to its proposed stock option plan, which People's
expects to adopt after the conversion and present to stockholders for
approval at a meeting of stockholders to be held at least six months after
the conversion is completed. If the stock option plan is approved by
stockholders, an amount equal to 10% of the common stock issued in the
conversion, or 119,000, 140,000, 161,000 and 185,150 shares at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock option plan. The issuance of
authorized but previously unissued shares of common stock pursuant to the
exercise of options under such plan would dilute existing stockholders'
interests. Assuming stockholder approval of the plan, that all the options
were exercised at the beginning of the period at an exercise price of $10.00
per share, and that the shares to fund the recognition plan are acquired
through open market purchases at $10.00 per share, (a) pro forma earnings
per share for the year ended September 30, 1999 would be $0.44, $0.42, $0.41
and $0.39, and (b) pro forma stockholders' equity per share at
September 30, 1999 would be $15.09, $14.48, $13.98 and $13.50, in each case
at the minimum, midpoint, maximum and 15% above the maximum of the offering
range, respectively.
(6) The retained earnings of People's Savings will be substantially restricted
after the conversion. See "The Conversion of People's Savings and the
Mergers with Oakley and Harvest Home Financial--Liquidation Rights of
Certain Depositors." Pro forma stockholders' equity and pro forma
stockholders' equity per share (i) reflect certain nonrecurring charges, net
of tax (see Note 4 to the Pro Forma Unaudited Consolidated Statement of
Financial Condition) and (ii) do not give effect to the liquidation account
or the bad debt reserves established by People's Savings for federal income
tax purposes in the event of a liquidation of People's Savings and does not
give effect to intangibles such as goodwill.
(7) Based on the number of shares sold in the conversion and 787,760 shares
issued in the merger with Harvest Home Financial.
(8) Assumes an increase in the number of shares due to a 15% increase in the
maximum of the offering range to reflect changes in market and financial
conditions before the conversion is completed or to fill the order of the
employee stock ownership plan.
36
<PAGE>
THE CONVERSION OF PEOPLE'S SAVINGS AND THE MERGERS
WITH OAKLEY AND HARVEST HOME FINANCIAL
THE BOARDS OF DIRECTORS OF PEOPLES COMMUNITY BANCORP AND PEOPLE'S SAVINGS
APPROVED THE PLAN OF CONVERSION, AS HAS THE OFFICE OF THRIFT SUPERVISION AND THE
OHIO DIVISION OF FINANCIAL INSTITUTIONS, SUBJECT TO APPROVAL BY THE MEMBERS OF
PEOPLE'S SAVINGS AND OAKLEY ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION
OF CERTAIN OTHER CONDITIONS. REGULATORY APPROVAL, HOWEVER, DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION BY SUCH AGENCIES.
GENERAL
When the Board of Directors of People's Savings approved the merger
agreements on September 30, 1999, it also unanimously adopted the Plan of
Conversion. The Plan of Conversion provides that People's Savings will convert
from an Ohio chartered mutual savings and loan association to a federally
chartered stock savings bank to be known as "Peoples Community Bank." All of the
common stock of Peoples Community Bank following the conversion will be held by
Peoples Community Bancorp. The common stock of Peoples Community Bancorp is
being offered for sale to depositor members of Oakley and People's Savings, as
well as others, in the subscription offering. People's Savings and Oakley each
have called a special meeting for their members to approve the Plan of
Conversion. The common stock of Peoples Community Bancorp also will be issued to
stockholders of Harvest Home Financial as part of the consideration of that
merger. Harvest Home Financial has called a meeting of its stockholders to
approve its merger agreement with Peoples Community Bancorp.
The conversion and the mergers are interdependent transactions and no
transaction will occur unless all of them do. In the event the conditions to the
mergers are not satisfied or waived, the conversion will not be completed, the
offerings will be terminated and the funds received will be returned to
subscribers. The completion of the merger of Oakley with People's Savings is
expected to occur immediately before the conversion and the merger of Harvest
Home Financial with Peoples Community Bancorp is expected to occur immediately
after the completion of the conversion. The mergers are governed by the merger
agreements that were adopted by the Boards of Directors of People's Savings,
Oakley and Harvest Home Financial and by the Board of Directors of Peoples
Community Bancorp.
The Plan of Conversion provides that Peoples Community Bancorp will offer
shares of common stock for sale in the subscription offering to eligible account
holders, tax-qualified employee stock benefit plans, supplemental eligible
account holders, other members, and officers, directors and employees of
People's Savings and Oakley. In addition, subject to the prior rights of holders
of subscription rights, Peoples Community Bancorp may elect to offer the shares
of common stock not subscribed for in the subscription offering, if any, for
sale in a community offering commencing prior to or upon completion of the
subscription offering. See "The Subscription Offering--Subscription Offering and
Subscription Rights" and "--Community Offering." Peoples Community Bancorp has
the right to accept or reject, in whole or in part, any orders to purchase
shares of common stock received in the Community Offering.
The aggregate price of the shares of common stock issued in the conversion
will be within the offering range. Based upon an independent appraisal of the
estimated pro forma market value of the common stock, the offering range is
currently $11,900,000 to $16,100,000. All shares of common stock to be issued
and sold in the conversion will be sold at the same price. The appraisal has
been performed by RP Financial, LC, a consulting firm experienced in the
valuation and appraisal of savings institutions. See "The Subscription
Offering--How People's Savings Determined the Price Per Share and the Offering
Range" for more information as to how the estimated pro forma market value of
the common stock was determined.
37
<PAGE>
SYNOPSIS FOR MEMBERS OF PEOPLE'S SAVINGS
People's Savings adopted the Plan of Conversion providing for the conversion
of People's Savings from mutual to stock form. The Plan of Conversion also
provides that Peoples Community Bancorp will become the holding company for the
converted savings bank. Peoples Community Bancorp is offering shares of its
common stock to members of People's Savings and the members of Oakley in a
subscription offering. (See "The Subscription Offering" on page 66). People's
Savings is asking its members to approve the Plan of Conversion. The Plan of
Conversion contemplates that Oakley will be merged with People's Savings just
before the conversion and that Harvest Home Financial will be merged into
Peoples Community Bancorp just after the conversion. The mergers with Oakley and
Harvest Home Financial do not require separate approval by members of People's
Savings.
SYNOPSIS FOR MEMBERS OF OAKLEY
Oakley has agreed to merge with People's Savings. People's Savings will be
the survivor and members of Oakley will become members of People's Savings.
Depositors of Oakley will have the same rights to subscribe for shares of
Peoples Community Bancorp in the subscription offering as members of People's
Savings. Members of Oakley are being asked to approve the Plan of Conversion.
The merger with People's Savings does not require separate approval by members
of Oakley.
SYNOPSIS FOR STOCKHOLDERS OF HARVEST HOME FINANCIAL
Stockholders of Harvest Home Financial are not receiving separate
subscription rights to purchase shares of common stock of Peoples Community
Bancorp, but they are being asked to approve the merger with Peoples Community
Bancorp. The merger agreement between Peoples Community Bancorp and Harvest Home
Financial provides that stockholders of Harvest Home Financial will receive
$9.00 in cash plus 0.9 of a share of Peoples Community Bancorp for each share of
Harvest Home Financial common stock.
PEOPLE'S SAVINGS' PURPOSES FOR CONVERTING TO STOCK-FORM AND MERGING WITH OAKLEY
AND HARVEST HOME FINANCIAL
As mutual savings and loan associations, People's Savings and Oakley do not
have stockholders and have no authority to issue capital stock. By converting to
the capital stock form of organization, People's Savings will be structured in
the form used by commercial banks and most business entities. The conversion
will permit People's Savings' and Oakley's customers and possibly other members
of the local community and of the general public to become equity owners and to
share in the future of People's Savings. The conversion will also provide
additional funds for lending and investment activities, possible diversification
into other related financial services activities and future growth through
possible acquisitions of other financial institutions.
The Boards of Directors of Peoples Community Bancorp, People's Savings,
Oakley, Harvest Home Financial and Harvest Home Savings Bank believe that the
combination of the parties will enhance the competitive position of the combined
entities and will enable the resulting institution to compete more effectively
than either People's Savings, Oakley or Harvest Home Savings Bank could on its
own. The combined entity will have greater financial resources and, as a result
of the offerings, increased capital levels. Peoples Community Bancorp's pro
forma stockholders' equity will amount to 15.1% of pro forma total assets at
September 30, 1999, assuming the conversion shares are sold at the midpoint of
the estimated offering range. The combination will result in increased funds
being available for lending purposes, greater resources for expansion of
services and better opportunities for attracting and retaining qualified
personnel.
After the conversion, Peoples Community Bancorp will be able to raise
additional equity capital through further sales of securities and to issue
securities in connection with possible additional
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acquisitions. At the present time, People's has no plans with respect to
additional offerings of securities, other than the possible issuance of
additional shares to the recognition plan or upon exercise of stock options.
After the conversion, Peoples will also be able to use stock-related incentive
programs to attract and retain executive and other personnel for Peoples
Community Bancorp and Peoples Community Bank. See "Management--New Stock Benefit
Plans."
The terms of the merger agreements were the result of arm's length
negotiations between the representatives of People's Savings, Oakley and Harvest
Home Financial. In adopting the Plan and the merger agreements, the Boards of
Directors of People's Savings, Harvest Home Financial and Oakley determined that
the conversion and the mergers were advisable and in the best interests of
People's Savings, Harvest Home Financial and Oakley and their depositors,
employees, customers and the communities historically served by them. Among the
factors considered by the Board of Directors of People's Savings were:
- the ability to expand People's Savings' presence in the Cincinnati
metropolitan area (upon completion of the mergers, Peoples Community Bank
will increase from two to six branches in the Cincinnati metropolitan
area);
- the ability to offer additional products, such as adjustable-rate mortgage
loans and checking accounts;
- the ability to offer larger loans and to increase the amount of commercial
real estate loans;
- information concerning the financial condition, results of operations,
capital levels, asset quality and prospects of People's Savings, Oakley
and Harvest Home;
- the impact the conversion and the mergers will have on People's
consolidated results of operations;
- the compatibility of the respective management and business philosophies;
- the enhanced ability of the combined enterprise to compete in relevant
banking and non-banking markets;
- industry and economic conditions; and
- the impact of the conversion and the mergers on the depositors, employees,
customers and communities served by People's Savings, Oakley and Harvest
Home Savings Bank through the contemplated expansion of lending products
as well as the expansion of retail banking products and services.
In light of the foregoing, the Boards of Directors of Peoples Community
Bancorp, People's Savings, Harvest Home Financial and Oakley believe that the
conversion and the mergers are in the best interests of the parties and their
respective members.
EFFECTS OF THE CONVERSION AND THE MERGERS ON MEMBERS OF PEOPLE'S SAVINGS AND
OAKLEY
GENERAL. When Oakley merges into People's Savings, account holders of
Oakley will become account holders of People's Savings. Before the conversion,
each depositor in People's Savings and Oakley has both a deposit account in the
institution and a pro rata ownership interest in the net worth of People's
Savings or Oakley, which interest may only be realized in the event of a
liquidation of People's Savings or Oakley. However, this ownership interest is
tied to the depositor's account and has no tangible market value separate from
such deposit account. A depositor who reduces or closes his account receives
nothing for his ownership interest in the net worth of People's Savings or
Oakley, which is lost to the extent that the balance in the account is reduced.
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Consequently, the depositors of People's Savings and Oakley normally cannot
realize the value of their ownership interest, which has realizable value only
in the unlikely event that People's Savings or Oakley is liquidated. In such
event, the depositors of record at that time, as owners, would share pro rata in
any residual surplus and reserves of People's Savings or Oakley after other
claims, including claims of depositors to the amount of their deposits, are
paid.
After the Oakley merger, when People's Savings converts to stock form,
permanent nonwithdrawable capital stock will be created to represent the
ownership of the net worth of Peoples Community Bank and Peoples Community Bank
will become a wholly owned subsidiary of Peoples Community Bancorp. THE COMMON
STOCK OF PEOPLES COMMUNITY BANK AND PEOPLES COMMUNITY BANCORP IS SEPARATE AND
APART FROM DEPOSIT ACCOUNTS OF PEOPLE'S SAVINGS AND CANNOT BE AND IS NOT INSURED
BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY. Certificates will be issued to
evidence ownership of the permanent stock of Peoples Community Bank and Peoples
Community Bancorp. The stock certificates of Peoples Community Bancorp will be
transferable, and therefore the stock may be sold or traded if a purchaser is
available with no effect on any account the seller may hold in Peoples Community
Bank.
CONTINUITY. During the conversion and mergers, People's Savings and Oakley
will continue their normal business of accepting deposits and making loans.
People's Savings and Oakley will continue to be subject to regulation by the
Office of Thrift Supervision and the FDIC. After the conversion and the mergers,
Peoples Community Bank will continue to provide services for depositors and
borrowers under current policies.
The directors and officers of People's Savings at the time of the conversion
will continue to serve as directors and officers of Peoples Community Bank after
the conversion. The directors and officers of Peoples Community Bancorp consist
of individuals currently serving as directors and officers of People's Savings.
On completion of the mergers, certain officers and directors of Oakley and
Harvest Home Savings Bank will become officers and directors of Peoples
Community Bancorp and/or Peoples Community Bank.
EFFECT ON DEPOSIT ACCOUNTS. Each depositor in People's Savings and Oakley
at the time of the conversion and mergers will automatically continue as a
depositor in Peoples Community Bank. The conversion and the mergers will not
affect deposit balance, interest rate and other terms, except to the extent that
funds in the account are withdrawn to purchase the common stock and except with
respect to voting and liquidation rights. Deposit accounts at Peoples Community
Bank will continue to be insured by the FDIC to the same extent as before the
conversion and mergers and depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
EFFECT ON LOANS. The conversion and mergers will not affect loans from
People's Savings or Oakley, except that Peoples Community Bank will be the
lender, and the amount, interest rate, maturity and security for each loan will
remain as they were contractually fixed before the conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors of People's
Savings and Oakley are members of, and have voting rights in, People's Savings
or Oakley as to all matters requiring membership action. When People's completes
the conversion and Oakley merger, depositors will cease to be members and will
no longer be entitled to vote at meetings of Peoples Community Bank. After the
conversion, Peoples Community Bancorp will be the sole stockholder of Peoples
Community Bank and will have all voting rights. Exclusive voting rights with
respect to Peoples Community Bancorp will be vested in the holders of common
stock. Depositors of People's Savings and Oakley will not have voting rights in
Peoples Community Bancorp after the conversion, except to the extent that they
become stockholders of Peoples Community Bancorp.
TAX EFFECTS. To complete the conversion and the mergers, People's must
receive rulings or opinions with regard to federal and Ohio income taxation
which indicate that the conversion will not be
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taxable for federal or Ohio income tax purposes to People's Eligible Account
Holders or Supplemental Eligible Account Holders, except as discussed below.
People's has received favorable opinions regarding the federal and Ohio income
tax consequences of the conversion. See "--Tax Aspects of the Conversion and the
Mergers."
EFFECT ON LIQUIDATION RIGHTS. If People's Savings or Oakley were to
liquidate, all claims of People's Savings' or Oakley's creditors (including
those of depositors, to the extent of their deposit balances) would be paid
first. Thereafter, if there were any assets remaining, members of People's
Savings or Oakley would receive such remaining assets, pro rata, based upon the
deposit balances in their deposit accounts at People's Savings or Oakley
immediately prior to liquidation. In the unlikely event that Peoples Community
Bank were to liquidate after the conversion and the mergers, all claims of
creditors (including those of depositors, to the extent of their deposit
balances) would also be paid first, followed by distribution of the "liquidation
account" to certain depositors (see "--Liquidation Rights of Certain
Depositors"), with any assets remaining thereafter distributed to Peoples
Community Bancorp as the holder of the capital stock of Peoples Community Bank.
Pursuant to the rules and regulations of the Office of Thrift Supervision, a
post-conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not be
considered a liquidation and, in such a transaction, the liquidation account
would be required to be assumed by the surviving institution.
REGULATORY APPROVALS NEEDED TO COMPLETE THE CONVERSION AND THE MERGERS
People's has to receive various approvals of the Office of Thrift
Supervision and the Ohio Division of Financial Institutions in order to complete
the conversion and the mergers. The Office of Thrift Supervision has approved
the Plan of Conversion, subject to approval by the members of People's Savings
and Oakley. In addition, completion of the conversion and the mergers is subject
to Office of Thrift Supervision approval of Peoples Community Bancorp's holding
company application to acquire all the Harvest Home Financial common stock and
People's Savings and the applications under The Bank Merger Act with respect to
the mergers of Harvest Home Savings Bank and Oakley with and into People's
Savings with People's Savings being the surviving entity. These approvals have
been received.
Pursuant to Office of Thrift Supervision regulations, the Plan of Conversion
must be approved by at least a majority of the total number of votes eligible to
be cast by members of People's Savings and Oakley. In addition, the parties have
conditioned the completion of the conversion and the merger on the approval of
the Harvest Home merger agreement by the stockholders of Harvest Home Financial
at a special meeting thereof called for March 24, 2000. Under Ohio law, the
Harvest Home merger agreement must be approved by a majority of the outstanding
Harvest Home Financial common stock entitled to vote thereon at Harvest Home
Financial's special meeting.
Peoples Community Bancorp is required to make certain filings with state
securities regulatory authorities in connection with the issuance of common
stock in the conversion and the merger with Harvest Home Financial.
LIQUIDATION RIGHTS OF CERTAIN DEPOSITORS
In the unlikely event of a complete liquidation of People's Savings or
Oakley in their present mutual forms, each depositor of People's Savings or
Oakley would receive his pro rata share of any assets of People's Savings or
Oakley remaining after payment of claims of all creditors (including the claims
of all depositors to the withdrawal value of their accounts). Each depositor's
pro rata share of such remaining assets would be in the same proportion as the
value of his deposit account was to the total value of all deposit accounts in
People's Savings or Oakley at the time of liquidation. After the conversion,
each depositor, in the event of a complete liquidation of People's Savings or
Oakley, would have a claim as a creditor of the same general priority as the
claims of all other general creditors of
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People's Savings or Oakley. However, except as described below, his claim would
be solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of People's
Savings or Oakley above that amount.
The Plan of Conversion provides for the establishment, upon the completion
of the conversion, of a special liquidation account for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the net worth of People's Savings and Oakley as of the date of its latest
statement of financial condition contained in the final prospectus-proxy
statement utilized in the conversion. As of the date of this prospectus-proxy
statement, the initial balance of the liquidation account would be approximately
$14.7 million. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at People's
Savings, would be entitled, upon a complete liquidation of People's Savings
after the conversion, to an interest in the liquidation account prior to any
payment to Peoples Community Bancorp as the sole stockholder of People's
Savings. Each Eligible Account Holder and Supplemental Eligible Account Holder
would have an initial interest in such liquidation account for each deposit
account, including passbook accounts, NOW accounts, money market deposit
accounts, and certificates of deposit, held in People's Savings at the close of
business on June 30, 1998 or December 31, 1999, as the case may be. Each
Eligible Account Holder and Supplemental Eligible Account Holder will have a pro
rata interest in the total liquidation account for each of his deposit accounts
based on the proportion that the balance of each such deposit account on the
June 30, 1998 eligibility record date (or the December 31, 1999, supplemental
eligibility record date, as the case may be) bore to the balance of all deposit
accounts in People's Savings on such dates.
If, however, on any September 30 annual closing date of People's Savings,
commencing September 30, 2000, the amount in any deposit account is less than
the amount in such deposit account on June 30, 1998 or December 31, 1999, as the
case may be, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. In addition, no interest in the liquidation account
would ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the claims of general creditors (including
the claims of all depositors to the withdrawal value of their accounts) and the
above liquidation rights of Eligible Account Holders and Supplemental Eligible
Account Holders are satisfied would be distributed to Peoples Community Bancorp
as the sole stockholder of People's Savings.
Harvest Home Savings Bank currently maintains a liquidation account for the
benefit of savings account holders of Harvest Home Savings Bank on
September 30, 1994. Upon completion of the conversion and the merger, People's
Savings will assume the current liquidation account of Harvest Home Savings Bank
in addition to the establishment of the liquidation account for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders of People's
Savings.
TAX ASPECTS OF THE CONVERSION AND THE MERGERS
People's Savings has received an opinion from its special counsel, Elias,
Matz, Tiernan & Herrick L.L.P., as to the material federal income tax
consequences of the conversion.
The opinion provides that, among other things:
- the change in form of People's Savings from mutual to stock form will
constitute a tax-free reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code;
- no gain or loss will be recognized by Peoples Community Bancorp upon its
purchase of the stock of Peoples Community Bank;
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- depositors of People's Savings and Oakley will not recognize any gain or
loss upon the issuance to them of deposit accounts in Peoples Community
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the mutual bank;
- assuming the subscription rights to purchase Peoples Community Bancorp
common stock have no value, the tax basis of the depositors' deposit
accounts in People's Savings immediately after the conversion will be the
same as the basis of their deposit accounts immediately prior to the
conversion;
- assuming the subscription rights to purchase Peoples Community Bancorp
common stock have no value, the tax basis of each depositor's interest in
the liquidation account will be zero; and
- the tax basis to depositors who buy Peoples Community Bancorp common stock
in the conversion will be the amount paid therefor, and the holding period
for the shares of common stock purchased by such persons will begin on the
date on which such person exercises the subscription right.
The opinion of Elias, Matz, Tiernan & Herrick L.L.P. is based in part upon,
and subject to the continuing validity in all material respects through the date
of the conversion of various factual representations of People's Savings. It is
also based upon certain assumptions and qualifications, including that the
conversion is consummated in the manner and according to the terms provided in
the plan of conversion. The opinion is also based upon the Internal Revenue
Code, regulations now in effect or proposed, current administrative rulings and
practice and judicial authority, all of which are subject to change, including a
change with a retroactive effect. Unlike private letter rulings received from
the IRS, an opinion is not binding upon the IRS and there is no assurance that
the IRS will not take a position contrary to the positions reflected in the
opinion, or that the courts will uphold the opinion if challenged by the IRS.
Grant Thornton LLP has also rendered an opinion to the effect that the
foregoing tax effects of the conversion under Ohio law are substantially the
same as they are under federal law.
People's Savings has received a letter from RP Financial stating its belief
that the subscription rights do not have any value, because those rights are
acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the common stock
at a price equal to its estimated fair market value, which will be the same
price as the purchase price for the unsubscribed shares of common stock. If the
subscription rights granted to eligible subscribers are deemed to have an
ascertainable value, receipt of those rights would be taxable probably only to
those eligible subscribers who exercise the subscription rights, either as a
capital gain or ordinary income, in an amount equal to that value. Eligible
subscribers are encouraged to consult with their own tax advisor as to the tax
consequences in the event that such subscription rights are deemed to have an
ascertainable value. Unlike private rulings, the letter of RP Financial is not
binding on the IRS, and the IRS could disagree with conclusions reached in the
letter. In the event of any disagreement, there is no assurance that the IRS
would not prevail in a judicial or administrative proceeding.
Elias, Matz, Tiernan & Herrick L.L.P. also has issued an opinion to the
effect that, for federal income tax purposes, the Harvest Home Financial merger
will constitute a reorganization within the meaning of Section 368(a) of the
Code. The full opinions of Elias, Matz, Tiernan & Herrick L.L.P. and Grant
Thornton LLP are filed as exhibits to the registration statement Peoples
Community Bancorp filed with the SEC.
ACCOUNTING TREATMENT OF THE MERGERS
The Oakley merger will be accounted for as a pooling-of-interests. The
Harvest Home Financial merger will be accounted for under the purchase method of
accounting in accordance with generally
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accepted accounting principles. This means that Peoples Community Bancorp will
record the fair market value of Harvest Home Financial's assets and liabilities
on its financial statements. Any difference between the purchase price and the
fair value of the identifiable net assets of Harvest Home Financial is recorded
as goodwill. Peoples Community Bancorp estimates that it will record
$4.7 million in goodwill from the Harvest Home Financial merger. This goodwill
will be amortized on a straight-line basis over 15 years. The income statement
of Peoples Community Bancorp will incorporate the recorded income of Harvest
Home Financial's operations beginning at the completion of the merger.
WHEN THE MERGERS WILL BE COMPLETED
The Oakley merger will be completed immediately prior to the conversion and
the Harvest Home Financial merger will be completed immediately after the
conversion. The Harvest Home Financial merger will become effective at the time
set forth in the certificate of merger that will be filed with the Secretaries
of State of the States of Delaware and Ohio. The certificate of merger will be
filed following the satisfaction or waiver of certain conditions to the Harvest
Home Financial merger.
DELIVERY OF CERTIFICATES
As soon as practicable following completion of the conversion, People's
transfer agent will mail certificates representing common stock issued in the
stock offering to the persons entitled to certificates at the addresses of such
persons appearing on the stock order form. People's will hold any certificates
returned as undeliverable until claimed by persons legally entitled to it or
otherwise disposed of in accordance with applicable law. Until certificates for
common stock are available and delivered to subscribers, subscribers may not be
able to sell the shares of common stock for which they have subscribed, even
though trading of the common stock may have commenced.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER THE CONVERSION
All shares of common stock purchased in connection with the conversion by
any of People's directors or executive officers will be subject to a restriction
that the shares not be sold for a period of one year following the conversion,
except in the event of the death of such director or executive officer or
pursuant to a merger or similar transaction approved by the Office of Thrift
Supervision. Each certificate for restricted shares will bear a legend giving
notice of this restriction on transfer, and appropriate stop-transfer
instructions will be issued to People's transfer agent. Any shares of common
stock issued at a later date within this one year period as a stock dividend,
stock split or otherwise with respect to such restricted stock will be subject
to the same restrictions. People's directors and executive officers will also be
subject to the insider trading rules promulgated pursuant to the Securities
Exchange Act of 1934, as amended as long as the common stock is registered
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended.
Purchases of People's common stock by its directors, executive officers and
their associates during the three-year period following completion of the
conversion may be made only through a broker or dealer registered with the SEC,
except with the prior written approval of the Office of Thrift Supervision. This
restriction does not apply, however, to negotiated transactions involving more
than 1% of People's outstanding common stock or to certain purchases of stock
pursuant to an employee stock benefit plan, such as the employee stock ownership
plan, or by any non-tax-qualified employee stock benefit plan, such as the
recognition plan.
Pursuant to Office of Thrift Supervision regulations, Peoples Community
Bancorp will generally be prohibited from repurchasing any shares of the common
stock within one year following completion of the conversion. During the second
and third years following completion of the conversion, Peoples Community
Bancorp may not repurchase any shares of its common stock other than pursuant
to:
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(1) an offer to all stockholders on a pro rata basis which is approved
by the Office of Thrift Supervision;
(2) the repurchase of qualifying shares of a director, if any;
(3) purchases in the open market by a tax-qualified or non-tax-qualified
employee stock benefit plan in an amount reasonable and appropriate to fund
the plan; or
(4) purchases that are part of an open-market stock repurchase program
not involving more than 5% of its outstanding capital stock during a
12-month period,
if the repurchases do not cause People's Savings to become undercapitalized and
Peoples Community Bancorp provides to the Regional Director of the Office of
Thrift Supervision no later than 10 days prior to the commencement of a
repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
The Office of Thrift Supervision may permit stock repurchases in excess of such
amounts prior to the third anniversary of the conversion if exceptional
circumstances are shown to exist.
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THE MERGER BETWEEN
PEOPLE'S SAVINGS AND OAKLEY
GENERAL
On September 30, 1999, People's Savings and Oakley entered into a merger
agreement which provides for the merger of Oakley and People's Savings. The
merger agreement has been approved by the Boards of Directors of Oakley and
People's Savings. No consideration will be exchanged in the merger of People's
Savings and Oakley.
BACKGROUND OF AND REASONS FOR THE MERGER BETWEEN PEOPLE'S SAVINGS AND OAKLEY
Beginning in August 1999, People's Savings and Oakley met to discuss the
benefits of a merger of People's Savings and Oakley. During August and September
1999, the Boards of Directors of Oakley and People's Savings met separately to
discuss the merger. Negotiations continued regarding the merger in early to mid
September 1999 and in late September 1999, both Boards of Directors approved the
merger.
Due to various inefficiencies of a smaller thrift institution and the
increased competition in the financial services industry, the Board of Directors
of Oakley believed that it would be in the best interest of Oakley and its
depositors and customers to merge with a bigger institution. In addition, the
Board of Directors of Oakley believed that an association with a larger
institution would provide its depositors and customers with expanded products
and services. Further, the Board of Directors of Oakley believed that the
long-term prospects of the combined entity as converted to stock form outweighed
the prospects of Oakley on a stand alone basis.
TERMS OF THE MERGER AGREEMENT OF PEOPLE'S SAVINGS AND OAKLEY
The following is a general summary of the agreement People's Savings and
Oakley have regarding actions prior to the merger. You should read the merger
agreement, which is included as an exhibit to the registration statement filed
on Form S-1 with the SEC, for a more complete understanding of this agreement.
CONDITIONS TO THE OAKLEY MERGER. The proposed merger with Oakley will not
be completed unless certain conditions are satisfied. The obligations of
People's Savings and Oakley to complete their merger are subject to the
following conditions being satisfied:
- compliance with or satisfaction of all representations and warranties set
forth in the merger agreement;
- People's Savings and Oakley continuing their business in the ordinary and
usual course;
- all necessary regulatory approvals required to complete the Oakley merger
must be received;
- there may not be any material adverse changes in the business, operations,
properties or financial condition of People's Savings or Oakley; and
- all corporate action necessary to authorize the execution, delivery and
performance of the Oakley merger agreement must have been duly and validly
taken by People's Savings and Oakley.
In addition to the above, the consents, approvals and authorizations from
governmental bodies or third parties may not contain any term or condition which
would have a material adverse effect on the business, operations, properties,
assets or financial position of Oakley or People's Savings or otherwise
materially reduce or impair the value of Oakley to People's Savings.
The obligations of Oakley also are conditioned on People's Savings taking
all action required for its conversion and the acquisition of Harvest Home
Financial and receiving all necessary regulatory or governmental approvals or
consents.
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No guarantee can be given that the regulatory consents and approvals
necessary to complete the conversion and the Oakley merger will be obtained or
that all of the other conditions to the merger will be satisfied or waived. If
the merger with Oakley is not completed on or before September 30, 2000, the
merger agreement may be terminated.
CONDUCT OF BUSINESS PRIOR TO THE CLOSING DATE. People's Savings and Oakley
have agreed to certain limitations on the way that they conduct their business
prior to their merger. Under the terms of the merger agreement, People's Savings
and Oakley have agreed to conduct their businesses in the ordinary and usual
course. In addition, they have agreed that each shall not, except as otherwise
approved by the written consent of the other, take certain actions, including
the following:
- amend its Articles of Incorporation, Constitution or Bylaws;
- alter the terms of its existing deposit accounts or the terms upon which
deposit accounts are accepted by it, other than in response to market
conditions;
- enter into any material contracts, agreements or commitments or enter into
any securities transaction or investments involving in excess of $25,000,
whether oral or written, except in the ordinary and usual course of its
business;
- enter into any lease, contract or commitment for the purchase, sale or
improvement of any real estate;
- incur any indebtedness or refinance any existing indebtedness except, in
each case, in the ordinary and usual course of its business;
- declare or pay any bonus, extra dividend, or extra interest to members or
depositors;
- enter into any employment contract with any employee or increase the
remuneration paid to any director, officer, employee or agent, or agree to
do so, except for normal merit and cost of living increases for employees;
- make any material change in its historic accounting methods;
- employ or make any agreement or commitment to employ any additional
officer, employee (other than tellers to be employed by People's Savings)
or agent or appoint any additional person as director or nominate any
person as a candidate for election as a director who is not currently a
director;
- waive any rights or cancel any debts or claims of material value, whether
considered individually or in the aggregate;
- incur any material obligation or liability, except in the ordinary course
of business;
- establish any new lending programs or make any changes in its policies
concerning which persons may approve loans;
- advance any funds secured by an open end mortgage except the original loan
amount secured by such a mortgage;
- make or commit to make any material capital expenditure; or
- except for the proposed merger with Harvest Home Financial, negotiate or
participate with anyone, other than each other, in respect of the merger
or consolidation of Oakley or People's Savings or the acquisition of all
or any part of the business or assets of Oakley or People's Savings.
REPRESENTATIONS AND WARRANTIES MADE BY PEOPLE'S SAVINGS AND OAKLEY IN THE
MERGER AGREEMENT. People's Savings and Oakley have made customary
representations and warranties relating to their businesses. With certain
exceptions, such representations and warranties must remain true in all material
respects through the completion of the merger. See "--Conditions to the Oakley
Merger."
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WAIVING AND AMENDING PROVISIONS IN, OR TERMINATING THE MERGER
AGREEMENT. Any provision in the merger agreement generally may be amended or
waived by the mutual consent of People's Savings and Oakley.
The merger agreement may be terminated prior to the effective time by:
- the mutual consent of the Boards of Directors of Oakley and People's
Savings;
- either People's Savings or Oakley if the conditions to their obligations
under the merger agreement are not satisfied or waived before
September 30, 2000; and
- either People's Savings or Oakley if the merger is not completed before
September 30, 2000.
In the event of the termination of the merger agreement, as provided above,
the merger agreement will become void and have no effect, and there will be no
liability on the part of People's Savings or Oakley, as applicable, or their
respective officers or directors, except that certain provisions regarding
confidential information and expenses will remain in full force and effect.
People's Savings or Oakley will not be relieved from any liability arising out
of the willful breach by People's Savings or Oakley, as applicable, of any
covenant or agreement of it or the willful misrepresentation in the merger
agreement of any material fact.
INTERESTS OF DIRECTORS AND OFFICERS IN THE CONVERSION AND THE OAKLEY MERGER THAT
MAY BE
DIFFERENT FROM YOUR INTERESTS
BOARDS OF DIRECTORS. At the time of completion of the conversion and the
merger, Peoples Community Bancorp and People's Savings will take all necessary
action to appoint Mr. Noe, the managing officer of Oakley, to the Boards of
Directors of Peoples Community Bancorp and Peoples Community Bank for a
three-year term.
CREATION OF THE OAKLEY ADVISORY BOARD. The directors of Oakley as of the
completion of the merger will be appointed to an advisory board of Peoples
Community Bank for a one-year term. Subject to review on each anniversary date
of the completion of the Oakley merger, each of these individuals will be
reappointed to two additional one-year terms. In addition, assuming approval of
the stock option plan by stockholders of Peoples Community Bancorp after the
conversion, each advisory board member will be granted options to acquire 2,000
shares of common stock of Peoples Community Bancorp. Peoples Community Bancorp
has also agreed to assume the obligations under Oakley's existing fully funded
director's deferred compensation plan.
EXECUTIVE OFFICERS. On the completion of the merger, Peoples Community
Bancorp and Peoples Community Bank will enter into an employment agreement with
Mr. Noe. See "Management--Employment Agreements."
EMPLOYEES. People's Savings has agreed to retain all employees of Oakley
after the completion of the Oakley merger provided that Peoples Community
Bancorp and People's Savings shall not have any obligation to continue the
employment of such persons. The merger agreement provides that officers and
employees of Oakley who become employees of People's Savings after the merger
will be entitled to participate in People's Savings' employee benefit plans
maintained generally for the benefit of its employees. People's Savings shall
treat Oakley's employees who become employees of People's Savings as new
employees, but shall amend its employee benefit plans to provide credit, for
purposes of vesting and eligibility to participate, for service with Oakley if
their service was recognized for similar purposes under Oakley's plans.
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<PAGE>
THE MERGER BETWEEN PEOPLES COMMUNITY BANCORP AND
HARVEST HOME FINANCIAL
SUMMARY OF THE MERGER OF PEOPLES COMMUNITY BANCORP AND HARVEST HOME FINANCIAL
This summary highlights selected information from this document and may not
contain all the information that is important to a stockholder of Harvest Home
Financial. To understand the merger of Peoples Community Bancorp and Harvest
Home Financial fully, you should read this entire document carefully, and
particularly this section "The Merger Between Peoples Community Bancorp and
Harvest Home Financial."
EACH HARVEST HOME FINANCIAL SHARE WILL BE EXCHANGED FOR 0.9 OF A SHARE OF
PEOPLES COMMUNITY BANCORP STOCK AND $9.00 IN CASH. In the merger, Harvest Home
Financial will merge into Peoples Community Bancorp, the parent holding company
of People's Savings. The stockholders of Harvest Home Financial will become
stockholders of Peoples Community Bancorp. At the completion of the merger, each
share of Harvest Home Financial common stock will be converted into the right to
receive 0.9 of a share of Peoples Community Bancorp common stock and $9.00 in
cash, subject to adjustment.
COMPARATIVE STOCK PRICES. Harvest Home Financial common stock is traded on
the Nasdaq National Market under the symbol "HHFC". On September 30, 1999, the
last trading day prior to the public announcement of the proposed merger, the
last reported sales price for Harvest Home Financial common stock was $14.38. On
February 15, the last reported sales price for Harvest Home Financial common
stock was $17.50. Shares of Peoples Community Bancorp have not been issued or
traded to date.
STOCKHOLDERS OF HARVEST HOME FINANCIAL GENERALLY WILL RECOGNIZE CAPITAL
GAINS INCOME TAX ON THE CASH, BUT NOT THE STOCK, THEY RECEIVE IN THE
MERGER. Harvest Home Financial stockholders will recognize capital gains income
tax on cash received for shares of common stock of Harvest Home Financial. The
exchange of shares of Harvest Home Financial common stock for shares of Peoples
Community Bancorp common stock will be tax free. However, because tax matters
are complicated, and tax results may vary among stockholders, Harvest Home
Financial stockholders should contact their own advisor to understand fully how
the merger will affect them.
HARVEST HOME FINANCIAL STOCKHOLDERS HAVE DISSENTERS' RIGHTS. Under Ohio
law, Harvest Home Financial stockholders may dissent from the merger and have
the fair cash value of their shares paid to them. To exercise this right, a
Harvest Home Financial stockholder must follow a number of procedures. These
procedures include filing a demand for payment of the fair cash value of your
shares and not voting in favor of the merger. For more information on how to
exercise these rights, see "--Rights of Harvest Home Financial Stockholders to
Dissent."
HARVEST HOME FINANCIAL'S FINANCIAL ADVISOR SAYS THE MERGER CONSIDERATION IS
FAIR TO STOCKHOLDERS. In deciding to approve the merger, the Harvest Home
Financial Board considered the opinion of its financial advisor, Keefe,
Bruyette & Woods, to determine that the consideration to be received in the
merger with Peoples Community Bancorp is fair from a financial point of view to
the holders of Harvest Home Financial common stock. If you are a Harvest Home
Financial stockholder, the opinion of Keefe, Bruyette & Woods dated
September 30, 1999, is attached as Annex C to the copy of this document
delivered to stockholders of Harvest Home Financial. Stockholders of Harvest
Home Financial are encouraged to read this opinion.
THE RIGHTS OF STOCKHOLDERS OF HARVEST HOME FINANCIAL MAY DIFFER FROM RIGHTS
OF STOCKHOLDERS OF PEOPLES COMMUNITY BANCORP. As a result of the merger,
holders of Harvest Home Financial common stock who receive shares of Peoples
Community Bancorp common stock in the merger will become
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<PAGE>
stockholders of Peoples Community Bancorp. For a comparison of the corporate
documents of Peoples Community Bancorp and Harvest Home Financial governing the
rights of Peoples Community Bancorp and Harvest Home Financial stockholders, see
"--Comparison of Rights of Harvest Home Financial and Peoples Community
Bancorp."
DIRECTORS AND EXECUTIVE OFFICERS OF HARVEST HOME FINANCIAL HAVE SOME
INTERESTS IN THE MERGER THAT ARE DIFFERENT FROM OR IN ADDITION TO THEIR
INTERESTS AS STOCKHOLDERS. When considering the recommendation of the Harvest
Home Financial Board, Harvest Home Financial stockholders should be aware that
some directors and officers of Harvest Home Financial have interests in the
merger that are different from, or in addition to, their interests. Upon
consummation of the merger, the employment agreements of John E. Rathkamp,
Dennis J. Slattery and Teresa O'Quinn will be terminated and they will enter
into new employment agreements with Peoples Community Bancorp. John E. Rathkamp
will be appointed to the Peoples Community Bancorp Board of Directors. Further,
there are provisions in the merger agreement relating to director and officer
indemnification and insurance after the merger. The Harvest Home Financial Board
was aware of these matters and considered them, among other matters, in
approving the merger agreement.
HARVEST HOME FINANCIAL RECOMMENDS THAT ITS STOCKHOLDERS APPROVE THE
MERGER. The Board of Directors of Harvest Home Financial has unanimously
adopted the merger agreement and has determined that the merger with Peoples
Community Bancorp is in the best interests of Harvest Home Financial and its
stockholders. The Harvest Home Financial Board recommends that stockholders vote
for the adoption of the merger agreement at the special meeting.
HARVEST HOME FINANCIAL'S REASONS FOR THE MERGER. For a discussion of the
factors considered by the Harvest Home Financial Board in reaching its decision
to adopt the merger agreement with Peoples Community Bancorp and approve the
transactions contemplated in the merger agreement, see "--Background and Reasons
for the Harvest Home Merger."
THE HARVEST HOME FINANCIAL SPECIAL MEETING. The Harvest Home Financial
Special Meeting will be held on Friday, March 24, 2000 at 4:00 p.m., eastern
time, at Dante's Restaurant, 5510 Rybolt Road, Cincinnati, Ohio. At the special
meeting, you will be asked:
- to approve and adopt the merger agreement; and
- to act on any other matters that may properly be submitted to a vote at
the special meeting.
RECORD DATE AND VOTE REQUIRED FOR APPROVAL OF THE MERGER. You can vote at
the Harvest Home Financial special meeting if you owned shares of Harvest Home
Financial common stock at the close of business on February 17, 2000. On that
date, there were 875,289 shares of Harvest Home Financial common stock
outstanding and entitled to vote. You can cast one vote for each share of
Harvest Home Financial common stock that you owned on that date. In order to
approve and adopt the merger agreement, the holders of a majority of the
outstanding shares of Harvest Home Financial common stock must vote in favor of
doing so.
COMPLETION OF THE MERGER IS SUBJECT TO CERTAIN CONDITIONS. The completion
of the merger is subject to a number of conditions being met, including approval
of the merger agreement by Harvest Home Financial stockholders and receipt of
all required regulatory approvals.
Where the law permits, a party to the merger agreement could elect to waive
a condition to its obligation to complete the merger, even if that condition has
not been satisfied. We cannot be certain when (or if) the conditions to the
merger will be satisfied or waived or that the merger will be completed. See
"--Conditions to the Harvest Home Merger."
WE EXPECT PURCHASE ACCOUNTING TREATMENT FOR THE MERGER. The merger will be
treated as a purchase for accounting purposes. Accordingly, under generally
accepted accounting principles, Peoples
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Community Bancorp will record at its cost the acquired assets less liabilities
assumed. Any difference between the cost of Harvest Home Financial and the sum
of the fair values of tangible and identifiable assets, less liabilities, will
be reported as goodwill. The report of income of Peoples Community Bancorp will
include the operations of Harvest Home Financial after the merger, based on the
cost to Peoples Community Bancorp.
BACKGROUND AND REASONS FOR THE HARVEST HOME FINANCIAL MERGER
Over the past several years, the Harvest Home Financial Board of Directors
has studied and evaluated Harvest Home Financial's position as an independent
financial institution. The Harvest Home Financial Board of Directors observed
that the continuing consolidation in the thrift industry made it difficult for
Harvest Home Financial to compete. The Board of Directors deemed Harvest Home
Financial to be at a disadvantage due to its asset size, relatively small market
area coverage, and limited offerings of products and services. The Board of
Directors concluded that in order for Harvest Home Financial to stay competitive
and increase earnings, Harvest Home Financial needed to grow in size and market
coverage. As a result, the Harvest Home Financial Board of Directors decided
that it was in the best interest of the stockholders of Harvest Home Financial
to pursue a sale, merger or other consolidation.
A committee of three directors was formed to seek a potential sale or
business combination that would most effectively satisfy the needs of Harvest
Home Financial, its stockholders and customers. In 1999, Harvest Home Financial
received two formal offers from other financial institutions for the purchase of
and/or merger with Harvest Home Financial. After thoroughly reviewing and
evaluating both offers, the Harvest Home Financial Board of Directors concluded
that Peoples Community Bancorp presented the best opportunity for the
stockholders of Harvest Home Financial and agreed to accept the offer of Peoples
Community Bancorp, subject to negotiation of a definitive agreement. The Harvest
Home Financial merger agreement was signed on September 30, 1999.
The Harvest Home Financial merger was deemed by the Harvest Home Financial
Board of Directors as favorable to Harvest Home Financial stockholders for a
variety of reasons. First, the Board of Directors believes the consideration of
Peoples Community Bancorp common stock and cash to be fair. The Board evaluated
People's offer in light of information provided by Harvest Home Financial's
financial advisor, Keefe, Bruyette & Woods, which included detailed analysis of
the market for thrift stocks over the past couple of years. The consideration
offered by Peoples Community Bancorp was deemed favorable in comparison to the
market. The Board also reviewed and considered the opinion of Keefe,
Bruyette & Woods that the consideration to be received by Harvest Home Financial
stockholders was fair from a financial perspective.
The Harvest Home Financial Board of Directors believes that the combination
of stock and cash will give Harvest Home Financial stockholders the opportunity
to use the cash return to diversify their investment, and also give stockholders
the opportunity to participate in a strengthened and more competitive thrift
institution through the receipt of Peoples Community Bancorp common stock.
In addition, the Board of Directors believes the merger will result in a
combined institution that will be better suited to compete in the marketplace
and yet will retain its identity as a community thrift. The increased asset size
of the new company will enable it to offer a broader array of products and
services than currently offered by Harvest Home Financial. This should enable
the new company to be more competitive in its offering of loans and deposit
products, and will enable it to expand its products and services to its
customers. For example, the new company is expected to be better positioned to
offer loans which are more profitable, such as commercial real estate loans. The
merger also should result in economies of scale which likewise will enhance the
surviving entities' competitive posture.
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The Harvest Home Board of Directors also took into consideration that the
merger will allow Harvest Home Financial to expand its market area. Peoples
Community Bancorp has offices in the Lebanon and Blanchester areas. The Oakley
office is in Oakley, which is part of the City of Cincinnati. Together with
Harvest Home Financial's three western-Hamilton County offices, the Board of
Directors believes that the combined institution will have broader market
coverage in southwestern Ohio and will be better positioned to expand into
growing market areas.
The merger was also deemed favorable by the Board of Directors because of
the compatibility of the institutions. As stated above, the branches are well
positioned. The asset mix of Peoples Community Bancorp and Oakley, primarily
first mortgage loans, is compatible with Harvest Home Financial's asset mix. The
management team, which will combine the management of Harvest Home Financial,
Peoples Community Bancorp and Oakley, is deemed by the Harvest Home Board of
Directors to be a strength in the merger and will provide strong and
forward-looking management. Finally, the Board of Directors believes that the
companies involved have the same business philosophy: to grow as a strong,
independent community institution.
The Harvest Home Board of Directors also considered that the additional
capital in the surviving entity will provide greater opportunities for
expansion. The surviving entity will be better positioned to expand into new
geographical areas by acquiring or building additional branches and will have a
greater opportunity to consider future mergers of other banks.
Another factor considered by the Harvest Home Board of Directors was the
increase of Harvest Home Financial's stockholder base, which should provide a
more active trading market for its stockholders.
The preceding discussion summarizes the material factors considered by the
Board of Directors of Harvest Home Financial in determining that the merger is
in the best interest of Harvest Home Financial stockholders.
OPINION OF HARVEST HOME FINANCIAL'S FINANCIAL ADVISOR
In September 1999, Harvest Home Financial retained Keefe, Bruyette & Woods
to evaluate the proposed merger of Harvest Home Financial with Peoples Savings.
Keefe, Bruyette & Woods as part of its investment banking business, is regularly
engaged in the evaluation of business and securities in connection with mergers
and acquisitions, negotiated underwritings, and distributions of listed and
unlisted securities. Keefe, Bruyette & Woods is familiar with the market for
common stocks of publicly traded banks, thrifts and bank and thrift holding
companies. The Board of Directors selected Keefe, Bruyette & Woods on the basis
of the firm's reputation and its experience and expertise in transactions
similar to the merger and its prior work for and relationship with Harvest Home
Financial and Harvest Home Savings Bank.
Pursuant to its engagement, Keefe, Bruyette & Woods was asked to render an
opinion as to the fairness, from a financial point of view, of the consideration
to be received in the merger for the stock of Harvest Home Financial. Keefe,
Bruyette & Woods delivered its opinion to the Harvest Home Financial Board that,
as of September 30, 1999, the consideration to be received in the merger is
fair, from a financial point of view, to the stockholders of Harvest Home
Financial. No limitations were imposed by the Board of Directors upon Keefe,
Bruyette & Woods with respect to the investigations made or procedures followed
by it in rendering its opinion. Keefe, Bruyette & Woods has consented to the
inclusion herein of the summary of its opinion to the Harvest Home Financial
Board and to the reference to the entire opinion attached as Annex C to the
notice and prospectus-proxy statement distributed to stockholders of Harvest
Home Financial.
The full text of the opinion of Keefe, Bruyette & Woods, which is attached
as Annex C to the notice and prospectus-proxy statement distributed to
stockholders of Harvest Home Financial, sets
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<PAGE>
forth certain assumptions made, matters considered and limitations on the review
undertaken by Keefe, Bruyette & Woods, and should be read in its entirety. The
summary of the opinion of Keefe, Bruyette & Woods set forth as Annex C to the
notice and prospectus-proxy statement distributed to stockholders of Harvest
Home Financial is qualified in its entirety by reference to the opinion.
In rendering its opinion, Keefe, Bruyette & Woods (i) reviewed the merger
agreement, (ii) reviewed Harvest Home Financial's Annual Reports, Proxy
Statements and Form 10-KSB's for the prior three fiscal years of 1999, 1998 and
1997 and certain other internal financial analysis considered relevant and
reviewed People's Savings' financials, (iii) discussed with senior management
and the Board of Directors of Harvest Home Financial and its wholly-owned
subsidiary, Harvest Home Savings Bank the current position and prospective
outlook for Harvest Home Financial, (iv) discussed with senior management of
People's Savings their operations, financial performance and future plans and
prospects, (v) considered historical quotations, levels of activity and prices
of recorded transactions in Harvest Home Financial's common stock,
(vi) reviewed financial and stock market data of other thrifts in a comparable
asset range to Harvest Home Financial, (vii) reviewed financial and stock market
data of other thrifts in a comparable asset range to People's Savings,
(viii) reviewed certain recent business combinations with thrifts as the
acquired company, which Keefe, Bruyette & Woods deemed comparable in whole or in
part, and (ix) performed other analyses which Keefe, Bruyette & Woods considered
appropriate.
In rendering its opinion, Keefe, Bruyette & Woods assumed and relied upon
the accuracy and completeness of the financial information provided to it by
Harvest Home Financial and People's Savings. In its review, with the consent of
the Harvest Home Financial Board, Keefe, Bruyette & Woods did not undertake any
independent verification of the information provided to it, nor did it make any
independent appraisal or evaluation of the assets or liabilities, and potential
or contingent liabilities of Harvest Home Financial or People's Savings.
ANALYSIS OF RECENT COMPARABLE ACQUISITION TRANSACTIONS. In rendering its
opinion, Keefe, Bruyette & Woods analyzed certain comparable merger and
acquisition transactions of both pending and completed thrift deals, comparing
the acquisition price relative to tangible book value, last twelve month
earnings, total assets, total deposits, and premium to core deposits. The
analysis included a comparison of the median of the above ratios for completed
and pending acquisitions, based on the following five comparable groups:
(i) all thrift acquisitions since January 1, 1999; (ii) all thrift acquisitions
with total assets between $80 million and $150 million ("Comparable Asset
Size"); (iii) all acquisitions since January 1, 1999 with the selling thrift
having equity to total assets of between 8.0% and 12.0% ("Comparable Equity
Ratio"); (iv) all thrift acquisitions since January 1, 1999 with the selling
thrift having a return on average equity between 5% and 8% ("Comparable Earnings
Ratio"); and (v) all thrift acquisitions since January 1, 1999 located in the
Midwest ("Comparable Regional Deals").
The information in the following table summarizes the material information
analyzed by Keefe, Bruyette & Woods with respect to the merger. The summary does
not purport to be a complete description of the analysis performed by Keefe,
Bruyette & Woods and should not be construed independently of the other
information considered by Keefe, Bruyette & Woods in rendering its opinion.
Selecting portions of Keefe, Bruyette & Woods's analysis or isolating certain
aspects of the comparable transactions without considering all analysis and
factors, could create an incomplete or potentially misleading view of the
evaluation process.
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<TABLE>
<CAPTION>
PRICE TO
-------------------------------------------------------- CORE
LAST TWELVE MONTHS DEPOSIT
TANGIBLE BOOK EARNINGS PER SHARE ASSETS DEPOSITS PREMIUM
------------- ------------------ -------- -------- --------
(%) (X) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
Consideration--$18.00 per
share........................ 168.9 31.8 16.5 24.9 11.3
Recent Transactions Number Median for all deals since January 1, 1999
Completed................ 46 182.0 23.9 19.1 26.0 12.5
Pending.................. 37 151.1 23.2 18.9 25.7 10.9
Comparable Asset Size
Completed................ 8 178.7 20.9 17.1 22.5 9.0
Pending.................. 10 126.5 20.8 18.9 26.3 8.1
Comparable Equity Ratio
Completed................ 14 186.1 31.0 21.1 29.5 17.9
Pending.................. 8 182.5 30.3 15.8 24.1 12.2
Comparable Earnings Ratio
Completed................ 7 168.6 31.5 22.6 32.7 15.7
Pending.................. 12 133.2 22.1 19.3 26.1 6.6
Comparable Regional Deals
Completed................ 15 185.3 21.0 22.7 31.7 14.8
Pending.................. 12 173.4 23.9 19.3 27.1 9.9
</TABLE>
Based on the above information, Keefe, Bruyette & Woods concluded that the
implied per share price of $18.00, was in the ranges of each mentioned
comparable group.
In preparing its analysis, Keefe, Bruyette & Woods made numerous assumptions
with respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of Keefe, Bruyette & Woods and
Harvest Home. The analyses performed by Keefe, Bruyette & Woods are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses and do not
purport to be appraisals or reflect the prices at which a business may be sold.
Keefe, Bruyette & Woods will receive a fee of approximately $60,000 for
services rendered in connection with advising and issuing a fairness opinion
regarding the Harvest Home merger. To date, Keefe, Bruyette & Woods has received
$25,000 of the fee and will receive the remainder at the closing of the
transaction. Keefe, Bruyette & Woods is also the marketing agent for the mutual
to stock conversion offering of People's Savings on a best-effort basis, for
which it will receive a fee. Keefe, Bruyette & Woods will not opine on any
fairness issues for Peoples Savings or provide or set the valuation of the
shares to be offered by Peoples Community Bancorp in its offerings.
THE HARVEST HOME FINANCIAL SPECIAL MEETING
INTRODUCTION. This prospectus-proxy statement is being furnished to the
stockholders of Harvest Home Financial in connection with the solicitation of
proxies by the Board of Directors of Harvest Home Financial for use at the
special meeting of Harvest Home Financial stockholders to be held on Friday,
March 24, 2000 at 4:00 p.m., eastern time, at Dante's Restaurant, 5510 Rybolt
Road, and at any adjournments or postponements thereof. Each copy of this
document mailed to Harvest Home Financial stockholders is accompanied by a proxy
card furnished in connection with the solicitation of proxies by the Harvest
Home Financial Board of Directors for use at the special meeting.
MATTER TO BE CONSIDERED AT THE HARVEST HOME FINANCIAL SPECIAL MEETING;
HARVEST HOME FINANCIAL'S BOARD OF DIRECTORS' RECOMMENDATION. At the Harvest
Home Financial special meeting, Harvest Home Financial stockholders will be
asked to (i) adopt the merger agreement between Peoples
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Community Bancorp and Harvest Home Financial Corporation and the transactions
contemplated thereby, and (ii) vote upon such other business as may properly
come before the special meeting or any adjournments or postponements thereof
(including, without limitation, adjournment or postponement of the special
meeting in order to allow for additional solicitation of stockholder votes in
order to obtain a quorum or in order to obtain more votes in favor of the merger
agreement). The Harvest Home Financial Board of Directors knows of no business
that will be presented for consideration at the special meeting other than the
adoption of the merger agreement.
The Harvest Home Financial Board of Directors has determined that the merger
agreement is advisable and in the best interests of Harvest Home Financial
stockholders and has unanimously approved the merger agreement. Accordingly, the
Harvest Home Financial Board of Directors recommends that Harvest Home Financial
stockholders vote "for" adoption of the merger agreement.
Harvest Home Financial stockholders are requested to promptly complete,
date, sign and return the accompanying proxy card in the enclosed postage-paid
envelope. Failure to return a properly executed proxy card or to vote at the
Harvest Home Financial special meeting will have the same effect as a vote
against the merger agreement.
RECORD DATE AND VOTING AT THE HARVEST HOME FINANCIAL SPECIAL MEETING. Only
the holders of record of Harvest Home Financial common stock as of the close of
business on February 17, 2000 are entitled to notice of and to vote at the
special meeting. At the close of business on February 17, 2000 there were
875,289 shares of Harvest Home Financial common stock outstanding and entitled
to vote, held by approximately 350 stockholders. Directors and executive
officers of Harvest Home Financial and its affiliates (as a group) were entitled
to vote 122,900 shares of Harvest Home Financial common stock, or approximately
14.04% of the outstanding votes entitled to be cast at the special meeting.
Holders of record of Harvest Home Financial common stock as of the close of
business on February 17, 2000 are entitled to one vote per share on any matter
voted on at the special meeting.
The presence, either in person or by proxy, of the holders of a majority of
the outstanding shares of Harvest Home Financial common stock as of the record
date is necessary to constitute a quorum at the special meeting. Broker
non-votes and abstentions count only for the purpose of determining a quorum at
the special meeting.
Harvest Home Financial stockholders should not forward any stock
certificates with their proxy cards. If the Harvest Home Financial merger is
consummated, stock certificates should be delivered in accordance with
instructions set forth in a letter of transmittal, which will be sent to
stockholders by Fifth Third Bank, Cincinnati, Ohio, in its capacity as the
exchange agent, within seven business days after the completion of the merger.
VOTE REQUIRED AT THE HARVEST HOME FINANCIAL SPECIAL MEETING. The holders of
at least a majority of the outstanding shares of Harvest Home Financial common
stock entitled to vote on the matters to be acted upon, or 437,646 shares, must
vote to adopt the merger agreement. The failure to submit a proxy card or vote
in person at the Harvest Home Financial special meeting has the same effect as a
vote against the merger agreement. Abstentions and broker non-votes also have
the same effect as a vote against the merger agreement. Brokers who hold shares
of Harvest Home Financial common stock as nominees will not have discretionary
authority to vote shares with respect to the merger agreement absent
instructions from the beneficial owner. Therefore, by not giving such
instructions you will in effect, be voting against the merger.
The proxy holders named in the enclosed proxy card will vote all of the
Harvest Home Financial shares represented by proxy cards that are properly
signed and returned by stockholders in accordance with the instructions
contained therein. Specify your voting choice by marking the appropriate box on
the proxy card.
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If you properly sign and return the proxy card sent to you by Harvest Home
Financial, but do not specify your voting choices, your shares will be voted
"for" the adoption of the merger agreement as recommended by the Harvest Home
Financial Board of Directors.
The Harvest Home Financial Board of Directors is not aware of any matters
other than the Harvest Home Financial merger that may be brought before the
special meeting. If any other matters properly come before the special meeting
the persons named in the accompanying proxy will vote the shares represented by
all properly executed proxies on such matters in their discretion, except that
shares represented by proxies which have been voted "against" the merger
agreement will not be used to vote "for" adjournment of the special meeting for
the purpose of allowing additional time for soliciting additional votes "for"
the merger agreement.
NAME AND ADDRESS OF BENEFICIAL OWNERS OF HARVEST HOME FINANCIAL COMMON
STOCK. The following table sets forth, as of January 31, 2000, information with
respect to the beneficial ownership of Harvest Home Financial common stock by
each person known by Harvest Home Financial to be the beneficial owner of more
than five percent of the common stock, by each present director of Harvest Home
Financial, by executive officers of Harvest Home Financial and by all directors
and executive officers of Harvest Home Financial as a group. The stockholders
listed in the table have sole voting and investment power with respect to shares
beneficially owned by them.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NO. OF SHARES PERCENT OF CLASS
- ------------------------ ------------- ----------------
<S> <C> <C>
John E. Rathkamp.................................. 14,959 1.7%
Dennis J. Slattery................................ 7,475 .8%
Richard F. Hauck.................................. 25,671 2.9%
Walter A. Schuch.................................. 14,959 1.7%
Thomas L. Eckert.................................. 14,959 1.7%
Marvin J. Ruehlman................................ 14,959 1.7%
Herb E. Menkhaus.................................. 14,959 1.7%
George C. Eyrich.................................. 14,959 1.7%
Total of all directors and officers as a group.... 122,900 14.04%
</TABLE>
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NO. OF SHARES(1) PERCENT OF CLASS
- ------------------------ ---------------- ----------------
<S> <C> <C>
Tontine Financial Partners, L.P................. 67,000 7.66%
200 Park Avenue
Suite 3900
New York, NY 10166
Johnson Trust Co................................ 46,000 5.26%
c/o Star Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
</TABLE>
- ------------------------
(1) The shares held by Tontine Financial Partners, L.P. and Johnson Trust Co.
are disclosed since the percentage of ownership is greater than five
percent. Neither organization is an affiliate of Harvest Home Financial nor
Harvest Home Savings.
COMPARATIVE STOCK PRICES. Harvest Home Financial common stock is traded on
the Nasdaq National Market under the symbol "HHFC". On September 30, 1999, the
last trading day prior to the public announcement of the proposed merger, the
last reported Nasdaq sales price for Harvest Home Financial common stock was
$14.38. On February 15, 2000, the day before we printed this prospectus-proxy
statement, the last reported sales price for Harvest Home Financial common stock
was $17.50. Shares of Peoples Community Bancorp common stock have not been
issued or traded to date.
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REVOCABILITY OF HARVEST HOME FINANCIAL PROXIES. A Harvest Home Financial
stockholder may revoke a proxy at any time prior to its exercise by
(i) delivering to Harvest Home Financial, John E. Rathkamp, Chief Executive
Officer, 3621 Harrison Avenue, Cincinnati, Ohio 45211, a written notice of
revocation prior to the special meeting, (ii) delivering, prior to the special
meeting, a duly executed proxy bearing a later date, or (iii) attending the
special meeting and voting in person. The presence of a stockholder at the
special meeting will not in and of itself automatically revoke such stockholder
proxy.
SOLICITATION OF PROXIES BY HARVEST HOME FINANCIAL. All expenses of Harvest
Home Financial's solicitation of proxies, including the cost of mailing this
document, will be paid by Harvest Home Financial. In addition to solicitation by
use of the mails, proxies may be solicited from stockholders by directors,
officers and employees in person or by telephone, facsimile, or other means of
communications. These directors, officers and employees will not receive
additional compensation, but may be reimbursed for their out-of-pocket expenses
in connection with such solicitation. Harvest Home Financial will make
arrangements with brokerage houses, custodians, nominees and fiduciaries for the
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such brokerage houses, custodians, nominees and fiduciaries, and
Harvest Home Financial will reimburse such brokerage houses, custodians,
nominees and fiduciaries for their reasonable expenses incurred in connection
with such solicitation.
ADJOURNMENT OF THE HARVEST HOME FINANCIAL SPECIAL MEETING. A vote in person
by a Harvest Home Financial stockholder for adjournment of the special meeting,
or for the last proposal on the proxy card authorizing the named proxies to vote
the shares covered by such proxy in their discretion with respect to other
business properly coming before the special meeting, would allow for additional
solicitation of stockholder votes in order to obtain a quorum or in order to
obtain more votes in favor of the merger agreement.
HARVEST HOME FINANCIAL STOCKHOLDER MATTERS. Harvest Home Financial will
hold its Annual Meeting of Stockholders only if the merger with Peoples
Community Bancorp is not consummated as set forth in the merger agreement. The
Annual Report to Stockholders has been prepared and mailed to all stockholders
of record. Harvest Home Financial's Form 10-KSB for the year ended
September 30, 1999, was submitted to the SEC on December 17, 1999.
TERMS OF THE MERGER AGREEMENT WITH HARVEST HOME FINANCIAL
The following is a general summary of the merger agreement between Peoples
Community Bancorp, People's Savings and Harvest Home Financial. We urge you to
read the merger agreement, which is included as an exhibit to the registration
statement filed on Form S-1 filed with the SEC, for a more complete
understanding of the agreement. The merger agreement also is attached as Annex A
to the copy of the notice and prospectus-proxy statement which is sent to
stockholders of Harvest Home Financial.
STRUCTURE OF THE HARVEST HOME MERGER. The merger agreement contemplates the
merger of Harvest Home Financial with and into Peoples Community Bancorp and the
merger of Harvest Home Savings Bank into Peoples Community Bank. Peoples
Community Bancorp will be the surviving entity of the merger and the separate
existence of Harvest Home Financial will cease.
EFFECTIVE TIME. After the satisfaction or waiver of the conditions in the
merger agreement, the parties will complete the merger by filing Certificates of
Merger with the Secretary of State of Ohio and with the State of Delaware,
unless a later date and time is specified as the effective time in such
Certificates of Merger. The effective time of the Harvest Home merger will occur
immediately after the conversion. Various opinions, certificates and other
documents are required to be delivered to Harvest Home Financial and Peoples
Community Bancorp before the merger may be completed.
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CONVERSION OF HARVEST HOME FINANCIAL COMMON STOCK IN THE MERGER. At the
completion of the merger, each share of Harvest Home Financial common stock will
be converted into the right to receive 0.9 of a share of Peoples Community
Bancorp common stock and $9.00 in cash, subject to adjustment.
TREATMENT OF STOCK OPTIONS. At the completion of the merger, each Harvest
Home Financial option which is then outstanding and unexercised will be
cancelled. As consideration for such cancellation, Peoples Community Bancorp
will make payment for the options in cash.
FRACTIONAL SHARES. No fractional shares of Peoples Community Bancorp common
stock will be issued to holders of Harvest Home Financial common stock. In lieu
of fractional shares, each holder of shares of Harvest Home Financial common
stock entitled to a fraction of a share of Peoples Community Bancorp common
stock will be entitled to receive cash (without interest) equal to the amount of
the fractional share interest which such holder would otherwise be entitled to,
multiplied by the initial public offering price.
REPRESENTATIONS AND WARRANTIES. The merger agreement between Harvest Home
Financial and Peoples Community Bancorp contains representations and warranties
which are customary in merger transactions, including, but not limited to,
representations and warranties concerning: (i) the organization and
capitalization of Harvest Home Financial and Peoples Community Bancorp and their
subsidiaries; (ii) the due authorization, execution, delivery and enforceability
of the merger agreement; (iii) consents or approvals required, and the lack of
conflicts or violations under applicable certificates of incorporation,
charters, bylaws, instruments and laws, with respect to the transactions
contemplated by the merger agreement; (iv) absence of material adverse changes;
(v) the documents to be filed by the parties with the SEC and other regulatory
agencies; (vi) the conduct of business in the ordinary course; (vii) financial
statements; (viii) compliance with laws; and (ix) the allowance for loan losses
and real estate owned. The representations and warranties of Harvest Home
Financial and Peoples Community Bancorp will not survive beyond the effective
time of the merger.
CONDITIONS TO THE HARVEST HOME MERGER. The obligations of Peoples Community
Bancorp and Harvest Home Financial to complete their merger are subject to the
satisfaction or waiver of certain conditions including, among other things,
receipt of all necessary regulatory, stockholder and member approvals, the
compliance with or satisfaction of all representations, warranties, covenants
and conditions set forth therein, the absence of any order, decree or injunction
enjoining or prohibiting consummation of either the conversion or the merger and
the receipt of tax opinions. We cannot guarantee that the conditions to
consummation of the merger will be satisfied or waived.
CONDUCT OF BUSINESS PENDING THE HARVEST HOME MERGER. Harvest Home Financial
has agreed that, until its merger with Peoples Community Bancorp is completed,
it will conduct its business in the ordinary course, consistent with past
practice or to the extent otherwise contemplated under the merger agreement,
except with the prior written consent of Peoples Community Bancorp. Harvest Home
Financial also has agreed to (i) preserve its business organization and that of
its subsidiaries intact, (ii) keep available to itself and Peoples Community
Bancorp the present services of its employees and those of its subsidiaries, and
(iii) preserve for itself and Peoples Community Bancorp the goodwill of its
customers and those of its subsidiaries and others with whom business
relationships exist.
In addition, under the terms of the merger agreement, Harvest Home Financial
has agreed that, except as otherwise approved by Peoples Community Bancorp in
writing or as submitted, contemplated or required by the merger agreement, it
will not, nor will it permit its subsidiaries to, engage in certain activities.
NO SOLICITATION. The Harvest Home merger agreement provides that Harvest
Home Financial will not, except as the Harvest Home Financial Board of Directors
is required by its fiduciary duties to
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stockholders, directly or indirectly, solicit, initiate or encourage or hold
discussions or negotiations with or provide any information to any person in
connection with any proposal from any person for the merger of all or any
substantial portion of the business, assets or securities of Harvest Home
Financial or its subsidiaries. Harvest Home Financial's Board of Directors may
enter into negotiations with other persons regarding such proposals if the Board
provides written notice to Peoples Community Bancorp and if the Board, after
consultation with counsel, determines that it is required to pursue such
negotiations pursuant to its fiduciary duties.
TERMINATION OF THE HARVEST HOME MERGER AGREEMENT. The Harvest Home
Financial merger agreement may be terminated by (a) mutual consent in writing of
the parties, (b) by Peoples Community Bancorp if Harvest Home Financial has
breached (i) any material covenant or undertaking or (ii) any representation or
warranty, which failure has not been cured after notice, (c) by Peoples
Community Bancorp or Harvest Home Financial if any approval of a governmental
agency required to permit the consummation of the transaction is denied or any
governmental authority issues a final unappealable order prohibiting Peoples
Community Bancorp from completing the Harvest Home transactions, (d) by Harvest
Home Financial and Peoples Community Bancorp in the event of (i) the failure of
Harvest Home Financial stockholders to approve the Merger Agreement or (ii) the
failure of the members of People's Savings and Oakley to approve the conversion,
(e) by Harvest Home Financial or Peoples Community Bancorp in the event that the
merger is not completed by September 30, 2000, (f) by Peoples Community Bancorp
in the event of a "Purchase Event" (as defined in the merger agreement).
In the event of the termination of the Harvest Home Financial merger
agreement, the merger agreement will become void and have no effect, except that
(i) certain provisions regarding confidential information and expenses will
survive and remain in full force and effect; and (ii) no party will be relieved
from any liability arising out of the willful breach by such party of any
covenant or agreement of it or the willful misrepresentation in the merger
agreement of any material fact. If the merger agreement is terminated by Peoples
Community Bancorp other than due to (i) Harvest Home Financial's breach of a
material covenant or undertaking or representation or warranty; (ii) Harvest
Home Financial's refusal to convene the meeting to vote on the merger agreement
or the meeting is held and the Harvest Home stockholders do not approve the
merger agreement, (iii) the existence of a proceeding initiated by a
governmental entity for an order, injunction or decree preventing consummation
of the merger, or (iv) Harvest Home Financial exercises a right of termination
prior to September 30, 2000, Peoples Community Bancorp will pay Harvest Home
Financial the sum of $200,000. Likewise, Harvest Home Financial will pay Peoples
Community Bancorp the sum of $500,000 upon occurrence of a Purchase Event prior
to a Fee Termination Event (as defined below).
A "Fee Termination Event" is the first to occur of the following: (i) the
day the Harvest Home merger is completed; (ii) termination of the merger
agreement prior to the occurrence of a Purchase Event (other than a termination
of the merger agreement by Peoples Community Bancorp as a result of a willful
breach of any representation, warranty, covenant or agreement of Harvest Home
Financial or Harvest Home Savings Bank); or, (iii) twelve months following
termination of the merger agreement by Peoples Community Bancorp unless a
Purchase Event shall have occurred.
DIRECTOR AND OFFICER INSURANCE. Peoples Community Bancorp will provide
director and officer liability insurance to the former directors and executive
officers of Harvest Home Financial and its subsidiary for three years after the
Harvest Home Financial merger. This insurance will be comparable to Harvest Home
Financial's current director and officer liability insurance.
EXCHANGE OF HARVEST HOME FINANCIAL CERTIFICATES
EXCHANGE AGENT. The Fifth Third Bank will act as exchange agent for the
exchange of Harvest Home Financial stock certificates for cash and stock
certificates of Peoples Community Bancorp pursuant to the Harvest Home Financial
merger.
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EXCHANGE PROCEDURES. After completion of the conversion and the Harvest
Home merger, each Harvest Home Financial stockholder, upon surrender of stock
certificates to the exchange agent, will receive $9.00 in cash plus a
certificate or certificates for 0.9 of a share of Peoples Community Bancorp
common stock for each share of Harvest Home Financial common stock surrendered.
The exchange agent will mail to each holder of record of an outstanding
certificate for shares of Harvest Home Financial common stock, a form of letter
of transmittal advising the stockholder of the terms of the exchange effected by
the merger and of the procedure for surrendering to the exchange agent the
certificate in exchange for cash plus a certificate or certificates of Peoples
Community Bancorp common stock. THE STOCKHOLDERS OF HARVEST HOME FINANCIAL
SHOULD NOT FORWARD HARVEST HOME FINANCIAL COMMON STOCK CERTIFICATES TO PEOPLES
COMMUNITY BANCORP OR THE EXCHANGE AGENT UNTIL THEY RECEIVE THE LETTER OF
TRANSMITTAL.
Upon the surrender of the stockholder certificate(s) of shares of Harvest
Home Financial common stock and a duly completed letter of transmittal to the
exchange agent, the stockholder will receive: A certificate representing the
shares of Peoples Community Bancorp common stock in exchange for shares of
Harvest Home Financial common stock; cash to which the holder is entitled; cash
issued in place of fractional shares, if any, which the holder is entitled; and
any dividends or other distribution, if any, which the holder is entitled.
INTERESTS OF DIRECTORS AND OFFICERS IN THE CONVERSION AND THE HARVEST HOME
MERGER THAT MAY BE
DIFFERENT FROM YOUR INTERESTS
BOARDS OF DIRECTORS. At the time of completion of the conversion and the
mergers, Peoples Community Bancorp and People's Savings will take all necessary
action to appoint Mr. Rathkamp, currently a member of Harvest Home Financial's
and Harvest Home Savings Bank's Boards, to Peoples Community Bancorp's and
Peoples Community Bank's Boards of Directors for a three-year term.
EXECUTIVE OFFICERS. Upon the completion of the conversion and the mergers,
Peoples Community Bancorp and Peoples Community Bank will enter into employment
agreements with Messrs. Rathkamp and Slattery. See "Management--Employment
Agreements."
EXISTING BENEFIT PLANS AND EMPLOYMENT AGREEMENTS. As of September 30, 1999,
there were an aggregate of 84,947 stock options to purchase Harvest Home
Financial common stock outstanding under Harvest Home Financial's Stock Option
and Incentive Plan. All of these stock options are currently exercisable. If any
of the Harvest Home Financial options remain outstanding immediately prior to
completion of the conversion and the merger with Harvest Home Financial, they
will be cancelled and all rights under the options will be extinguished.
However, in consideration for the cancellation, Harvest Home Financial will make
cash payment to each option holder, immediately prior to the consummation of the
merger with Peoples Community Bancorp, equal to the number of shares subject to
the option multiplied by the difference between $18.00 and the exercise price of
the option.
As of September 30, 1999, the Harvest Home Financial employee stock
ownership plan held 20,337 shares of Harvest Home Financial common stock which
had not yet been allocated to participants and which were pledged as collateral
for the remaining $224,088 loan to the Harvest Home Financial employee stock
ownership plan. The loan balance is expected to be repaid immediately prior to
completion of the conversion and the merger, at such time the remaining
unallocated shares will be allocated to the participants and the employee stock
ownership plan will be terminated.
Pursuant to the merger agreement, People's Savings has agreed to retain all
employees of Harvest Home Financial and Harvest Home Savings Bank after the
completion of the merger provided that Peoples Community Bancorp and People's
Savings shall not have any obligation to continue the employment of such
persons. The merger agreement provides that officers and employees of Harvest
Home Financial and Harvest Home Savings Bank who become employees of People's
Savings after the merger will be entitled to participate in People's Savings'
employee benefit plans maintained generally
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for the benefit of its employees. People's Savings shall treat Harvest Home
Savings Bank's employees who become employees of People's Savings as new
employees, but shall amend its employee benefit plans to provide credit, for
purposes of vesting and eligibility to participate, for service with Oakley and
Harvest Home Savings Bank if their service was recognized for similar purposes
under Harvest Home Savings Bank's plans.
RIGHTS OF HARVEST HOME FINANCIAL STOCKHOLDERS TO DISSENT. Stockholders of
Harvest Home Financial have the right to dissent to the merger with Peoples
Community Bancorp. We describe below the steps which Harvest Home Financial
stockholders must take if they wish to exercise dissenters' rights with respect
to the merger. The description is not complete. You should read Section 1701.84
and 1701.85 of the Ohio General Corporation Law. This section is attached as
Annex B to the notice and prospectus-proxy statement distributed to stockholders
of Harvest Home Financial. FAILURE TO TAKE ANY ONE OF THE REQUIRED STEPS MAY
RESULT IN TERMINATION OF THE STOCKHOLDER'S DISSENTERS' RIGHTS UNDER THE OHIO
GENERAL CORPORATION LAW. If you are a Harvest Home Financial stockholder
considering dissenting, you should consult your own legal advisor.
To exercise dissenters' rights, you must satisfy five conditions:
- You must be a stockholder of record of Harvest Home Financial on
February 17, 2000;
- You must not vote dissenting shares in favor of the merger;
- You must deliver a written demand for "fair cash value" of your dissenting
shares within 20 days of the vote on the merger;
- If Peoples Community Bancorp requests, you must send to Peoples Community
Bancorp within 15 days of its request, your stock certificates so that a
legend may be added stating that the demand for "fair cash value" has been
made; and
- Within three months of your written demand to receive "fair cash value,"
you must file a complaint in court for a determination of the "fair cash
value" or you and Peoples Community Bancorp must have agreed on the "fair
cash value."
FEDERAL INCOME TAX CONSEQUENCES TO HARVEST HOME FINANCIAL STOCKHOLDERS
The following discussion is a summary of the material federal income tax
consequences of the merger to Harvest Home Financial stockholders. The
discussion is based on the Internal Revenue Code, proposed, temporary and final
Treasury regulations promulgated thereunder, published administrative rulings
and pronouncements and judicial decisions in effect as of the date of this
document, all of which are subject to change, possibly with retroactive effect.
This discussion does not address every aspect of the federal income tax laws
that may be relevant to you in light of your personal investment circumstances,
nor does it address the effects of any state, local or foreign tax laws on the
Harvest Home Financial merger. The tax treatment for you may vary, depending
upon your particular situation, and some stockholders (including, for example,
insurance companies, tax-exempt organizations, financial institutions and
broker-dealers, and individuals who received Harvest Home Financial common stock
pursuant to the exercise of employee stock options or otherwise as compensation)
may be subject to special rules not discussed below. In addition, the discussion
relates to persons who hold Harvest Home Financial common stock as capital
assets.
HOLDERS OF HARVEST HOME FINANCIAL COMMON STOCK ARE URGED TO CONSULT THEIR TAX
ADVISERS AS TO THE PARTICULAR EFFECT OF THEIR OWN INDIVIDUAL FACTS AND
CIRCUMSTANCES ON THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO THEM, AND
ALSO TO THE EFFECT OF ANY STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
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Under current federal income tax law, and based upon assumptions and
representations as to factual matters of Peoples Community Bancorp and Harvest
Home Financial, and assuming that the merger is consummated in the manner set
forth in the Harvest Home Financial merger agreement, it is anticipated that the
following federal income tax consequences would result:
(i) The merger will constitute a reorganization within the meaning of
Section 368(a) of the Code;
(ii) A Harvest Home Financial stockholder will generally recognize gain, but
not loss, upon his receipt of cash and shares of common stock of Peoples
Community Bancorp in exchange for his shares of Harvest Home Financial to the
extent of the lesser of: (1) the realized gain, or (2) the amount of cash
received by such stockholder.
(iii) The aggregate tax basis of Peoples Community Bancorp common stock
received pursuant to the Harvest Home Financial merger will equal such
stockholder's aggregate tax basis in the shares of Harvest Home Financial common
stock being exchanged, reduced by any amount allocable to a fractional share
interest of Peoples Community Bancorp common stock for which cash is received
and by the amount of cash consideration received (as discussed below), and
increased by the amount of gain, if any, recognized by such stockholder in the
Harvest Home Financial merger (including any portion of such gain that is
treated as a dividend).
(iv) The holding period of the shares of Peoples Community Bancorp common
stock received by a Harvest Home Financial stockholder in the merger will
include the holding period of the Harvest Home Financial common stock being
exchanged.
(v) Cash received in the merger by a Harvest Home Financial stockholder
including cash received in lieu of fractional shares will likely qualify as
capital gain income. The recognized capital gain will be the lesser of the
realized gain or the cash received by the Harvest Home Financial shareholder.
Any capital gain or loss will be long-term capital gain or loss if the Harvest
Home Financial common stock exchanged was held more than one year.
Based upon factual representations to be made by Peoples Community Bancorp
and Harvest Home Financial, Peoples Community Bancorp has received an opinion of
Elias, Matz, Tiernan & Herrick L.L.P., special counsel to Peoples Community
Bancorp that the Harvest Home merger will constitute a reorganization within the
meaning of Section 368(a) of the Code. Based upon factual representations made
by Peoples Community Bancorp and Harvest Home Financial, Harvest Home Financial
has received an opinion of Kepley, Gilligan & Eyrich, L.P.A., general counsel to
Harvest Home Financial, to the effect of subparagraphs (ii) - (v) above. The
opinions are subject to various assumptions and qualifications, including that
the Harvest Home Financial merger is consummated in the manner and in accordance
with the terms of the merger agreement. The opinions are based entirely upon the
Internal Revenue Code, regulations then in effect or proposed thereunder, then
current administrative rulings and practice and judicial authority, all of which
would be subject to change, possibly with retroactive effect. Consummation of
the Harvest Home Financial merger is conditioned upon the receipt by Peoples
Community Bancorp and Harvest Home Financial, respectively, of such opinions.
The full opinions of Elias, Matz, Tiernan & Harrick L.L.P. and Kepley, Gilligan
& Eyrich, L.P.A., are filed as exhibits to the registration statement of Peoples
Community Bancorp filed with the SEC.
No ruling has been or will be requested from the IRS, including any ruling
as to federal income tax consequences of the merger to Peoples Community Bancorp
or Harvest Home Financial stockholders. Unlike a ruling from the IRS, an opinion
of counsel or independent certified public accountants is not binding on the
IRS. There can be no assurance that the IRS will not take a position contrary to
the positions reflected in such opinion or that such opinion would be upheld by
the courts if challenged.
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FEDERAL SECURITIES LAW CONSEQUENCES OF THE HARVEST HOME MERGER
All shares of Peoples Community Bancorp common stock received by Harvest
Home Financial stockholders in the merger will be freely transferable, except
for shares of Peoples Community Bancorp common stock received by any person who
is deemed to be an "affiliate" (as such term is defined under the Securities
Exchange Act of 1934) of Harvest Home Financial prior to the merger or of
Peoples Community Bancorp after the merger. Affiliates may sell their Peoples
Community Bancorp common stock only in compliance with the volume and
manner-of-sale requirements of Rules 144 and 145 under the Securities Exchange
Act of 1933. Affiliates of Harvest Home Financial generally include individuals
or entities that control, are controlled by, or are under common control with,
such party and may include officers and directors of such party as well as
principal stockholders of such party. As of the completion of the Harvest Home
Financial merger, Harvest Home Financial common stock will no longer be traded
on Nasdaq, and the registration of Harvest Home Financial common stock under the
Securities Exchange Act of 1934 will be terminated.
COMPARISON OF RIGHTS OF HARVEST HOME FINANCIAL AND PEOPLES COMMUNITY BANCORP
GENERAL. After the completion of the Harvest Home Financial merger,
stockholders of Harvest Home Financial will become stockholders of Peoples
Community Bancorp, a Delaware corporation. Their rights will then be governed by
Peoples Community Bancorp's Certificate of Incorporation, Bylaws and the
Delaware General Corporation Law. Presently, Harvest Home Financial
stockholders' rights are governed by Harvest Home Financial's Articles of
Incorporation, Harvest Home Financial's Code of Regulations, and Ohio General
Corporation Law. The following discussion summarizes material differences
affecting the rights of stockholders but is not intended to be a complete
statement of all differences and is qualified in its entirety by reference to
the Delaware General Corporation Law. Peoples Community Bancorp's Certificate of
Incorporation and Bylaws, Harvest Home Financial's Articles of Incorporation and
Code of Regulations and the Ohio General Corporation Law. For information as to
how the full text of each document, see "Additional Information" on page 174.
Each Harvest Home Financial stockholder should carefully consider these
differences in connection with the decision to vote for or against the adoption
of the Harvest Home Financial merger agreement.
CAPITAL STOCK. The Harvest Home Financial Articles of Incorporation
authorizes the issuance of 2,000,000 shares of common stock, with no par value,
and provides that the Harvest Home Financial Board of Directors may issue any
authorized shares from time to time. As of February 17, 2000, there were 875,289
shares of Harvest Home Financial common stock issued and outstanding.
The Peoples Community Bancorp Certificate of Incorporation authorizes the
issuance of 10,000,000 shares of common stock, $.01 par value per share, and
1,000,000 shares of preferred stock, $.01 par value per share, and provides that
the Peoples Community Bancorp Board of Directors may issue any authorized shares
from time to time and may fix the rights and preferences of the serial preferred
stock, all without stockholder action. Peoples Community Bancorp, which has
never issued capital stock, is offering up to 2,715,713 shares of Peoples
Community Bancorp common stock in connection with the conversion and mergers.
SPECIAL MEETINGS. The Peoples Community Bancorp Certificate of
Incorporation provides that special meetings of stockholders may be called only
by the Board of Directors, pursuant to a resolution approved by the affirmative
vote of at least three-fourths of the directors then in office.
The Harvest Home Financial Articles of Incorporation provides that special
meetings of stockholders may be called at any time by the Chairman of the Board,
the President, a majority of the Board of Directors acting with or without a
meeting, or by the President or Secretary upon the request of the holder or
holders of fifty percent of all shares outstanding and entitled to vote at the
meeting. Calls for special meetings shall specify the time, place and object or
objects thereof, and, unless all
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stockholders agree otherwise, no business other than that specified in the call
therefor shall be considered at such meeting.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS. The Peoples Community Bancorp Bylaws provide that if a stockholder
desires to introduce business at the annual meeting, notice must be given in
writing to the secretary of Peoples Community Bancorp within 120 days prior to
the anniversary date of the mailing of the proxy or in case of the first annual
meeting, by September 30, 2000.
In accordance with Harvest Home Financial's Code of Regulations, in order
for Harvest Home Financial stockholders to properly introduce business to be
transacted at the annual or any special meeting of stockholders, a stockholder
of record must give written notice of any proposal, including nominations for
Harvest Home Financial's Board of Directors, to Harvest Home's corporate
secretary not less than 30 days prior to the meeting.
NUMBER OF DIRECTORS. Peoples Community Bancorp's Board of Director will
consist of ten directors and Harvest Home Financial's Board of Directors
consists of seven directors.
CLASSIFIED BOARD OF DIRECTORS. The Peoples Community Bancorp Certificate of
Incorporation and Bylaws specify that the Peoples Community Bancorp Board of
Directors will be divided into three classes with each class elected in
staggered elections and serving a three-year term. Harvest Home Financial's
Articles of Incorporation and Code of Regulations specify that Harvest Home
Financial's Board of Directors will be divided into three classes with each
class elected in staggered elections and serving a three-year term.
Classification of directors makes it more difficult for stockholders to
change the composition of the board of directors. At least two annual meetings
of stockholders, instead of one, will generally be required to change the
majority of the Board of Directors. If Peoples Community Bancorp or Harvest Home
Financial was confronted by a holder attempting to force a proxy contest, a
tender or exchange offer or other extraordinary corporate transaction, this
classification and time period would allow the board of directors sufficient
time to review the proposal. The board of directors would also have the
opportunity to review any available alternatives to the proposal and to act in
what it believes to be the best interests of the stockholders. The
classification provisions could also discourage a third party from starting a
proxy contest, making a tender offer or otherwise attempting to obtain control
of the company in a transaction that could be beneficial to Peoples Community
Bancorp or Harvest Home Financial and their stockholders.
REMOVAL OF DIRECTORS. The Peoples Community Bancorp Certificate of
Incorporation specifies that Peoples Community Bancorp directors are subject to
removal only with cause by an affirmative vote of not less than 80% of the
authorized, issued and outstanding shares. Cause is set out in Peoples Community
Bancorp's Certificate of Incorporation. The Delaware corporate law provides that
directors serving on a classified board may be removed only for cause unless the
corporation's charter provides otherwise.
The Harvest Home Financial Code of Regulations states that a Harvest Home
Financial director may be removed from office, without assigning any cause, by
the vote of the holders of record of 80% of the authorized, issued and
outstanding stock.
VACANCIES. Vacancies on Peoples Community Bancorp's Board may be filled by
a majority vote of the directors then in office, whether or not a quorum is
present, or by a sole remaining director and any director so chosen shall hold
office for the remainder of the term to which the director was elected and until
such director's successor shall have been elected and qualified.
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Vacancies and newly created directorships resulting from any increase in the
authorized number of directors of Harvest Home Financial may be filled by
affirmative vote of a majority of the remaining directors.
CUMULATIVE VOTING. Peoples Community Bancorp stockholders are not entitled
to cumulative voting in the election of directors. Harvest Home Financial
stockholders are entitled to cumulative voting in the election of directors.
AMENDMENTS TO CHARTER DOCUMENTS. Peoples Community Bancorp's Certificate of
Incorporation may be amended by approval of a resolution for amendment,
addition, alteration, change or repeal by the affirmative vote by the Board of
Directors of a majority of the directors and thereafter approved by stockholders
of at least 80% of the voting shares. The Delaware corporate law provides that
the certificate of incorporation of a Delaware corporation may be amended only
if first approved by the corporation's board of directors and thereafter by a
majority of the outstanding stock entitled to vote thereon, and, if applicable,
a majority of each class of shares entitled to vote thereon as a class.
Harvest Home Financial's Articles of Incorporation may be amended by the
vote of 51% of the issued and outstanding capital stock of Harvest Home
Financial.
LIABILITY OF DIRECTORS AND EXECUTIVE OFFICERS. Under Ohio law, stockholders
are entitled to bring suit, generally in an action on behalf of the corporation,
to recover damages caused by breaches of duty of care and the duty of loyalty
owed to a corporation and its stockholders by directors and, to a limited
extent, executive officers. Ohio law has codified the traditional business
judgment rule. Ohio law provides that the business judgment presumption of good
faith may only be overcome by clear and convincing evidence, rather than the
preponderance of the evidence standard applicable in most states.
Further, Ohio law provides specified statutory authority for directors to
consider, in addition to the interests of the corporation's stockholders, other
factors such as the interests of the corporation's employees, suppliers,
creditors and customers; the economy of the state and the nation; community and
societal considerations; the long-term and short-term interests of the
corporation and the stockholders; and the possibility that these interests may
be best served by the continued independence of the corporation.
Directors of Ohio corporations are, unless the corporation's articles of
incorporation or code of regulations otherwise provide, liable to the
corporation for money damages for actions taken or failed to be taken as a
director only if it is proven by clear and convincing evidence that the act or
failure to act involved an act or omission undertaken with deliberate intent to
cause injury to the corporation or reckless disregard for the best interests of
the corporation.
Peoples Community Bancorp's Certificate of Incorporation provides for
indemnification to its directors, officers, employees, agents and former
directors, officers, employees and agents, against expenses (including
attorneys' fees, judgments, fees and amounts paid in settlement) incurred in
connection with any pending or threatened action, suit or proceeding, to the
fullest extent permitted by Delaware corporate law.
Harvest Home Financial's Code of Regulations provides to the fullest extent
permitted by Ohio law, for indemnification of directors, officers and employees
who are sued or are threatened with suit, action or proceeding, whether civil,
criminal, administrative, or investigative, by reason of the fact the he is or
was a director, officer, or employee of the Corporation or is or was serving at
the request of Harvest Home Financial as a director, trustee, or employee of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, judgments, decrees, fines, penalties and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of Harvest
Home Financial and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
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THE SUBSCRIPTION OFFERING
HOW PEOPLE'S SAVINGS DETERMINED THE PRICE PER SHARE AND THE OFFERING RANGE
The Plan of Conversion requires that the purchase price of the common stock
must be based on the appraised pro forma market value of the common stock, as
determined on the basis of an independent valuation. People's Savings retained
RP Financial to make such valuation. For its services in making such appraisal
and assistance in preparing a business plan, RP Financial's fees and
out-of-pocket expenses are estimated to be $40,000. People's Savings agreed to
indemnify RP Financial and any employees of RP Financial in connection with the
appraisal and the business plan.
RP Financial made its appraisal in reliance upon the information contained
in this document, including the financial statements. RP Financial also
considered the following factors, among others:
- the present and projected operating results and financial condition of
Peoples Community Bancorp, People's Savings, Oakley, Harvest Home
Financial and Harvest Home Savings Bank and the economic and demographic
conditions in People's Savings; Oakley's and Harvest Home Savings Bank's
existing marketing areas;
- certain historical, financial and other information relating to People's
Savings, Oakley and Harvest Home Financial;
- a comparative evaluation of the operating and financial statistics of
People's Savings, Oakley and Harvest Home Financial with those of other
similarly situated publicly traded savings institutions located in Ohio
and other regions of the United States;
- the aggregate size of the offering of the common stock;
- the impact of the conversion and the mergers on People's Savings' net
worth and earnings potential;
- the proposed dividend policy of Peoples Community Bancorp and People's
Savings; and
- the trading market for securities of comparable institutions and general
conditions in the market for such securities.
In its review of the appraisal provided by RP Financial, the Board of
Directors of People's Savings reviewed the methodologies and the appropriateness
of the assumptions used by RP Financial in addition to the factors listed above,
and the Board of Directors believes that such assumptions were reasonable. The
projected operating results reviewed by RP Financial covered periods through
September 30, 2003. The financial projections assume the following:
(1) Loan portfolio growth consisting of one-to-four family permanent
mortgage loans, construction loans, commercial real estate loans and home
equity lines of credit;
(2) Loan growth will primarily be funded by retail deposit growth with
such growth consisting of NOW, money market and passbook savings accounts
and certificates of deposit;
(3) Utilization of Federal Home Loan Bank advances to fund purchases of
mortgage-backed securities at a positive interest rate spread; and
(4) Capital expenditures of $5.0 million for renovation of present
branch offices and construction of a new main office.
On the basis of the foregoing, RP Financial gave its opinion, dated
December 10, 1999, that the estimated pro forma market value of the common stock
ranged from a minimum of $11,900,000 to a maximum of $16,100,000, with a
midpoint of $14,000,000. People's determined that the common stock should be
sold at $10.00 per share, resulting in a range of 1,190,000 to 1,610,000 shares
of common stock being offered in the subscription offering. The offering range
may be amended with the approval
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of the Office of Thrift Supervision, if required, or if necessitated by
subsequent developments in People's financial condition or market conditions
generally, or to fill the order of the employee stock ownership plan. In the
event the offering range is updated to amend the value of People's Savings below
$11,900,000 or above $18,515,000 (the maximum of the offering range, as adjusted
by 15%), the new appraisal will be filed with the SEC by post-effective
amendment.
In the event People's receives orders for common stock in excess of
$16,100,000 (the maximum of the offering range) and up to $18,515,000 (the
maximum of the offering range, as adjusted by 15%), it may be required by the
Office of Thrift Supervision to accept all such orders. No assurances, however,
can be made that People's will receive orders for common stock in excess of the
maximum of the offering range or that, if such orders are received, that all
such orders will be accepted because the final valuation and number of shares to
be issued are subject to the receipt of an updated appraisal from RP Financial
which reflects the increase in the valuation and the approval of such increase
by the Office of Thrift Supervision. In addition, an increase in the number of
shares above 1,610,000 shares will first be used, if necessary, to fill the
order of the employee stock ownership plan. There is no obligation or
understanding on the part of management to take and/or pay for any shares in
order to complete the conversion.
RP FINANCIAL'S VALUATION IS NOT A RECOMMENDATION AS TO THE ADVISABILITY OF
PURCHASING SHARES OF PEOPLES COMMUNITY BANCORP. RP FINANCIAL DID NOT
INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY
PEOPLE'S SAVINGS, OAKLEY OR HARVEST HOME FINANCIAL, NOR DID RP FINANCIAL VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF PEOPLE'S SAVINGS, OAKLEY OR HARVEST
HOME FINANCIAL. THE VALUATION CONSIDERS PEOPLE'S SAVINGS AS A GOING CONCERN AND
SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF PEOPLE'S
SAVINGS. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES
AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM
TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING COMMON STOCK IN
THE CONVERSION OR RECEIVING SHARES IN THE HARVEST HOME FINANCIAL MERGER WILL
THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE INITIAL
PURCHASE PRICE OF $10.00 PER SHARE.
Before People's completes the conversion, the maximum of the offering range
may be increased up to 15% and the number of shares of common stock may be
increased to up to 1,851,000 shares to reflect changes in market and financial
conditions or to fill the order of the employee stock ownership plan, without
the resolicitation of subscribers. See "--Limitations on Common Stock Purchases"
as to the method of distribution and allocation of additional shares that may be
issued in the event of an increase in the offering range to fill unfilled orders
in the Subscription Offering.
No sale of shares of common stock in the conversion or issuance of the
shares in the Harvest Home Financial merger may be consummated unless RP
Financial first confirms that nothing of a material nature occurred which,
taking into account all relevant factors, would cause it to conclude that the
purchase price is materially incompatible with the estimate of the pro forma
market value of a share of common stock upon completion of the conversion and
the mergers. If such is not the case, a new offering range may be set and a new
subscription offering may be held or such other action may be taken as People's
determines and the Office of Thrift Supervision may permit or require.
Depending upon market or financial conditions, the total number of shares of
common stock may be increased or decreased without a resolicitation of
subscribers, provided that the aggregate gross proceeds are not below the
minimum or more than 15% above the maximum of the offering range. In the event
market or financial conditions change so as to cause the aggregate purchase
price of the shares to be below the minimum of the offering range or more than
15% above the maximum of such range, purchasers will be resolicited. In any
resolicitation, purchasers will be permitted to continue, modify or rescind
their orders. If no election is made by a purchaser prior to the expiration of
the resolicitation offering, the purchaser's order will be rescinded and any
funds paid will be promptly refunded with interest at People's Savings' passbook
rate of interest, and withdrawal authorizations will
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be cancelled. Any change in the offering range must be approved by the Office of
Thrift Supervision. If the number of shares of common stock issued in the
conversion is increased due to an increase of up to 15% in the offering range to
reflect changes in market or financial conditions or to fill the order of the
employee stock ownership plan, persons who subscribed for the maximum number of
shares will be given the opportunity to subscribe for the adjusted maximum
number of shares. See "--Limitations on Common Stock Purchases."
An increase in the number of shares of common stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and People's pro forma net income and
stockholders' equity on a per share basis while increasing pro forma net income
and stockholders' equity on an aggregate basis. A decrease in the number of
shares of common stock would increase both a subscriber's ownership interest and
People's pro forma net income and stockholders' equity on a per share basis
while decreasing pro forma net income and stockholders' equity on an aggregate
basis. See "Pro Forma Unaudited Combined Consolidated Financial Information."
The appraisal report of RP Financial was filed as an exhibit to the
Application for Conversion which People's Savings filed with the Office of
Thrift Supervision, and is available for inspection in the manner set forth
under "Additional Information."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of common stock were granted under the Plan of Conversion to the
following persons in the following order of descending priority:
(1) Eligible Account Holders,
(2) the employee stock ownership plan,
(3) Supplemental Eligible Account Holders,
(4) Other Members, and
(5) directors, officers and employees of People's Savings and Oakley.
All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan of Conversion and as described below under "--Limitations
on Common Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder of
People's Savings and Oakley will receive, without payment, first priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of
(a) $150,000 of common stock,
(b) one-tenth of one percent (0.10%) of the total offering of shares of
common stock or
(c) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common stock to be
issued by a fraction, of which the numerator is the amount of the Eligible
Account Holder's qualifying deposits and the denominator of which is the
total amount of qualifying deposits of all Eligible Account Holders,
in each case as of the close of business on June 30, 1998, the eligibility
record date, subject to the overall purchase limitations. See "--Limitations on
Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares first will be allocated among subscribing Eligible Account Holders so as
to permit each such Eligible Account Holder, to the
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extent possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Any shares remaining after each subscribing Eligible Account Holder has
been allocated the lesser of the number of shares subscribed for or 100 shares
will be allocated among the subscribing Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective eligible deposits bear to the total amount of eligible deposits of
all subscribing Eligible Account Holders whose subscriptions remain unfilled,
provided that no fractional shares shall be issued. Subscription Rights of
Eligible Account Holders will be subordinated to the priority rights of the
employee stock ownership plan to purchase shares in excess of the maximum of the
offering range.
To ensure proper allocation of stock, each Eligible Account Holder must list
on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of People's Savings
or Oakley or their associates will be subordinated to the subscription rights of
other Eligible Account Holders to the extent attributable to increased deposits
in the year preceding June 30, 1998.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. The employee stock ownership
plan will receive, without payment, second priority, nontransferable
subscription rights to purchase, in the aggregate, up to 10% of the common
stock, including any increase in the number of shares of common stock after the
date hereof as a result of an increase of up to 15% in the maximum of the
offering range. The employee stock ownership plan intends to purchase 8% of the
shares of common stock, or 95,200 shares and 128,800 shares based on the minimum
and maximum of the offering range, respectively. Subscriptions by the employee
stock ownership plan will not be aggregated with shares of common stock
purchased directly by or which are otherwise attributable to any other
participants in the Subscription and Community Offerings, including
subscriptions of any of People's Savings' or Oakley's directors, officers,
employees or associates thereof. In the event that the total number of shares
offered in the conversion is increased to an amount greater than the number of
shares representing the maximum of the offering range, the employee stock
ownership plan will have a priority right to purchase any such shares exceeding
the maximum of the offering range up to an aggregate of 10% of the common stock.
See "--Limitations on Common Stock Purchases" and "Risk Factors--People's
Employee Stock Benefit Plans May Be Dilutive."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that there
are sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the employee stock ownership plan, each Supplemental
Eligible Account Holder of People's Savings and Oakley will receive, without
payment, third priority, nontransferable subscription rights to subscribe for in
the Subscription Offering up to the greater of
(a) $150,000 of common stock,
(b) one-tenth of one percent (0.10%) of the total offering of shares of
common stock or
(c) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common stock to be
issued by a fraction, of which the numerator is the amount of the
Supplemental Eligible Account Holder's qualifying deposits and the
denominator of which is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders,
in each case as of the close of business on December 31, 1999, the supplemental
eligibility record date, subject to the overall purchase limitations. See
"--Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions of
all Supplemental Eligible Account Holders, available shares first will be
allocated among subscribing Supplemental Eligible Account Holders so as to
permit each Supplemental Eligible Account Holder, to the extent possible, to
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purchase a number of shares sufficient to make his total allocation equal to the
lesser of the number of shares subscribed for or 100 shares. Thereafter, any
shares remaining available will be allocated among the Supplemental Eligible
Account Holders whose subscriptions remain unfilled in the proportion that the
amounts of their respective eligible deposits bear to the total amount of
eligible deposits of all subscribing Supplemental Eligible Account Holders whose
subscriptions remain unfilled, provided that no fractional shares shall be
issued.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
employee stock ownership plan and Supplemental Eligible Account Holders, each
Other Member of People's Savings and Oakley will receive, without payment,
fourth priority, nontransferable subscription rights to subscribe for common
stock in the Subscription Offering up to the greater of
(a) $150,000 of common stock or
(b) one-tenth of one percent (0.10%) of the total offering of shares of
common stock, in each case subject to the overall purchase limitations. See
"--Limitations on Common Stock Purchases."
In the event the Other Members subscribe for a number of shares which, when
added to the shares subscribed for by Eligible Account Holders, the employee
stock ownership plan and Supplemental Eligible Account Holders, is in excess of
the total number of shares of common stock offered in the conversion, available
shares first will be allocated so as to permit each subscribing Other Member, to
the extent possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Any remaining shares will be allocated among such subscribing Other
Members on a pro rata basis in the same proportion as each Other Member's
subscription bears to the total subscriptions of all subscribing Other Members,
provided that no fractional shares shall be issued.
PRIORITY 5: DIRECTORS, OFFICERS AND EMPLOYEES. To the extent that there are
sufficient shares remaining after satisfaction of all subscriptions by Eligible
Account Holders, the employee stock ownership plan, Supplemental Eligible
Account Holders and Other Members, then directors, officers and employees of
People's Savings and Oakley will receive, without payment, fifth priority,
nontransferable subscription rights to subscribe for, in this category, an
aggregate of up to 23% of the shares of common stock offered in the Subscription
Offering. The ability of directors, officers and employees to purchase common
stock under this category is in addition to rights which are otherwise available
to them under the Plan of Conversion as they may fall within higher priority
categories, and the Plan generally allows such persons to purchase in the
aggregate up to 33% of common stock sold in the conversion. See "--Limitations
on Common Stock Purchases."
In the event of an oversubscription in this category, subscription rights
will be allocated among the individual directors, officers and employees on a
point system basis, whereby such individuals will receive subscription rights in
the proportion that the number of points assigned to each of them bears to the
total points assigned to all directors, officers and employees, provided that no
fractional shares shall be issued. One point will be assigned for each year of
service with People's Savings or Oakley, one point for each salary increment of
$5,000 per annum and five points for each office presently held in People's
Savings or Oakley, including directorships. For information as to the number of
shares proposed to be purchased by the directors and executive officers, see
"Proposed Management Purchases."
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EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire at 12:00 noon, eastern time, on March 15, 2000, unless extended for
up to 45 days or for such additional periods by People's as may be approved by
the Office of Thrift Supervision. The Subscription Offering may not be extended
beyond March 24, 2002. Subscription rights which have not been exercised prior
to the expiration time of the Subscription Offering (unless extended) will
become void.
People's Savings will not execute orders until at least the minimum number
of shares of common stock (1,190,000 shares) are subscribed for or otherwise
sold. If all shares are not subscribed for or sold within 45 days after the
expiration date of the Subscription Offering, unless such period is extended
with the consent of the Office of Thrift Supervision, all funds delivered to
People's Savings and Oakley pursuant to the Subscription Offering will be
returned promptly to the subscribers with interest and all withdrawal
authorizations will be cancelled. If an extension beyond the 45-day period
following the expiration date of the Subscription Offering is granted, People's
Savings will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, the employee stock ownership
plan, Supplemental Eligible Account Holders, Other Members and directors,
officers and employees of People's Savings and Oakley, we may elect to offer
such shares either prior to or upon completion of the Subscription Offering to
certain members of the general public, with preference given to natural persons
residing in Warren, Clinton and Hamilton counties in Ohio (such natural persons
referred to as "preferred subscribers"). Such persons may purchase up to the
greater of
(a) $150,000 of common stock, or
(b) one-tenth of one percent (0.10%) of the total offering of shares of
common stock,
in each case subject to the maximum purchase limitations. See "--Limitations on
Common Stock Purchases." THIS AMOUNT MAY BE INCREASED AT THE SOLE DISCRETION OF
PEOPLE'S SAVINGS TO UP TO 5% OF THE TOTAL OFFERING OF SHARES IN THE SUBSCRIPTION
OFFERING. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE
COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF PEOPLE'S SAVINGS, IN ITS
SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER
AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE
EXPIRATION TIME OF THE SUBSCRIPTION OFFERING.
If there are not sufficient shares available to fill the orders of preferred
subscribers after completion of the Subscription and Community Offerings, such
stock will be allocated first to each preferred subscriber whose order is
accepted by People's Savings, in an amount equal to the lesser of 100 shares or
the number of shares subscribed for by each such preferred subscriber, if
possible. Thereafter, unallocated shares will be allocated among the preferred
subscribers whose accepted orders remain unsatisfied in the same proportion that
the unfilled subscription of each (up to 2% of the total offering) bears to the
total unfilled subscriptions of all preferred subscribers whose accepted orders
remain unsatisfied, provided that no fractional shares shall be issued. Orders
for common stock in the Community Offering will first be filled to a maximum of
2% of the total number of shares of common stock sold in the conversion and
thereafter any remaining shares shall be allocated on an equal number of shares
basis per order until all orders have been filled. If there are any shares
remaining, shares will be allocated to other members of the general public who
subscribe in the Community Offering applying the same allocation described above
for preferred subscribers.
SYNDICATED COMMUNITY OFFERING
The Plan of Conversion provides that, if necessary, all shares of common
stock not purchased in the Subscription and Community Offerings, if any, may be
offered for sale to the general public in a
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Syndicated Community Offering through selected dealers managed by Keefe,
Bruyette & Woods acting as People's agent in the sale of the common stock.
People's Savings has the right to reject orders, in whole or in part, in its
sole discretion in the Syndicated Community Offering. Neither Keefe, Bruyette &
Woods nor any registered broker-dealer shall have any obligation to take or
purchase any shares of common stock in the Syndicated Community Offering;
however, Keefe, Bruyette & Woods has agreed to use its best efforts in the sale
of shares in the Syndicated Community Offering. Common stock sold in the
Syndicated Community Offering will be sold at a purchase price per share which
is the same price as all other shares being offered in the conversion. No person
will be permitted to subscribe in the Syndicated Community Offering for shares
of common stock with an aggregate purchase price of more than $150,000.
It is estimated that the selected dealers will receive a negotiated
commission based on the amount of common stock sold by the selected dealer,
payable by People's Savings. During the Syndicated Community Offering, and until
a specified order date, selected dealers may only solicit indications of
interest from their customers to place orders with People's Savings for the
purchase of shares of common stock. When and if People's Savings and Keefe,
Bruyette & Woods believe that enough indications and orders have been received
in the offering to complete the conversion, Keefe, Bruyette & Woods will
request, as of the order date, selected dealers to submit orders to purchase
shares for which they have received indications of interest from their
customers. Selected dealers will send confirmations of the orders to such
customers on the next business day after the order date on a debit date, which
is three business days after the order date, selected dealers will debit the
accounts of their customers. Customers who authorize selected dealers to debit
their brokerage accounts are required to have the funds for payment in their
account on but not before the debit date. On the next business day following the
debit date, select dealers will remit funds to the account that People's will
establish for each selected dealer. After payment has been received by People's
from selected dealers, funds will earn interest at People's Savings' passbook
savings rate until the conversion is completed. In the event the conversion is
not completed, funds will be returned promptly with interest to the customers'
brokerage account.
The Syndicated Community Offering may close at any time after the expiration
time of the Subscription Offering at the discretion of People's Savings, but in
no case later than April 29, 2000, unless further extended with the consent of
the Office of Thrift Supervision. The offering may not be extended beyond
March 24, 2002.
PERSONS WHO CANNOT EXERCISE SUBSCRIPTION RIGHTS
People's Savings will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for stock pursuant to the Plan of Conversion reside. However, People's Savings
is not required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which:
- the number of persons otherwise eligible to subscribe for shares under the
Plan of Conversion who reside in such jurisdiction is small;
- the granting of subscription rights or the offer or sale of shares of
common stock to such persons would require any of Peoples Community
Bancorp and People's Savings or their officers, directors or employees,
under the laws of such jurisdiction, to register as a broker, dealer,
salesman or selling agent or to register or otherwise qualify its
securities for sale in such jurisdiction or to qualify as a foreign
corporation or file a consent to service of process in such jurisdiction;
and
- such registration, qualification or filing in People's Savings' judgment
would be impracticable or unduly burdensome for reasons of costs or
otherwise.
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Where the number of persons eligible to subscribe for shares in one state is
small, People's Savings will base its decision as to whether or not to offer the
common stock in such state on a number of factors, including but not limited to
the size of accounts held by account holders in the state, the cost of
registering or qualifying the shares or the need to register Peoples Community
Bancorp, its officers, directors or employees as brokers, dealers or salesmen.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan of Conversion includes the following limitations on the number of
shares of common stock which may be purchased in the conversion:
(1) No fewer than 25 shares of common stock may be purchased, to the
extent such shares are available;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of (a) $150,000 of common stock,
(b) one-tenth of one percent (0.10%) of the total offering of shares of
common stock or (c) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of common stock
to be issued by a fraction, of which the numerator is the amount of the
qualifying deposits of the Eligible Account Holder and the denominator is
the total amount of qualifying deposits of all Eligible Account Holders, in
each case as of the close of business on the eligibility record date, with
clauses (a) and (b) above subject to the overall limitation in clause (6)
below;
(3) The employee stock ownership plan may purchase in the aggregate up
to 10% of the shares of common stock, including any additional shares issued
in the event of an increase in the offering range, although at this time it
intends to purchase only 8% of such shares;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of (a) $150,000 of
common stock, (b) one-tenth of one percent (0.10%) of the total offering of
shares of common stock or (c) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of common
stock to be issued by a fraction, of which the numerator is the amount of
the qualifying deposits of the Supplemental Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all Supplemental
Eligible Account Holders, in each case as of the close of business on the
supplemental eligibility record date, with clauses (a) and (b) above subject
to the overall limitation in clause (6) below;
(5) Each Other Member or any person purchasing shares of common stock in
the Community Offering may subscribe for and purchase in the Subscription
Offering or Community Offering, as the case may be, up to the greater of
(a) $150,000 of common stock or (b) one-tenth of one percent (0.10%) of the
total offering of shares of common stock, subject to the overall limitation
in clause (6) below;
(6) Except for the employee stock ownership plan and certain Eligible
Account Holders and Supplemental Eligible Account Holders whose subscription
rights are based upon the amount of their deposits, the maximum number of
shares of common stock subscribed for or purchased in all categories of the
conversion by any person, together with associates of and groups of persons
acting in concert with such persons when aggregated with any exchange shares
received or to be received pursuant to the Harvest Home Financial merger,
shall not exceed $450,000; and
(7) No more than 23% of the total number of shares offered for sale in
the Subscription Offering may be purchased by directors and officers of
People's Savings in the fourth priority category in the Subscription
Offering. No more than 33% of the total number of shares offered for sale in
the conversion may be purchased by directors and officers of People's
Savings and their associates in the aggregate, excluding purchases by the
employee stock ownership plan.
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In the event that a member of People's Savings or Oakley is also a
stockholder of Harvest Home Financial, then he will receive shares of common
stock in exchange for his shares of Harvest Home Financial common stock. In such
event, the total amount of common stock that the member may buy in the
conversion when added to the shares of common stock that he will receive from
the merger of Harvest Home Financial with Peoples Community Bancorp may not
exceed $450,000.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
People's Savings or Oakley, the individual amount permitted to be subscribed for
may be increased up to a maximum of 5% of the number of shares sold in the
conversion and both the individual and the overall purchase limitations may be
decreased to a minimum of 0.10% of the number of shares sold in the conversion
at People's sole discretion. If such amount is increased, subscribers for the
maximum amount will be, and certain other large subscribers in People's sole
discretion may be, given the opportunity to increase their subscriptions up to
the then applicable limit.
In the event of an increase in the total number of shares of common stock
offered in the conversion due to an increase in the offering range of up to 15%,
the additional adjusted maximum number of shares will be allocated in the
following order of priority in accordance with the Plan:
(1) to fill the employee stock ownership plan's subscription of 8% of
the adjusted maximum number of shares;
(2) in the event that there is an oversubscription by Eligible Account
Holders, to fill unfulfilled subscriptions of Eligible Account Holders;
(3) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unfulfilled subscriptions of Supplemental
Eligible Account Holders;
(4) in the event that there is an oversubscription by Other Members, to
fill unfulfilled subscriptions of Other Members;
(5) in the event there is an oversubscription by People's directors,
officers and employees, to fill unfulfilled subscriptions of directors,
officers and employees; and
(6) to fill unfulfilled subscriptions in the Community Offering to the
extent possible.
The term "associate" of a person is defined to include the following:
(a) any corporation or other organization (other than Peoples Community
Bancorp and People's Savings or a majority-owned subsidiary of People's
Savings) of which such person is a director, officer or partner or is
directly or indirectly the beneficial owner of 10% or more of any class of
equity securities;
(b) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in a
similar fiduciary capacity, provided, however, that such term shall not
include any tax-qualified employee stock benefit plan of Peoples Community
Bancorp and People's Savings in which such person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary
capacity; and
(c) any relative or spouse of such person, or any relative of such
spouse, who either has the same home as such person or who is a director or
officer of Peoples Community Bancorp, People's Savings or any of their
subsidiaries.
The term "acting in concert" is defined to mean (1) knowing participation in
a joint activity or interdependent conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or (2) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other
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<PAGE>
arrangement, whether written or otherwise. People's Savings may presume that
certain persons are acting in concert based upon, among other things, joint
account relationships, common addresses on People's Savings records and the fact
that such persons have filed joint Schedules 13D or 13G with the SEC with
respect to other companies.
MARKETING ARRANGEMENTS
Peoples Community Bancorp and People's Savings retained Keefe, Bruyette &
Woods to consult with and to advise People's Savings, and to assist Peoples
Community Bancorp, on a best efforts basis, in the distribution of the shares of
common stock in the offering. The services that Keefe, Bruyette & Woods will
provide include, but are not limited to:
- training the employees of People's Savings and Oakley who will perform
certain ministerial functions in the offering regarding the mechanics and
regulatory requirements of the stock offering;
- managing the stock information centers by assisting interested stock
subscribers and by keeping records of all stock orders;
- preparing marketing materials; and
- assisting in the solicitation of proxies from members of People's Savings
and Oakley for use at the special meetings.
For its services, Keefe, Bruyette & Woods will receive a fee of $215,000. In the
event that selected dealers are used to assist in the sale of shares of Peoples
Community Bancorp common stock in the direct community offering, these dealers
will be paid a fee of up to 5.5% of the total purchase price of the shares sold
by such dealers. People's Savings has agreed to indemnify Keefe,
Bruyette & Woods against certain claims or liabilities, including certain
liabilities under the Securities Act of 1933, as amended, and will contribute to
payments Keefe, Bruyette & Woods may be required to make in connection with any
such claims or liabilities.
Sales of shares of Peoples Community Bancorp common stock will be made by
registered representatives affiliated with Keefe, Bruyette & Woods or by the
broker-dealers managed by Keefe, Bruyette & Woods. Keefe, Bruyette & Woods has
undertaken that the shares of Peoples Community Bancorp common stock will be
sold in a manner which will ensure that the distribution standards of the Nasdaq
Stock Market will be met. A stock information center will be established at the
main office of People's Savings in Lebanon, Ohio and in the Cincinnati
metropolitan area. Peoples Community Bancorp will rely on Rule 3a4-1 of the
Securities Exchange Act of 1934 and sales of Peoples Community Bancorp common
stock will be conducted within the requirements of this rule, so as to permit
officers, directors and employees to participate in the sale of Peoples
Community Bancorp common stock in those states where the law permits. No
officer, director of employee of Peoples Community Bancorp or People's Savings
or Oakley will be compensated directly or indirectly by the payment of
commissions or other remuneration in connection with his or her participation in
the sale of common stock.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours before
the expiration time of the Subscription Offering (unless extended) in accordance
with Rule 15c2-8 of the Exchange Act, no prospectus will be mailed any later
than five days prior to such date or hand delivered any later than two days
prior to such date. Execution of the order form will confirm receipt or delivery
in accordance with Rule 15c2-8. Order forms will only be distributed with a
prospectus.
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<PAGE>
To purchase shares in the Subscription Offering, an executed order form with
the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at People's Savings (which
may be given by completing the appropriate blanks in the order form), must be
received by People's Savings by 12:00 noon, central time, on March 15, 2000
(unless extended). In addition, People's Savings will require a prospective
purchaser to execute a certification in the form required by applicable Office
of Thrift Supervision regulations in connection with any sale of common stock.
Order forms which are not received by such time or are executed defectively or
are received without full payment (or appropriate withdrawal instructions) are
not required to be accepted. Copies of order forms, order forms unaccompanied by
an executed certification form, payments from other private third parties and
wire transfers are also not required to be accepted. People's Savings has the
right to waive or permit the correction of incomplete or improperly executed
forms, but does not represent that it will do so. Once received, an executed
order form may not be modified, amended or rescinded without People's Savings
consent, unless the conversion has not been completed within 45 days after the
end of the Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the eligibility
record date (June 30, 1998) or the supplemental eligibility record date
(December 31, 1999) and depositors and borrowers as of the close of business on
the voting record date (January 31, 2000) must list all accounts on the stock
order form giving all names in each account and the account numbers. FAILURE TO
LIST ALL OF YOUR ACCOUNTS MAY RESULT IN FEWER SHARES BEING ALLOCATED TO YOU THAN
IF ALL OF YOUR ACCOUNTS HAD BEEN DISCLOSED.
Payment for subscriptions may be made (1) in cash if delivered in person at
the main office of People's Savings, (2) by check or money order, or (3) by
authorization of withdrawal from deposit accounts maintained with People's
Savings. Interest will be paid on payments made by cash, check or money order at
People's Savings' passbook rate of interest from the date payment is received
until the conversion is completed or terminated. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the conversion, but a hold
will be placed on such funds, thereby making them unavailable to the depositor
until completion or termination of the conversion.
If a subscriber authorizes People's Savings to withdraw the amount of the
purchase price from his deposit account, People's Savings will do so as of the
effective date of the conversion. People's Savings will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be cancelled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate.
The employee stock ownership plan will not be required to pay for the shares
subscribed for at the time it subscribes. Instead, the employee stock ownership
plan may pay for the shares of common stock subscribed for by it at the purchase
price upon consummation of the Subscription and Community Offerings, provided
that there is a valid loan commitment in force from the time of its subscription
until such time. The loan commitment may be from an unrelated financial
institution or Peoples Community Bancorp to lend to the employee stock ownership
plan, at the completion of the conversion, the aggregate purchase price of the
shares for which the employee stock ownership plan subscribed.
Owners of self-directed individual retirement accounts may use the assets of
such IRAs to purchase shares of common stock in the Subscription and Community
Offerings, provided that such IRAs are not maintained at People's Savings.
Persons with IRAs maintained at People's Savings must
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<PAGE>
have their accounts transferred to an unaffiliated institution or broker to
purchase shares of common stock in the Subscription and Community Offerings. In
addition, applicable regulations require that officers, directors and 10%
stockholders who use self-directed IRA funds to purchase shares of common stock
in the Subscription and Community Offerings make such purchases for the
exclusive benefit of the IRAs. Any interested parties wishing to use IRA funds
for stock purchases are advised to contact the Stock Information Center for
additional information and allow sufficient time for the account to be
transferred as required.
Certificates representing shares of common stock purchased will be mailed to
purchasers at the last address of such persons appearing on the records of
People's Savings, or to such other address as may be specified in properly
completed order forms, as soon as practicable following completion of the
conversion. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Members of People's Savings and Oakley may not transfer or enter into any
agreement or understanding to transfer the legal or beneficial ownership of
their subscription rights issued under the Plan or the shares of common stock to
be issued upon their exercise. Members may exercise their subscription rights
only for their own account. Members who exercise subscription rights will be
required to certify that they are purchasing shares solely for their own account
and that they have no agreement or understanding regarding the sale or transfer
of such shares. Federal regulations also prohibit any person from offering or
making an announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of common stock prior to the completion of the
conversion.
PEOPLE'S SAVINGS WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE
EVENT IT BECOMES AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR
ORDERS KNOWN TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
77
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
STATEMENTS OF EARNINGS
The following Statements of Earnings of People's Savings for the years ended
September 30, 1999, 1998 and 1997 are a part of the audited financial statements
of People's Savings which appear beginning on page F-1 of this prospectus-proxy
statement. You should read these Statements of Earnings with the Financial
Statements and Notes of People's Savings and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of People's Savings"
included in this prospectus-proxy statement.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
-------- -------------- ----------
(RESTATED) (RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
Loans..................................................... $6,429 $6,369 $6,162
Mortgage-backed securities................................ 89 91 101
Investment securities..................................... 74 90 97
Interest-bearing deposits and other....................... 189 252 277
------ ------ ------
Total interest income................................... 6,781 6,802 6,637
Interest expense:
Deposits.................................................. 3,874 3,976 3,850
Borrowings................................................ 39 189 242
------ ------ ------
Total interest expense.................................. 3,913 4,165 4,092
------ ------ ------
Net interest income................................... 2,868 2,637 2,545
Provision for losses on loans............................... 150 48 --
------ ------ ------
Net interest income after provision for losses on
loans............................................... 2,718 2,589 2,545
Other operating income...................................... 16 20 24
General, administrative and other expense:
Employee compensation and benefits........................ 1,001 867 749
Occupancy and equipment................................... 68 61 55
Federal deposit insurance premiums........................ 43 46 63
Franchise taxes........................................... 132 138 132
Other operating expense................................... 329 301 265
------ ------ ------
Total general, administrative and other expense......... 1,573 1,413 1,264
------ ------ ------
Earnings before income taxes.......................... 1,161 1,196 1,305
Federal income taxes:
Current................................................... 524 406 415
Deferred.................................................. (129) -- 39
------ ------ ------
Total federal income taxes.............................. 395 406 454
------ ------ ------
Net earnings.......................................... $ 766 $ 790 $ 851
====== ====== ======
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PEOPLE'S SAVINGS
GENERAL
People's Savings' profitability depends primarily on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans, mortgage-backed securities,
investment securities and interest-earning deposits in other institutions, and
interest expense on interest-bearing deposits and borrowings from the Federal
Home Loan Bank of Cincinnati. Net interest income is dependent upon the level of
interest rates and the extent to which such rates are changing. People's
Savings' profitability also depends, to a lesser extent, on noninterest income,
provision for loan losses, general, administrative and other expenses and
federal income taxes.
People's Savings' operations and profitability are subject to changes in
interest rates, applicable statutes and regulations and general economic
conditions, as well as other factors beyond People's Savings' control.
On November 1, 1998, People's Savings combined with The Peoples Building &
Loan Company located in Blanchester, Ohio, an Ohio-chartered savings and loan
association with $8.6 million in assets, in a merger which was accounted for as
a pooling-of-interests. Accordingly, the historical financial statements of
People's Savings have been restated to reflect the effects of that merger as of
October 1, 1996.
PEOPLE'S SAVINGS' FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CHANGE
People's Savings makes certain statements in this document as to what
People's Savings expects may happen in the future. These statements usually
contain the words "believe," "estimate," "project," "expect," "anticipate,"
"intend" or similar expressions. Because these statements look to the future,
they are based on People's Savings' current expectations and beliefs. Actual
results or events may differ materially from those reflected in the
forward-looking statements. You should be aware that People's Savings' current
expectations and beliefs as to future events are subject to change at any time,
and People's Savings can give you no assurances that the future events will
actually occur.
PEOPLE'S SAVINGS' EXPOSURE TO CHANGES IN INTEREST RATES
People's Savings' ability to maintain net interest income depends upon
earning a higher yield on assets than the rates People's Savings pays on
deposits and borrowings. People's Savings' interest-earning assets consist
primarily of long-term residential mortgage loans which have fixed rates of
interest. People's Savings' ability to maintain a positive "spread" between the
interest earned on assets and the interest paid on deposits and borrowings can
be adversely affected when market rates of interest rise. Although the mortgage
loans contain a provision which permits People's Savings to call the loans due
at any time after three years from origination, which theoretically offers some
protection from changing interest rates, People's Savings has never used that
provision to call a loan due. Because long-term, fixed-rate mortgage loans make
up the dominant portion of interest-earning assets, People's Savings may be
particularly susceptible to the risk of changing interest rates.
QUANTITATIVE ANALYSIS. The Office of Thrift Supervision provides a
quarterly report on the potential impact of interest rate changes upon the
market value of People's Savings' portfolio equity. People's Savings reviews the
quarterly reports from the Office of Thrift Supervision which show the impact of
changing interest rates on People's Savings' net portfolio value. Net portfolio
value is the difference between incoming and outgoing discounted cash flows from
assets, liabilities, and off-balance sheet contracts. An institution has greater
than "normal" interest rate risk if it would suffer a loss of net portfolio
value exceeding 2.0% of the estimated market value of its assets in the event of
a 200 basis point increase or decrease in interest rates. A resulting change in
net portfolio value of more than 2% of the estimated market value of an
institution's assets will require the institution to deduct from
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<PAGE>
its risk-based capital 50% of that excess change, if and when a rule adopted by
the Office of Thrift Supervision takes effect. Under the rule, an institution
with greater than "normal" interest rate risk will be subject to a deduction of
its interest rate risk component from total capital for purposes of calculating
the risk-based capital requirement. However, the Office of Thrift Supervision
has indicated that no institution will be required to deduct capital for
interest rate risk until further notice. Because a 200 basis point increase in
interest rates would have resulted in People's Savings' net portfolio value
decreasing by more than 2% of the estimated market value of People's Savings'
assets as of September 30, 1999, People's Savings would have been subject to a
capital deduction of $655,000 as of September 30, 1999 if the regulation had
been effective as of such date.
The following table presents People's Savings' net portfolio value as of
September 30, 1999, as calculated by the Office of Thrift Supervision, based on
information provided to the Office of Thrift Supervision by People's Savings.
The information presented is based on the feature in People's Savings' mortgage
loans which permits the loans to be called any time after three years from the
date of origination and the assumed repricing of called loans at a higher rate
in a rising rate environment.
<TABLE>
<CAPTION>
CHANGE IN
CHANGE IN NET PORTFOLIO NET PORTFOLIO
INTEREST RATES NET PORTFOLIO VALUE VALUE AS % OF VALUE AS % OF
IN BASIS POINTS ------------------------------ PORTFOLIO VALUE PORTFOLIO VALUE
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE OF ASSETS OF ASSETS
- --------------------- -------- -------- -------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
300 $ 9,520 $(2,409) (20)% 10.92% (223)%
200 10,619 (1,310) (11) 11.98 (117)
100 11,420 (509) (4) 12.73 (44)
Static 11,929 -- -- 13.15 --
(100 ) 12,236 307 3 13.39 24
(200 ) 12,571 643 5 13.66 51
(300 ) 13,035 1,106 9 14.05 90
</TABLE>
As shown by the table above, increases in interest rates will result in
declines in People's Savings' net portfolio value based on Office of Thrift
Supervision calculations as of September 30, 1999, primarily due to significant
holdings of long-term fixed-rate loans. See "Risk Factors--Higher Interest Rates
Would Hurt People's Savings' Profitability."
QUALITATIVE ANALYSIS. People's Savings' fixed-rate loans help profitability
if interest rates are stable or declining, since these loans have yields that
exceed the cost of funds. However, if interest rates increase, People's Savings
would have to pay more on its deposits and new borrowings, which would adversely
affect the interest rate spread. In order to counter the potential effects of
dramatic increases in market rates of interest, People's Savings has focused
primarily on maintaining a strong deposit base. Historically, People's Savings
was able to maintain relatively stable levels of net interest income despite the
interest rate risk inherent in its operations. In the future, People's Savings
expects to reduce its potential exposure to interest rate risk by:
- originating one-year and three-year adjustable rate mortgage loans;
- increasing originations of commercial real estate mortgage loans, which
generally have higher yields and shorter terms to maturity than
single-family residential mortgage loans; and
- originating home equity lines of credit with interest rates that adjust
monthly based on an index.
CHANGES IN FINANCIAL CONDITION
Total assets of People's Savings have remained stable during the past three
fiscal years and amounted to $90.3 million at September 30, 1999 compared to
$89.3 million at September 30, 1997. Cash and cash equivalents decreased from
$5.0 million at September 30, 1997 to $2.0 million at September 30, 1999 while
loans receivable, net increased from $78.7 million at September 30, 1997 to
$83.9 million at September 30, 1999. Total liabilities decreased from
$79.1 million at September 30,
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<PAGE>
1997 to $78.5 million at September 30, 1999 due to a decrease of $6.0 million in
Federal Home Loan Bank advances, substantially offset by an increase in deposits
from $72.3 million at September 30, 1997 to $77.7 million at September 30, 1999.
Total equity increased from $10.2 million or 11.47% of total assets at
September 30, 1997 to $11.8 million or 13.05% of total assets at September 30,
1999.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND
1998.
GENERAL. People's Savings' net earnings amounted to $766,000 for the year
ended September 30, 1999 compared to $790,000 for the year ended September 30,
1998. The decrease of $24,000 or 3.0% was due primarily to an increase in the
provision for losses on loans and an increase in general, administrative and
other expense. These increases were substantially offset by an increase in net
interest income. These and other significant fluctuations in People's Savings'
results of operations are discussed below.
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID. The
following table presents for the periods indicated the total dollar amount of
interest income from average interest-earning assets and the resultant yields,
as well as interest expense on average interest-bearing liabilities, expressed
both in dollars and rates, and the net interest margin. All average balances are
based on monthly balances. People's Savings does not believe that the monthly
averages differ significantly from what the daily averages would be.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE(1) BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(2)......... $80,337 $6,429 8.00% $79,235 $6,369 8.04% $76,056 $6,162 8.10%
Mortgage-backed
securities................ 1,269 89 7.01 1,416 91 6.43 1,379 101 7.32
Investment securities(3).... 2,067 132 6.39 2,673 141 5.27 2,742 145 5.29
Interest-earning deposits... 3,132 131 4.18 4,620 201 4.35 5,197 229 4.41
------- ------ ------- ------ ------- ------
Total interest-earning
assets.................. 86,805 6,781 7.81 87,944 6,802 7.73 85,374 6,637 7.77
------ ------ ------
Noninterest-earning assets.... 1,664 1,524 1,486
------- ------- -------
Total assets.............. $88,469 $89,468 $86,860
======= ======= =======
Interest-bearing liabilities:
Passbook accounts............. $ 4,160 156 3.75 $ 4,693 176 3.75 $ 4,587 172 3.75
Money market deposit
accounts.................... 17,212 714 4.15 16,530 686 4.15 14,721 626 4.25
Certificates of deposit....... 54,319 3,004 5.53 53,195 3,114 5.85 52,489 3,052 5.81
Federal Home Loan Bank
advances.................... 710 39 5.49 3,530 189 5.35 4,500 242 5.38
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities............. 76,401 3,913 5.12 77,948 4,165 5.34 76,297 4,092 5.36
------ ------ ------
Noninterest-bearing
liabilities................. 662 884 755
------- ------- -------
Total liabilities......... 77,063 78,832 77,052
Retained earnings............. 11,406 10,636 9,808
------- ------- -------
Total liabilities and
retained earnings....... $88,469 $89,468 $86,860
======= ======= =======
Net interest income; average
interest rate spread........ $2,868 2.69% $2,637 2.39% $2,545 2.41%
====== ==== ====== ==== ====== ====
Net interest margin(4)........ 3.30% 3.00% 2.98%
==== ==== ====
Average interest-earning
assets to average
interest-bearing
liabilities................. 113.62% 112.82% 111.90%
======= ======= =======
</TABLE>
- ------------------------------
(1) At September 30, 1999, the weighted average yields earned and rates paid
were as follows: loans receivable, 7.68%; mortgage-backed securities, 6.87%;
investment securities, 6.04%; other interest-earning assets, 5.44%; total
interest-earning assets, 7.58%; deposits, 4.95%; total interest-bearing
liabilities, 4.95%; and interest rate spread, 2.63%.
(2) Includes non-accruing loans.
(3) Includes Federal Home Loan Bank stock.
(4) Equals net interest income divided by average interest-earning assets.
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RATE/VOLUME ANALYSIS. The following table shows the extent to which changes
in interest rates and changes in volume of interest-related assets and
liabilities affected People's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), and (ii) changes in
rate (change in rate multiplied by prior year volume). The combined effect of
changes in both rate and volume has been allocated proportionately to the change
due to rate and the change due to volume.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
1999 VS. 1998 1998 VS. 1997
----------------------------------------- -----------------------------------------
INCREASE(DECREASE) INCREASE(DECREASE)
DUE TO TOTAL DUE TO TOTAL
------------------------- INCREASE ------------------------- INCREASE
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE)
-------- -------- ---------- -------- -------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable.................. $ (26) $ 86 $ 60 $(52) $259 $207
Mortgage-backed securities........ 7 (9) (2) (13) 3 (10)
Investment securities(1).......... 27 (36) (9) 2 (6) (4)
Interest-earning deposits......... (7) (63) (70) (7) (21) (28)
----- ----- ----- ---- ---- ----
1 (22) (21) (70) 233 165
Interest-bearing liabilities:
Passbook accounts................. -- (20) (20) -- 4 4
Money market deposit accounts..... -- 28 28 (15) 75 60
Certificates of deposit........... (174) 64 (110) 21 41 62
Federal Home Loan Bank advances... 1 (151) (150) (1) (52) (53)
----- ----- ----- ---- ---- ----
Total interest-bearing
liabilities................... (173) (79) (252) 5 68 73
----- ----- ----- ---- ---- ----
Increase in net interest income..... $ 174 $ 57 $ 231 $(75) $167 $ 92
===== ===== ===== ==== ==== ====
</TABLE>
- ------------------------
(1) Includes Federal Home Loan Bank stock and certificates of deposit at other
institutions.
NET INTEREST INCOME. Net interest income is determined by People's Savings'
interest rate spread (i.e., the difference between the yields earned on
interest-earning assets and the rates paid on interest-bearing liabilities) and
the relative amounts of interest-earning assets and interest-bearing
liabilities. Net interest income increased $231,000 or 8.8% to $2.9 million for
the year ended September 30, 1999 compared to $2.6 million for the year ended
September 30, 1998. Such increase was primarily due to an increase in the
average interest rate spread to 2.69% for fiscal 1999 compared to 2.39% for
fiscal 1998. In addition, the ratio of average interest-earning assets to
interest-bearing liabilities was 113.62% for fiscal 1999 compared to 112.82% for
fiscal 1998. For the same time periods, People's Savings' net interest margin
increased from 3.00% to 3.30%.
INTEREST INCOME. Interest income decreased $21,000 or 0.3% between fiscal
1998 and 1999. The decrease was primarily due to a decrease in the average
outstanding balance of investment securities and interest-earning deposits.
These decreases were partially offset by an increase in the average outstanding
balance of loans receivable. The average outstanding balance of investment
securities and interest earning deposits decreased $606,000 and $1.5 million or
22.7% and 32.2%, respectively, from $2.7 million and $4.6 million, respectively,
for fiscal 1998 to $2.1 million and $3.1 million, respectively, for fiscal 1999.
During the same period, the average outstanding balance of loans receivable
increased $1.1 million or 1.4% from $79.2 million for fiscal 1998 to
$80.3 million for fiscal 1999. People's Savings used the excess liquidity from
interest-earning deposits and the maturity of certain investment securities to
fund continued loan growth.
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INTEREST EXPENSE. Interest expense decreased $252,000 or 6.1% to
$3.9 million for fiscal 1999 compared to $4.2 million for fiscal 1998. This
decrease was primarily due to a decrease on the rate paid on certificates of
deposit and a decrease in the outstanding average balance of Federal Home Loan
Bank advances. The average rate People's Savings paid on certificates of deposit
decreased from 5.85% in fiscal 1998 to 5.53% in fiscal 1999 as a result of a
general decline in market rates of interest. The average outstanding balance of
advances decreased $2.8 million or 79.9% to $710,000 for fiscal 1999 compared to
$3.5 million for fiscal 1998. Upon completion of People's Savings' merger with
The Peoples Building & Loan Company in November 1998, People's Savings used some
of the cash acquired to pay down borrowings.
PROVISION FOR LOSSES ON LOANS. It is People's Savings' policy to provide
valuation allowances for estimated losses on loans based on past loss
experience, trends in the level of delinquent and problem loans, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral and current and anticipated economic conditions in
People's Savings' primary lending area. When the collection of a loan becomes
doubtful, or otherwise troubled, People's Savings records a loan charge-off
equal to the difference between the fair value of the property securing the
loans and the loan's carrying value. Major loans and major lending areas are
reviewed periodically to determine potential problems at an early date. The
allowance for loan losses is increased by charges to earnings and decreased by
charge-offs (net of recoveries).
For the years ended September 30, 1999 and 1998, the provision for losses on
loans amounted to $150,000 and $48,000, respectively. The increase in the
provision during fiscal 1999 was due to an increase in nonperforming loans,
which consists primarily of loans secured by real estate for which borrowers
have had isolated instances of repayment difficulty. The balances of
non-performing residential and non-residential real estate loans increased by
$76,000 and $166,000, respectively, from 1998 levels. While People's Savings
cannot assure that future charge-offs and/or additional provisions will not be
necessary, People's Savings believes that, as of September 30, 1999, its
allowance for loan losses was adequate.
OTHER OPERATING INCOME. Between fiscal 1998 and 1999, People's Savings'
other operating income decreased $4,000 or 20% from $20,000 to $16,000.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES. General, administrative and
other expenses consist of employee compensation and benefits, occupancy and
equipment, federal deposit insurance premiums, franchise taxes and other
miscellaneous operating expenses. Noninterest expense amounted to $1.6 million
for fiscal 1999 compared to $1.4 million for fiscal 1998. The $160,000 or 11.3%
increase was primarily due to an increase of $134,000 or 15.5% in employee
compensation and benefits which was comprised of approximately $100,000 in
salary and merit increases, new staff and additional director fees as well as
$34,000 in increased health benefit expense to cover all employees. The
remaining increase in costs related solely to the integration of The Peoples
Building and loan of Blanchester into the data processing and operating system
which totalled approximately $25,000.
INCOME TAXES. Income taxes amounted to $395,000 and $406,000 for fiscal
1999 and 1998, respectively, resulting in effective tax rates of 34.0% and
33.9%, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
1997.
GENERAL. People's Savings' net earnings amounted to $790,000 in fiscal 1998
compared to $851,000 in fiscal 1997. The decrease of $61,000 or 7.2% was
primarily due to an increase in the provision for losses on loans and an
increase in general, administrative and other expenses. These increases were
partially offset by an increase in net interest income.
NET INTEREST INCOME. Net interest income increased $92,000 or 3.6% to
$2.6 million for fiscal 1998 from $2.5 million for fiscal 1997. People's
Savings' interest rate spread decreased slightly from
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2.41% for fiscal 1997 to 2.39% for fiscal 1998 while the ratio of average
interest-earning assets to average interest-bearing liabilities increased from
111.90% to 112.82% during the same periods. People's Savings' net interest
margin increased slightly to 3.00% for fiscal 1998 from 2.98% for fiscal 1997.
INTEREST INCOME. Interest income increased $165,000 or 2.5% from
$6.6 million for fiscal 1997 to $6.8 million for fiscal 1998. The increase was
due primarily to an increase of $3.2 million or 4.2% in the average outstanding
balance of loans receivable from $76.1 million in fiscal 1997 to $79.2 million
for fiscal 1998. This increase in the average outstanding balance of the loan
portfolio was primarily due to continued growth in People's Savings' loan
portfolio.
INTEREST EXPENSE. Interest expense amounted to $4.2 million and
$4.1 million for the years ended September 30, 1998 and 1997, respectively. The
increase of $73,000 or 1.8% was primarily due to increases in the average
outstanding balance of money market deposit accounts and certificates of
deposit. The average outstanding balance of money market deposit accounts
increased $1.8 million or 12.3% and the average outstanding balance of
certificates of deposit increased $706,000 or 1.3%. Such increases were used to
fund People's Savings' loan growth.
OTHER OPERATING INCOME. Other operating income decreased $4,000 or 16.7%
from $24,000 for fiscal 1997 to $20,000 for fiscal 1998.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES. General, administrative and
other expenses amounted to $1.4 million for fiscal 1998 compared to
$1.3 million for fiscal 1997. The increase of $149,000 or 11.8% was primarily
due to an increase of $118,000 or 15.8% in employee compensation and benefits as
a result of normal salary and merit increases.
INCOME TAXES. Income taxes amounted to $406,000 and $454,000 for fiscal
1998 and 1997, respectively, resulting in effective tax rates of 33.9% and
34.8%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
People's Savings is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five years
or less. Current regulations require that a savings institution maintain liquid
assets of not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. At September 30,
1999, People's Savings' liquidity was 5.1% or $777,000 in excess of the minimum
requirement.
At September 30, 1999, People's Savings had outstanding commitments to
originate $2.0 million of loans and $2.8 million of undisbursed construction
loans. In addition, as of September 30, 1999, the total amount of certificates
of deposit which were scheduled to mature in the following 12 months was
$33.2 million. People's Savings believes that it has adequate resources to fund
all of its commitments and that it can adjust the rate on certificates of
deposit to retain deposits in changed interest rate environments. If People's
Savings requires funds beyond its internal funding capabilities, advances from
the Federal Home Loan Bank of Cincinnati are available as an additional source
of funds.
People's Savings is required to maintain regulatory capital sufficient to
meet tangible, core and risk-based capital ratios of at least 1.5%, 3.0% and
8.0%, respectively. At September 30, 1999, People's Savings exceeded each of its
capital requirements, with tangible, core and risk-based capital ratios of
13.1%, 13.1% and 24.4%, respectively. See "People's Savings, Oakley and Harvest
Home Savings Bank Meet All of Their Regulatory Capital Requirements,"
"Regulation--People's Savings--Regulatory Capital Requirements" and Note J of
Notes to People's Savings' Financial Statements.
Assuming the sale of common stock at the midpoint of the offering range,
Peoples Community Bancorp's ratio of equity to assets would be 15.09% on a pro
forma basis at September 30, 1999. Both
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Peoples Community Bancorp and People's Savings will be well-capitalized upon
consummation of the conversion. It is anticipated that the net conversion
proceeds contributed to People's Savings will initially increase People's
Savings' liquidity.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
regarding People's Savings have been prepared in accordance with generally
accepted accounting principles, which generally require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of People's Savings' assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on People's Savings' performance than does the effect of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services, since such prices are
affected by inflation to a larger extent than interest rates.
RECENT ACCOUNTING STANDARDS
On January 1, 1998, People's Savings adopted the provisions of Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME. This
statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income includes the reported net income
of a company adjusted for items that are currently accounted for as direct
entries to net worth, such as the mark to market adjustment on securities
available for sale. For People's Savings, comprehensive income represents net
income plus other comprehensive income, which consists of the net change in
after-tax unrealized gains or losses on securities available for sale for the
period. Accumulated other comprehensive income in the accompanying statements of
financial condition represents the net unrealized gains or losses on securities
available for sale as of the reporting dates. Comprehensive income for fiscal
1999, 1998 and 1997 was $762,000, $790,000 and $851,000, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. Statement of Financial Accounting Standards
No. 131 requires public companies to report financial and other information
about key revenue producing segments of the entity for which such information is
available and is utilized by the chief operating officer. Specific information
to be reported for individual segments includes profit or loss, certain specific
revenue and expense items, and total assets. A reconciliation of segment
financial information to amounts reported in the financial statements is also
provided. As a community-oriented financial institution, substantially all of
People's Savings' operations involve the delivery of loan and deposit products
to customers. Management makes operating decisions and assesses performance
based on an ongoing review of these community banking operations, which
constitute People's Savings' only operating segment for financial reporting
purposes. Therefore, the adoption of Statement of Financial Accounting Standards
No. 131 did not result in any change in People's Savings' reporting.
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued in June 1998. This
statement requires that all derivatives be recognized as either assets or
liabilities in the statement of financial condition and that those instruments
be measured at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. This statement, as amended by
Statement of Financial Accounting Standards No. 137, is effective for fiscal
years beginning after June 15, 2000, although earlier adoption is permitted.
People's Savings anticipates, based on current activities, that the adoption of
Statement of Financial Accounting Standards No. 133 will not have an effect on
its financial position or results of operations.
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<PAGE>
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, ACCOUNTING FOR MORTGAGE-BACKED
SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY
A MORTGAGE BANKING ENTERPRISE, WHICH AMENDS STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 65, ACCOUNTING FOR CERTAIN MORTGAGE BANKING ACTIVITIES. This
statement conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with the
accounting for such securities by a non-mortgage banking enterprise. This
statement is effective for the first quarter beginning after December 15, 1998,
and did not have any impact on People's Savings' financial position or results
of operations as People's Savings not currently securitize mortgage loans.
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THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
STATEMENTS OF OPERATIONS
The following Statements of Operations of Oakley for the years ended
September 30, 1999, 1998 and 1997 are a part of the audited financial statements
of Oakley which appear beginning on page F-21 of this prospectus-proxy
statement. You should read these Statements of Operations with the Financial
Statements and Notes of Oakley and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Oakley" included in this
prospectus-proxy statement.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
Loans..................................................... $ 836 $ 924 $ 944
Mortgage-backed securities................................ 7 9 10
Investments............................................... 80 94 73
Interest-bearing deposits................................. 168 144 111
------ ------ ------
Total interest income................................... 1,091 1,171 1,138
Interest expense:
Deposits.................................................. 668 726 685
------ ------ ------
Net interest income................................... 423 445 453
Provision for losses on loans............................... 25 -- 1
------ ------ ------
Net interest income after provision for losses on
loans............................................... 398 445 452
Other income:
Gain on sale of investment securities..................... -- 91 --
Other operating income.................................... 4 5 6
------ ------ ------
Total other income...................................... 4 96 6
General, administrative and other expense:
Employee compensation and benefits........................ 371 250 238
Occupancy and equipment................................... 18 12 13
Franchise taxes........................................... 19 21 16
Other operating expense................................... 49 42 42
------ ------ ------
Total general, administrative and other expense......... 457 325 309
------ ------ ------
Earnings (loss) before income taxes (credits)......... (55) 216 149
Federal income taxes (credits):
Current................................................... (23) 58 48
Deferred.................................................. (1) 11 (26)
------ ------ ------
Total federal income taxes (credits).................... (24) 69 22
------ ------ ------
Net earnings (loss)................................... $ (31) $ 147 $ 127
====== ====== ======
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OAKLEY
GENERAL
Oakley's profitability depends primarily on its net interest income, which
is the difference between interest and dividend income on interest-earning
assets, principally loans, mortgage-backed securities, investment securities and
interest-earning deposits in other institutions, and interest expense on
interest-bearing deposits. Net interest income is dependent upon the level of
interest rates and the extent to which such rates are changing. Oakley's
profitability also depends, to a lesser extent, on its noninterest income,
provision for loan losses, noninterest expense and income taxes.
Oakley's operations and profitability are subject to changes in interest
rates, applicable statutes and regulations and general economic conditions, as
well as other factors beyond Oakley's control.
OAKLEY'S EXPOSURE TO CHANGES IN INTEREST RATES
Oakley's ability to maintain net interest income depends upon having a
higher yield on its assets than the rates Oakley pays on its deposits. Since
many of Oakley's mortgage loans have fixed interest rates, its ability to
maintain a positive interest rate spread can be adversely affected when the
rates Oakley pays on deposits and borrowings are increasing.
QUANTITATIVE ANALYSIS. Oakley monitors and evaluates the potential impact
of interest rate changes upon the market value of its portfolio equity on a
quarterly basis, in an attempt to ensure that interest rate risk is maintained
within limits established by the Board of Directors. Oakley uses the quarterly
reports from the Office of Thrift Supervision which show the impact of changing
interest rates on its Net Portfolio Value. An institution has greater than
"normal" interest rate risk if it would suffer a loss of Net Portfolio Value
exceeding 2.0% of the estimated market value of its assets in the event of a 200
basis point increase or decrease in interest rates. A resulting change in Net
Portfolio Value of more than 2% of the estimated market value of an
institution's assets will require the institution to deduct from its risk-based
capital 50% of that excess change, if and when a rule adopted by the Office of
Thrift Supervision takes effect. Under the rule, an institution with greater
than "normal" interest rate risk will be subject to a deduction of its interest
rate risk component from total capital for purposes of calculating the
risk-based capital requirement. However, the Office of Thrift Supervision has
indicated that no institution will be required to deduct capital for interest
rate risk until further notice. Because a 200 basis point increase in interest
rates would have resulted in Oakley's Net Portfolio Value decreasing by more
than 2% of the estimated market value of its assets as of September 30, 1999,
Oakley would have been subject to a capital deduction of $233,000 as of
September 30, 1999 if the regulation had been effective as of such date.
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The following table presents Oakley's Net Portfolio Value as of
September 30, 1999, as calculated by the Office of Thrift Supervision, based on
information provided to the Office of Thrift Supervision by Oakley.
<TABLE>
<CAPTION>
CHANGE IN
CHANGE IN NET PORTFOLIO VALUE NET PORTFOLIO VALUE
INTEREST RATES NET PORTFOLIO VALUE AS % OF AS % OF
IN BASIS POINTS ------------------------------ PORTFOLIO VALUE PORTFOLIO VALUE
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE OF ASSETS OF ASSETS
- --------------------- -------- -------- -------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
300 $3,049 $(741) (20)% 18.69% (327)%
200 3,326 (465) (12) 19.96% (200)
100 3,577 (213) (6) 21.07% (89)
Static 3,790 -- -- 21.96% --
(100) 3,958 167 4 22.62% 66
(200) 4,123 332 9 23.25% 129
(300) 4,314 524 14 23.98% 203
</TABLE>
As shown by the table above, increases in interest rates will result in
declines in Oakley's net portfolio value based on Office of Thrift Supervision
calculations as of September 30, 1999, primarily due to Oakley's significant
holdings of long-term fixed-rate loans, as well as its use of the National
Average Contract Mortgage Rate as the index for its adjustable-rate mortgage
loans. The National Average Contract Mortgage Rate is an index which generally
adjusts more slowly to changes in market rates than other indices.
QUALITATIVE ANALYSIS. Oakley has pursued various courses of action in order
to minimize the potential for adverse effects of material changes in interest
rates on its results of operations. Such actions have consisted primarily of the
following:
- Originating adjustable or variable rate long-term loans for portfolio;
- Maintaining adequate liquidity; and
- Maintaining a strong retail deposit base and emphasizing core deposits.
CHANGES IN FINANCIAL CONDITION
Oakley's total assets amounted to $17.0 million at September 30, 1999, a
decrease of $359,000 or 2.1% over 1998 levels. This decrease in total assets
resulted primarily from a $306,000 decrease in deposits from year to year. Cash
and cash equivalents totaled $3.2 million at September 30, 1999, a decrease of
$193,000 or 5.8% from 1998. Total investment and mortgage-backed securities
amounted to $2.5 million at September 30, 1999 remaining relatively unchanged
from year to year. Loans receivable decreased by $77,000 or .7% to
$10.6 million at September 30, 1999, due to higher levels of net repayments as
compared to the prior year.
Deposits decreased by $306,000 or 2.2% during fiscal 1999 to a total of
$13.3 million at September 30, 1999. The decrease resulted from continued
competition with respect to interest rates in the Company's primary marketplace.
Total equity decreased by $25,000 or .9% from September 30, 1998 due primarily
to the $31,000 net loss recorded for the year, which was partially offset by
$6,000 or .5% increase in Oakley's unrealized gain on investment securities
which totaled $1.3 million at September 30, 1999.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND
1998.
GENERAL. Oakley's net loss amounted to $31,000 for the year ended
September 30, 1999 compared to net earnings of $147,000 for the year ended
September 30, 1998. The decrease of $178,000 was
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primarily due to a decrease in other income and an increase in general,
administrative and other expense. These and other significant fluctuations in
Oakley's results of operations are discussed below.
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID. The
following table presents for the periods indicated the total dollar amount of
interest income from Oakley's average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. All average
balances are based on monthly balances. Oakley does not believe that the monthly
averages differ significantly from what the daily averages would be.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE(1) BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(2).......... $10,662 $ 836 7.84% $11,019 $ 924 8.39% $11,095 $ 944 8.51%
Mortgage-backed securities... 95 7 7.37 120 9 7.50 135 10 7.41
Investment securities(3)..... 3,062 80 2.61 2,755 94 3.41 2,277 73 3.21
Interest-earning deposits.... 3,161 168 5.31 2,696 144 5.34 2,182 111 5.09
------- ------ ------- ------ ------- ------
Total interest-earning
assets................... 16,980 1,091 6.43 16,590 1,171 7.06 15,689 1,138 7.25
Noninterest-earning assets..... 226 212 159
------- ------- -------
Total assets............... $17,206 $16,802 $15,848
======= ======= =======
Interest-bearing liabilities:
Passbook accounts.............. $ 1,518 46 3.03 $ 1,600 52 3.25 $ 1,629 51 3.13
Money market deposit
accounts................... 1,862 62 3.33 1,543 54 3.50 1,598 54 3.38
Certificates of deposit........ 10,092 560 5.55 10,246 620 6.05 9,790 580 5.92
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities.............. 13,472 668 4.96 13,389 726 5.42 13,017 685 5.26
------ ------ ------
Noninterest-bearing
liabilities.................. 832 746 614
------- ------- -------
Total liabilities.......... 14,304 14,135 13,631
Retained earnings.............. 2,902 2,667 2,217
------- ------- -------
Total liabilities and
retained earnings........ $17,206 $16,802 $15,848
======= ======= =======
Net interest income; average
interest rate spread......... $ 423 1.47% $ 445 1.64% $ 453 1.99%
====== ==== ====== ==== ====== ====
Net interest margin(4)......... 2.49% 2.68% 2.89%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities.................. 126.04% 123.91% 120.53%
======= ======= =======
</TABLE>
- ------------------------------
(1) At September 30, 1999, the weighted average yields earned and rates paid
were as follows: loans receivable, 7.82%; mortgage-backed securities, 6.38%;
investment securities, 5.44%; other interest-earning assets, 5.24%, total
interest-earning assets, 6.91%; deposits, 4.86%; total interest-bearing
liabilities, 4.86%; and interest rate spread, 2.05%.
(2) Includes non-accruing loans.
(3) Includes Federal Home Loan Bank stock and certificates of deposit with other
financial institutions.
(4) Equals net interest income divided by average interest-earning assets.
RATE/VOLUME ANALYSIS. The following table shows the extent to which changes
in interest rates and changes in volume of interest-related assets and
liabilities affected Oakley's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), and (ii) changes in
rate (change in rate multiplied by prior year volume).
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The combined effect of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
1999 VS. 1998 1998 VS. 1997
-------------------------------- --------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
------------------- INCREASE ------------------- INCREASE
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE)
-------- -------- ---------- -------- -------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............................. $(59) $(29) $(88) $(13) $(7) $(20)
Mortgage-backed securities................... -- (2) (2) -- (1) (1)
Investment securities(1)..................... (23) 9 (14) 5 16 21
Interest-earning deposits.................... -- 24 24 6 27 33
---- ---- ---- ---- --- ----
(82) 2 (80) (2) 35 33
Interest-bearing liabilities:
Passbook accounts............................ (4) (2) (6) 2 (1) 1
Money market deposit accounts................ (3) 11 8 2 (2) --
Certificates of deposit...................... (51) (9) (60) 13 27 40
---- ---- ---- ---- --- ----
Total interest-bearing liabilities......... (58) -- (58) 17 24 41
---- ---- ---- ---- --- ----
Increase (decrease) in net interest income..... $(24) $ 2 $(22) $(19) $11 $ (8)
==== ==== ==== ==== === ====
</TABLE>
- ------------------------
(1) Includes Federal Home Loan Bank stock.
NET INTEREST INCOME. Net interest income decreased $22,000 or 4.9% to
$423,000 for the year ended September 30, 1999 compared to $445,00 for the year
ended September 30, 1998. Such decrease was primarily due to a decrease in the
average interest rate spread to 1.47% for fiscal 1999 compared to 1.64% for
fiscal 1998. For the same time periods, Oakley's net interest margin decreased
from 2.68% to 2.49%.
INTEREST INCOME. Interest income decreased $80,000 or 6.8% between fiscal
1998 and 1999. The decrease was primarily due to a decrease in the yield earned
on loans receivable as well as a decrease in the average outstanding balance of
loans receivable. The average yield on loans receivable decreased from 8.39% for
fiscal 1998 to 7.84% for fiscal 1999 while the average outstanding balance of
such assets decreased $357,000 or 3.2% to $10.7 million for fiscal 1999. Such
decreases were partially offset by an increase in the average outstanding
balance of investment securities and interest-earning deposits. The decrease in
the average balance of loans receivable and the increase in the average balance
of investment securities and interest-earning deposits was due to decreased loan
demand and excess liquidity.
INTEREST EXPENSE. Interest expense decreased $58,000 or 8.0% to $668,000
for fiscal 1999 compared to $726,000 for fiscal 1998. This decrease was
primarily due to a decrease in the rate paid on deposits. The average rate paid
on deposits decreased from 5.42% in fiscal 1998 to 4.96% in fiscal 1999.
PROVISION FOR LOSSES ON LOANS. It is Oakley's policy to provide valuation
allowances for estimated losses on loans based on past loss experience, trends
in the level of delinquent and problem loans, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in Oakley's primary
lending area. When the collection of a loan becomes doubtful, or otherwise
troubled, Oakley records a loan charge-off equal to the difference between the
fair value of the property securing the loans and the loan's carrying value.
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Major loans and major lending areas are reviewed periodically to determine
potential problems at an early date. The allowance for loan losses is increased
by charges to earnings and decreased by charge-offs (net of recoveries).
For the years ended September 30, 1999 and 1998, the provision for losses on
loans amounted to $25,000 and $0, respectively. The increase in the provision
during fiscal 1999 was due to an increase in Oakley's nonperforming loans, which
was due primarily to an increase in non-accrual residental real estate loans
from none at September 30, 1998, to approximately $38,000 at September 30, 1999.
In addition, the increase was due to growth in origination of multi-family and
commercial real estate loans which typically have a higher degree of credit
risk. While no assurance can be given that future charge-offs and/or additional
provisions will not be necessary, management of Oakley believes that, as of
September 30, 1999, the allowance for loan losses was adequate.
OTHER INCOME. Other income amounted to $4,000 and $96,000 for fiscal 1999
and 1998, respectively. The decrease of $92,000 between fiscal 1998 and 1999 was
due to a decrease in gain on sale of investment securities. During fiscal 1998,
Oakley sold $93,000 of investment securities designated as available for sale.
Oakley did not conduct any such sales in fiscal 1999.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expenses consist of employee compensation and benefits, occupancy and
equipment, franchise taxes and other miscellaneous operating expenses. General,
administrative and other expense amounted to $457,000 for fiscal 1999 compared
to $325,000 for fiscal 1998. The $132,000 or 40.6% increase was primarily due to
an increase of $121,000 or 48.4% in employee compensation and benefits as a
result of the adoption of a directors' deferred compensation plan totalling
$70,000 increased expense from additional retirement liability totalling
approximately $30,000 and the hiring of a new managing officer and normal salary
and merit increases that comprise the remaining $21,000.
INCOME TAXES. Income taxes (credits) amounted to a $24,000 credit in fiscal
1999 compared to a provision of $69,000 for fiscal 1998.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
1997.
GENERAL. Oakley's net earnings amounted to $147,000 in fiscal 1998 compared
to $127,000 in fiscal 1997. The increase of $20,000 or 15.7% was primarily due
to an increase in total other income. Such increase was partially offset by an
increase in income taxes.
NET INTEREST INCOME. Net interest income decreased $8,000 or 1.8% to
$445,000 for fiscal 1998 from $453,000 for fiscal 1997. Oakley's interest rate
spread decreased from 1.99% for fiscal 1997 to 1.64% for fiscal 1998 while the
ratio of average interest-earning assets to average interest-bearing liabilities
increased from 120.53% to 123.91% during the same periods. Oakley's net interest
margin decreased to 2.68% for fiscal 1998 from 2.89% for fiscal 1997.
INTEREST INCOME. Interest income increased $33,000 or 2.9% from
$1.1 million for fiscal 1997 to $1.2 million for fiscal 1998. The increase was
due primarily to an increase in the average outstanding balance of investment
securities and interest-earning deposits as Oakley invested some of its excess
liquid funds.
INTEREST EXPENSE. Interest expense amounted to $726,000 and $685,000 for
the years ended September 30, 1998 and 1997, respectively. The increase of
$41,000 or 6.0% was primarily due to an increase in the average outstanding
balance of certificates of deposit as well as the rate paid on such liabilities.
The average outstanding balance of certificates of deposit increased $456,000 or
4.7%. The rate paid on certificates of deposit increased from 5.92% in fiscal
1997 to 6.05% in fiscal 1998.
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OTHER INCOME. Other income increased from $6,000 in fiscal 1997 to $96,000
in fiscal 1998. The increase of $90,000 in fiscal 1997 was due to gain on sale
of investment securities.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES. General, administrative and
other expenses amounted to $325,000 for fiscal 1998 compared to $309,000 for
fiscal 1997. The increase of $16,000 or 5.2% was primarily due to an increase of
$12,000 or 5.0% in employee compensation and benefits as a result of normal
salary and merit increases.
INCOME TAXES. Income taxes amounted to $69,000 and $22,000 for fiscal 1998
and 1997, respectively, resulting in effective tax rates of 31.9% and 14.8%,
respectively. The lower effective tax rate in fiscal 1997 was due to the use of
a net operating loss carryback from 1999 of $26,000.
LIQUIDITY AND CAPITAL RESOURCES
Oakley is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current regulations require that a savings institution maintain liquid assets of
not less than 4% of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. At September 30, 1999,
Oakley's liquidity was 45.7% or $5.6 million in excess of the minimum
requirement.
At September 30, 1999, Oakley had outstanding commitments to originate
$41,000 of loans and $540,000 of undisbursed construction loans. In addition, as
of September 30, 1999, the total amount of certificates of deposit which were
scheduled to mature in the following 12 months was $7.2 million. Oakley believes
that it has adequate resources to fund all of its commitments and that it can
adjust the rate on certificates of deposit to retain deposits in changed
interest rate environments. If Oakley requires funds beyond its internal funding
capabilities, advances from the Federal Home Loan Bank of Cincinnati are
available as an additional source of funds.
Oakley is required to maintain regulatory capital sufficient to meet
tangible, core and risk-based capital ratios of at least 1.5%, 3.0% and 8.0%,
respectively. At September 30, 1999, Oakley exceeded each of its capital
requirements, with tangible, core and risk-based capital ratios of 10.8%, 10.8%
and 26.3%, respectively. See Note I of Notes to Oakley's Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
Oakley's financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles,
which generally require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial companies,
virtually all of Oakley's assets and liabilities are monetary in nature. As a
result, interest rates generally have a more significant impact on Oakley's
performance than does the effect of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services, since such prices are affected by inflation to a larger extent than
interest rates.
RECENT ACCOUNTING STANDARDS
On January 1, 1998, Oakley adopted the provisions of Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME. This statement
establishes standards for reporting and display of comprehensive income and its
components. Comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct entries to net
worth, such as the mark to market adjustment on securities available for sale.
For Oakley, comprehensive income represents net income plus other comprehensive
income, which consists of the net change in after-tax unrealized gains or losses
on securities available for sale for the period.
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Accumulated other comprehensive income in the accompanying statements of
financial condition represents the net unrealized gains or losses on securities
available for sale as of the reporting dates. Comprehensive income (loss) for
fiscal 1999, 1998 and 1997 was $(25,000), $496,000 and $404,000, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. Statement of Financial Accounting Standards
No. 131 requires public companies to report financial and other information
about key revenue producing segments of the entity for which such information is
available and is utilized by the chief operating officer. Specific information
to be reported for individual segments includes profit or loss, certain specific
revenue and expense items, and total assets. A reconciliation of segment
financial information to amounts reported in the financial statements is also
provided. As a community-oriented financial institution, substantially all of
Oakley's operations involve the delivery of loan and deposit products to
customers. Management makes operating decisions and assesses performance based
on an ongoing review of these community banking operations, which constitute
Oakley's only operating segment for financial reporting purposes. Therefore, the
adoption of Statement of Financial Accounting Standards No. 131 did not result
in any change in reporting.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POST RETIREMENT BENEFITS, in February 1998. This statement revises employers'
disclosures about pension and other post retirement benefit plans. It does not
change the measurement or the recognition of these benefit costs for plans. The
statement was effective for Oakley's fiscal year 1998 reporting and did not
impact Oakley's financial position or results of operations.
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued in June 1998. This
statement requires that all derivatives be recognized as either assets or
liabilities in the statement of financial condition and that those instruments
be measured at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. This statement, as amended by
Statement of Financial Accounting Standards No. 137, is effective for fiscal
years beginning after June 15, 2000, although earlier adoption is permitted.
Oakley anticipates, based on current activities, that the adoption of Statement
of Financial Accounting Standards No. 133 will not have an effect on its
financial position or results of operations.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, ACCOUNTING FOR MORTGAGE-BACKED
SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY
A MORTGAGE BANKING ENTERPRISE, WHICH AMENDS STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 65, ACCOUNTING FOR CERTAIN MORTGAGE BANKING ACTIVITIES. This
statement conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with the
accounting for such securities by a non-mortgage banking enterprise. This
statement is effective for the first quarter beginning after December 15, 1998,
and did not have any impact on Oakley's financial position or results of
operations as Oakley does not currently securitize mortgage loans.
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HARVEST HOME FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
The following Consolidated Statements of Earnings of Harvest Home Financial
for the years ended September 30, 1999, 1998 and 1997 are a part of the audited
financial statements of Harvest Home Financial which appear beginning on page
F-41 of this prospectus-proxy statement. You should read these Consolidated
Statements of Earnings with the Consolidated Financial Statements and Notes of
Harvest Home Financial and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Harvest Home Financial" included in this
prospectus-proxy statement.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C> <C>
Interest income:
Loans..................................................... $3,748 $3,571 $3,457
Mortgage-backed securities................................ 2,126 2,085 1,654
Investment securities..................................... 417 504 734
Interest-bearing deposits and other....................... 191 207 138
------ ------ ------
Total interest income................................... 6,482 6,367 5,983
Interest expense:
Deposits.................................................. 3,001 2,922 2,786
Borrowings.............................................. 1,210 1,221 903
------ ------ ------
Total interest expense.................................. 4,211 4,143 3,689
------ ------ ------
Net interest income................................... 2,271 2,224 2,294
Provision for losses on loans............................... 12 12 9
------ ------ ------
Net interest income after provision for losses on
loans............................................... 2,259 2,212 2,285
Other income:
Gain on sale of investment and mortgage-backed
securities.............................................. -- 43 7
Other operating income.................................... 92 66 57
------ ------ ------
Total other income...................................... 92 109 64
General, administrative and other expense:
Employee compensation and benefits........................ 884 851 803
Occupancy and equipment................................... 205 184 170
Federal deposit insurance premiums........................ 37 36 28
Franchise taxes........................................... 115 124 121
Data processing........................................... 107 98 87
Other operating expense................................... 224 223 200
------ ------ ------
Total general, administrative and other expense......... 1,572 1,516 1,409
------ ------ ------
Earnings before income taxes.......................... 779 805 940
Federal income taxes:
Current................................................... 219 241 130
Deferred.................................................. 46 23 183
------ ------ ------
Total federal income taxes.............................. 265 264 313
------ ------ ------
Net earnings.......................................... $ 514 $ 541 $ 627
====== ====== ======
Earnings per share:
Basic..................................................... $ 0.60 $ 0.63 $ 0.71
====== ====== ======
Diluted................................................... $ 0.59 $ 0.60 $ 0.70
====== ====== ======
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF HARVEST HOME FINANCIAL
GENERAL
Since its formation, Harvest Home Financial's activities have been primarily
limited to holding the stock of Harvest Home Savings Bank. As a result, the
discussion that follows focuses largely on the operations of Harvest Home
Savings Bank.
Harvest Home Savings Bank's operating results are dependent to a significant
degree on its net interest income, which is the difference between interest
income on loans and investments and interest expense on deposits and borrowings.
Like most thrift institutions, the interest income and interest expense of
Harvest Home Savings Bank changes as interest rates fluctuate and assets and
liabilities reprice. Interest rates may fluctuate because of general economic
conditions, the policies of various regulatory authorities and other factors
beyond Harvest Home Savings Bank's control. Assets and liabilities will reprice
in accordance with the contractual terms of the asset or liability instrument
and in accordance with customer reaction to general economic trends.
Harvest Home Savings Bank's interest-earning assets repricing within one
year after September 30, 1999, are greater than interest-bearing liabilities
repricing within the same period by approximately $1.7 million, resulting in a
positive cumulative one-year gap of 1.7% of total assets. Harvest Home Savings
Bank's interest-earning assets repricing within three years of September 30,
1999, were $3.6 million greater than interest bearing liabilities repricing
during the same period, resulting in a positive cumulative gap for such period
of 3.7% of total assets.
In the event that interest rates rise during the forthcoming year, Harvest
Home Savings Bank's positive cumulative one-year gap may have a positive effect
on earnings because interest-earning assets may reprice at a faster pace than
interest-bearing liabilities. However, rising interest rates could also affect
Harvest Home Savings Bank's earnings in a negative manner as a result of
diminished loan demand and the increased risk of delinquencies resulting from
increased payment amounts on adjustable-rate loans.
Harvest Home Savings Bank's earnings are also vulnerable to changes in
interest rates due to the amount of adjustable-rate mortgage loans originated
with low margins and adjustment caps. Harvest Home Savings Bank originates
adjustable rate mortgage loans which provide for interest rate adjustments every
three years. Moreover, many of these loans have adjustment caps of 2% in any
three year period. Therefore, if interest rates rise rapidly, Harvest Home
Savings Bank may be unable to increase the interest rates on such loans as
rapidly as the cost of liabilities increase.
Notwithstanding the foregoing risks, Harvest Home Savings Bank is operating
within management's predetermined level of interest rate risk and management
believes that Harvest Home Savings Bank's interest rate risk posture and the
strategies discussed below will result in Harvest Home Savings Bank maintaining
acceptable operating results in the current interest rate environment.
ASSET AND LIABILITY MANAGEMENT
QUALITATIVE ANALYSIS. Harvest Home Savings Bank's interest rate spread is
the principal determinant of income. The interest rate spread, and therefore net
interest income, can vary considerably over time because asset and liability
repricing do not coincide. Moreover, the long-term or cumulative effect of
interest rate changes can be substantial. Interest rate risk is defined as the
sensitivity of an institution's earnings and net asset values to changes in
interest rates. In managing its interest rate risk, Harvest Home Savings Bank
begins with an objective to increase the interest rate sensitivity of its assets
by originating loans with interest rates subject to period adjustment and market
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conditions and/or shorter maturities. Harvest Home Savings Bank has historically
had to rely primarily upon retail deposit accounts as a source of funds and
intends to continue to do so. Management believes that reliance on retail
deposit accounts as a source of funds compared to brokered deposits and
long-term borrowings may reduce the effects of interest rate fluctuations
because these deposits generally represent a more stable source of funds.
However, Harvest Home Savings Bank has utilized Federal Home Loan Bank advances
as a source of financing to fund purchases of certain mortgage-backed securities
when favorable spreads became available.
QUALITATIVE ANALYSIS. The following table sets forth the amounts of
interest-earning assets and interest-bearing liabilities outstanding at
September 30, 1999, which are expected to reprice or mature in each of the
future periods shown. The analysis of this interest-rate sensitivity, which is
prepared quarterly by a financial advisory firm for Harvest Home Savings Bank,
incorporates the assumptions set forth below.
<TABLE>
<CAPTION>
WITHIN SIX SIX MONTHS TO OVER 10
MONTHS ONE YEAR 1-3 YEARS 3-5 YEARS 5-10 YEARS YEARS TOTAL
---------- ------------- --------- --------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans:
Adjustable Rate(1)............ $ 6,173 $13,235 $ -- $ -- $ -- $ -- $19,408
Fixed Rate(2)................. 2,842 2,491 6,686 4,718 6,872 3,039 26,648
Non-residential adjustable
rate(1)..................... 1,742 3,630 -- -- -- -- 5,372
Other loans:
Home equity................... 1,480 -- -- -- -- -- 1,480
Consumer...................... 20 -- -- -- -- -- 20
Investments(3).................. 1,823 -- 6,000 -- -- -- 7,823
Mortgage-backed securities...... 27,628 2,442 4,645 -- -- -- 34,715
------- ------- ------- ------- ------ ------ -------
Total rate sensitive
assets.................... $41,708 $21,798 $17,331 $ 4,718 $6,872 $3,039 $95,466
======= ======= ======= ======= ====== ====== =======
Interest-bearing liabilities
Deposits:
Certificates of deposit(4).... $ 9,502 $24,871 $ 9,097 $ 3,570 $ -- $ -- $47,040
Money market accounts(5)...... 649 562 1,591 895 877 273 4,847
NOW accounts.................. 564 489 1,382 777 762 237 4,211
Passbook accounts............. 1,370 1,186 3,355 1,887 1,851 575 10,224
Federal Home Loan Bank
advances...................... 19,100 3,500 -- -- -- -- 22,600
------- ------- ------- ------- ------ ------ -------
Total rate sensitive
liabilities............... $31,185 $30,608 $15,425 $ 7,129 $3,490 $1,085 $88,922
======= ======= ======= ======= ====== ====== =======
Interest rate sensitivity gap..... $10,523 $(8,810) $ 1,906 $(2,411) $3,382 $1,954 $ 6,544
======= ======= ======= ======= ====== ====== =======
Cumulative interest rate
sensitivity gap................. $10,523 $ 1,713 $ 3,619 $ 1,208 $4,590 $6,544 $ 6,544
======= ======= ======= ======= ====== ====== =======
Cumulative interest rate
sensitivity gap as a percent of
total assets.................... 10.64% 1.73% 3.66% 1.22% 4.64% 6.61% 6.61%
======= ======= ======= ======= ====== ====== =======
</TABLE>
- ------------------------
(1) Includes all adjustable rate mortgage loans and mortgage-backed securities
based on contractual term to repricing.
(2) Includes all fixed-rate mortgage loans and mortgage-backed securities which
are assumed to reprice in accordance with prepayment assumptions supplied by
Harvest Home Savings Banks'
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asset/liability management software provider. Such prepayment assumptions
have been derived from prepayment assumption models previously utilized by
the Office of Thrift Supervision.
(3) Includes all investment securities, interest-bearing deposits and federal
funds sold.
(4) Certificates of deposit are shown repricing based on contractual terms to
maturity.
(5) Based on assumptions supplied by Harvest Home Savings Banks' asset/liability
management provider, money market deposits, NOW accounts and passbook
accounts are assumed to decay over a five-year period.
Savings banks have historically presented a gap analysis as a measure of
interest rate risk. The gap analysis presents the projected maturities and
periods to repricing of a savings bank's rate sensitive assets and liabilities.
As set forth above, Harvest Home Savings Bank's cumulative one-year gap, which
represents the difference between the amount of interest sensitive assets
maturing or repricing in one year and the amount of interest sensitive
liabilities maturing or repricing in the same period, was a positive 1.7% of
total assets at September 30, 1999. A positive cumulative gap indicates that
interest sensitive assets exceed interest sensitive liabilities at a specific
date. In a rising interest rate environment, institutions with positive
repricing or maturity gaps generally experience a more rapid increase in
interest income earned on assets than the interest expense paid on liabilities.
Conversely, in an environment of falling interest rates, interest income earned
on assets will generally decrease more rapidly than the interest expense paid on
liabilities. A negative gap will have the opposite effect. Harvest Home Savings
Bank's one to three year gap was a positive 3.7% (of total assets), while all
other maturities greater than three years reflected a positive gap of 3.0% of
total assets. The foregoing totals have been based on certain prepayment and
repricing data that may not reflect actual performance in a rapidly rising or
declining interest rate environment.
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, Harvest Home Financial's operations and
Harvest Home Financial's actual results could differ significantly from those
discussed in the forward-looking statements. Some of the factors that could
cause or contribute to such differences are discussed herein but also include
changes in the economy and interest rates in the nation and Harvest Home
Financial's market area generally.
Some of the forward-looking statements included herein are the statements
regarding management's determination of the amount and adequacy of the allowance
for loan losses, the effect of the year 2000 on information technology systems
and the effect of recent accounting pronouncements.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 1998 TO SEPTEMBER 30, 1999
Harvest Home Financial's assets totaled $98.9 million at September 30, 1999,
an increase of $2.0 million, or 2.1%, over September 30, 1998 levels. The
increase in total assets was funded primarily by a $6.0 million increase in
deposits, partially offset by a $3.3 million decrease in Federal Home Loan Bank
advances.
Cash, federal funds sold and interest-bearing deposits in other financial
institutions totaled $2.8 million at September 30, 1999, a decrease of $38,000,
or 1.3%, from 1998 levels. Federal funds sold decreased by $100,000, while
interest-bearing deposits and cash increased by $62,000, or 2.3%, during 1999.
Investment securities totaled $6.0 million at September 30, 1999, an increase of
$1.9 million, or 47.6%, over the balance at September 30, 1998. This increase
resulted primarily from the purchase of $6.0 million of investment securities,
offset by the maturity of $4.0 million of investment securities during the 1999
period.
Mortgage-backed securities decreased by $4.2 million, or 11.0%, to a total
of $33.7 million at September 30, 1999, compared to September 30, 1998, as
principal repayments of $15.0 million
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exceeded purchases of $12.0 million. During fiscal 1999, management purchased
$8.0 million of long-term, adjustable-rate U.S. Government agency collateralized
mortgage obligations with a weighted-average yield of 6.38%. Such purchases were
funded with proceeds from Federal Home Loan Bank advances. Additionally, Harvest
Home Savings Bank acquired $4.0 million of intermediate-term U. S. Government
agency collateralized mortgage obligations at a fixed rate of 5.50%.
Loans receivable increased by $4.0 million, or 8.2%, to a total of
$52.8 million at September 30, 1999, compared to September 30, 1998 levels. Loan
disbursements totaled $15.8 million during fiscal 1999, as compared to
$13.9 million during fiscal 1998, and were partially offset by principal
repayments totaling $11.9 million. Growth in the loan portfolio consisted
primarily of one- to four-family residential and construction loans, which
increased by $3.2 million, or 6.9%, year to year.
At September 30, 1999, Harvest Home Savings Bank's allowance for loan losses
totaled $139,000, representing .25% of total loans and 556.0% of nonperforming
loans. At September 30, 1998, the allowance for loan losses totaled $127,000, or
.25% of total loans, and 259.2% of nonperforming loans. Nonperforming loans
amounted to $25,000, or .1%, and $49,000, or .1%, of total assets at
September 30, 1999 and 1998, respectively. Although Harvest Home Financial's
management believes that its allowance for loan losses at September 30, 1999,
was adequate based on the available facts and circumstances, there can be no
assurance that additions to such allowance will not be necessary in future
periods, which could adversely affect Harvest Home Savings Bank's results of
operations.
Deposits totaled $66.2 million at September 30, 1999, an increase of
$6.0 million, or 10.0%, over the $60.2 million total at September 30, 1998.
Harvest Home Savings Bank has historically sought to maintain a moderate rate of
deposit growth through marketing and pricing strategies. The increase in
deposits during fiscal 1999 can be attributed primarily to consolidation in the
financial services industry in Harvest Home Savings Bank's market area, and
consumers' preference for conducting financial business with a smaller,
locally-owned institution.
Federal Home Loan Bank advances totaled $22.6 million at September 30, 1999,
a decrease of $3.3 million, or 12.6%, from September 30, 1998, as repayments of
mortgage-backed securities were used to repay advances. At September 30, 1999,
the advances carried a 5.23% weighted-average interest rate and are scheduled to
mature through fiscal 2008.
Stockholders' equity totaled $9.7 million at September 30, 1999, a decrease
of $324,000, or 3.2%, from September 30, 1998 levels. The decrease resulted
primarily from cash dividends paid totaling $376,000, coupled with an increase
of $781,000 in unrealized losses on securities designated as available for sale,
which were partially offset by net earnings of $514,000, amortization of stock
benefit plan expense of $197,000, and the exercise of stock options totaling
$122,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
1999 AND 1998
GENERAL. Net earnings for the year ended September 30, 1999, totaled
$514,000, a decrease of $27,000, or 5.0%, from the $541,000 in net earnings
reported for the fiscal year ended September 30, 1998. The decrease in net
earnings resulted primarily from a $56,000 increase in general administrative
and other expense, coupled with a $17,000 decrease in other income, which were
partially offset by a $47,000 increase in net interest income.
NET INTEREST INCOME. Total interest income amounted to $6.5 million for the
fiscal year ended September 30, 1999, an increase of $115,000, or 1.8%, over
fiscal 1998. Interest income on loans totaled $3.7 million in fiscal 1999, an
increase of $177,000, or 5.0%. This increase was due primarily to a
$3.7 million, or 7.9%, increase in the weighted-average balance outstanding,
which was partially offset by a 21 basis point decrease in weighted-average
yield, to 7.49% in 1999. Interest income on mortgage-backed securities increased
by $41,000, or 2.0%, as a result of a $2.9 million increase in the weighted-
average balance outstanding, which was partially offset by a 38 basis point
decrease in weighted-average
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yield, to 5.86% in fiscal 1999. Interest income on investment securities and
interest-bearing deposits decreased by $103,000, or 14.5%, due to a $515,000, or
4.7%, decrease in the weighted-average balance outstanding, coupled with a 64
basis point decrease in weighted-average yield, to 5.85% in fiscal 1999.
Interest expense totaled $4.2 million for the fiscal year ended
September 30, 1999, an increase of $68,000, or 1.6%, over the $4.1 million total
recorded in fiscal 1998. Interest expense on deposits increased by $79,000, or
2.7%, due to a $5.1 million, or 8.5%, increase in the weighted-average balance
outstanding, which was partially offset by a 27 basis point decrease in the
weighted-average cost of funds, to 4.61% during fiscal 1999. Interest expense on
borrowings totaled $1.2 million during fiscal 1999, a decrease of $11,000 from
fiscal 1998, due to a decrease of 54 basis points in the weighted-average
interest rate, to 5.08% during fiscal 1999, partially offset by a $2.1 million
increase in the weighted-average balance of advances outstanding from the
Federal Home Loan Bank.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $47,000, or 2.1%, from $2.2 million
for the fiscal year ended September 30, 1998, to $2.3 million for fiscal 1999.
The interest rate spread increased by 1 basis point during fiscal 1999 to 1.96%,
while the net interest margin declined by 10 basis points year-to-year,
amounting to 2.35% in fiscal 1999.
PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is charged to
earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Harvest Home Savings Bank, the status of past due
principal and interest payments, general economic conditions, particularly as
such conditions relate to the Harvest Home Savings Bank's market area, and other
factors related to the collectibility of the Harvest Home Savings Bank's loan
portfolio. As a result of such analysis, management recorded a $12,000 provision
for losses on loans during each of the fiscal years ended September 30, 1999 and
1998. The provisions for each of the fiscal years 1999 and 1998 have been
predicated primarily upon stable growth in Harvest Home Savings Bank's
residential real estate loan portfolio, and a declining level of non performing
loans. There can be no assurance that the allowance for loan losses of the
Harvest Home Savings Bank will be adequate to cover losses on nonperforming
assets in the future.
OTHER INCOME. Other income decreased by $17,000, or 15.6%, from $109,000
for the fiscal year ended September 30, 1998 to $92,000 for fiscal 1999. The
decrease was primarily due to the absence of the $43,000 gain on sale of
mortgage-backed securities recorded in fiscal 1998, partially offset by a
$20,000 increase in NOW account fees.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense increased by $56,000, or 3.7%, to a total of $1.6 million for the
year ended September 30, 1999, as compared to $1.5 million for fiscal 1998. The
increase resulted primarily from an increase of $33,000, or 3.9%, in employee
compensation and benefits and a $21,000, or 11.4%, increase in occupancy and
equipment expense. The increase in employee compensation and benefits resulted
from normal merit increases and an increase in staffing levels, while the
increases in occupancy and equipment resulted from the addition of new computer
technology.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled
$265,000 for the fiscal year ended September 30, 1999, an increase of $1,000
from the $264,000 total in fiscal 1998. The effective tax rates for the years
ended September 30, 1999 and 1998 were 34.0% and 32.8%, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
1998 AND 1997
GENERAL. Net earnings for the year ended September 30, 1998, totaled
$541,000, a decrease of $86,000, or 13.7%, from the $627,000 in net earnings
reported for the fiscal year ended September 30, 1997. The decrease in net
earnings resulted primarily from a $70,000 decline in net interest income,
coupled with a $107,000 increase in general administrative and other expense,
which were partially
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<PAGE>
offset by a $45,000 increase in other income and a $49,000 decrease in the
provision for federal income taxes.
NET INTEREST INCOME. Total interest income amounted to $6.4 million for the
fiscal year ended September 30, 1998, an increase of $384,000, or 6.4%, over
fiscal 1997. Interest income on loans totaled $3.6 million in fiscal 1998, an
increase of $114,000, or 3.3%. This increase was due primarily to a
$2.5 million increase in the weighted-average balance outstanding, which was
offset by a 17 basis point decrease in weighted-average yield, to 7.70% in 1998.
Interest income on mortgage-backed securities increased by $431,000, or 26.1%,
as a result of a $7.4 million increase in the weighted-average balance
outstanding, which was partially offset by a 14 basis point decrease in
weighted-average yield, to 6.24% in fiscal 1998. Interest income on investment
securities and interest-bearing deposits decreased by $161,000, or 18.5%, due
primarily to a $2.5 million decrease in the weighted-average balance
outstanding.
Interest expense totaled $4.1 million for the fiscal year ended
September 30, 1998, an increase of $454,000, or 12.3%, over the $3.7 million
total recorded in fiscal 1997. Interest expense on deposits increased by
$136,000, or 4.9%, due primarily to a 6 basis point increase in the
weighted-average cost of funds, to 4.87% during fiscal 1998. Interest expense on
borrowings totaled $1.2 million during fiscal 1998, an increase of $318,000 over
fiscal 1997, due to the previously discussed $6.1 million increase in the
weighted-average balance of advances outstanding from the Federal Home Loan
Bank.
As a result of the foregoing changes in interest income and interest
expense, net interest income decreased by $70,000, or 3.1%, from $2.3 million
for the fiscal year ended September 30, 1997, to $2.2 million for fiscal 1998.
The interest rate spread declined by 22 basis points during fiscal 1998 to
1.95%, while the net interest margin declined by 31 basis points year-to-year,
amounting to 2.45% in fiscal 1998.
PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is charged to
earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Harvest Home Savings Bank, the status of past due
principal and interest payments, general economic conditions, particularly as
such conditions relate to the Harvest Home Savings Bank's market area, and other
factors related to the collectibility of the Harvest Home Savings Bank's loan
portfolio. As a result of such analysis, management recorded a $12,000 provision
for losses on loans during the fiscal year ended September 30, 1998, as compared
to $9,000 for fiscal 1997. There can be no assurance that the allowance for loan
losses of the Harvest Home Savings Bank will be adequate to cover losses on
nonperforming assets in the future.
OTHER INCOME. Other income increased by $45,000, or 70.0%, from $64,000 for
the fiscal year ended September 30, 1997 to $109,000 for fiscal 1998. The
increase was due primarily to a $36,000 increase in gain on sale of investment
and mortgage-backed securities during the year.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense increased by $107,000, or 7.6%, to a total of $1.5 million for the
year ended September 30, 1998, as compared to $1.4 million for fiscal 1997. The
increase resulted primarily from an increase of $48,000, or 6.0%, in employee
compensation and benefits, a $14,000, or 8.2%, increase in occupancy and
equipment expense and a $23,000, or 11.5% increase in other operating expenses.
The increase in employee compensation and benefits resulted from normal merit
increases and additional staffing levels, while the increases in occupancy and
equipment resulted from the addition of new computer technology and other
related corporate expenses, respectively.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled
$264,000 for the fiscal year ended September 30, 1998, a decrease of $49,000
from the $313,000 total in fiscal 1997. The decrease resulted primarily from a
$135,000, or 14.4%, decrease in pre-tax earnings. The effective tax rates for
the years ended September 30, 1998 and 1997 were 32.8% and 33.3%, respectively.
101
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AVERAGE YIELD ANALYSIS. The following table presents for the periods
indicated, the total amount of interest income from average interest-earning
assets and the resulting yields, and the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates, and the net
interest margin. Balances are based on average monthly balances which, in the
opinion of management, do not differ materially from daily balances.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
---------------- ---------------------------------------------------------------------
1999 1999 1998
---------------- --------------------------------- ---------------------------------
WEIGHTED AVERAGE INTEREST AVERAGE INTEREST
AVERAGE OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
INTEREST RATE BALANCE PAID RATE BALANCE PAID RATE
---------------- ----------- -------- -------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable................. 7.25 $50,060 $3,748 7.49% $46,391 $3,571 7.70%
Mortgage-backed securities....... 6.13 36,286 2,126 5.86 33,391 2,085 6.24
Investment securities............ 5.50 5,046 301 5.97 5,900 402 6.81
Interest-bearing deposits and
other.......................... 5.32 5,347 307 5.74 5,008 309 6.17
---- ------- ------ ------ ------- ------ ------
Total interest-earning
assets....................... 96,739 6,482 6.70 90,690 6,367 7.02
Non-interest-earning assets........ 3,161 2,031
------- -------
Total assets................... $99,900 $92,721
======= =======
Interest-bearing liabilities:
Deposits
NOW accounts..................... 1.93 $ 3,997 75 1.88 $ 3,533 77 2.18
Passbook....................... 2.53 9,926 250 2.52 9,264 250 2.70
Money market demand deposits... 3.00 4,398 132 3.00 4,354 130 2.99
Certificates................... 5.25 46,745 2,544 5.44 42,814 2,465 5.76
Borrowings....................... 5.23 23,827 1,210 5.08 21,738 1,221 5.62
---- ------- ------ ------ ------- ------ ------
Total interest-bearing
liabilities.................. 88,893 4,211 4.74 81,703 4,143 5.07
------ ------ ------ ------
Non-interest-bearing liabilities... 1,003 770
------- -------
Total liabilities.............. 89,896 82,473
Stockholders' equity............... 10,004 10,248
------- -------
Total liabilities and
stockholders' equity........... $99,900 $92,721
------- -------
Net interest income; interest rate
spread (1)....................... $2,271 1.96% $2,224 1.95%
------ ------ ------ ------
Net yield (net interest income as a
percent of average interest-
earning assets).................. 2.35% 2.45%
------ ------
Ratio of average interest-earning
assets to average interest-
bearing liabilities.............. 108.83% 111.00%
------ ------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1997
---------------------------------
AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable................. $43,929 $3,457 7.87%
Mortgage-backed securities....... 25,938 1,654 6.38
Investment securities............ 9,846 675 6.86
Interest-bearing deposits and
other.......................... 3,538 197 5.57
------- ------ ------
Total interest-earning
assets....................... 83,251 5,983 7.19
Non-interest-earning assets........ 2,153
-------
Total assets................... $85,404
=======
Interest-bearing liabilities:
Deposits
NOW accounts..................... $ 3,477 110 3.16
Passbook....................... 9,057 252 2.78
Money market demand deposits... 4,436 144 3.25
Certificates................... 40,909 2,280 5.57
Borrowings....................... 15,615 903 5.78
------- ------ ------
Total interest-bearing
liabilities.................. 73,494 3,689 5.02
------ ------
Non-interest-bearing liabilities... 1,608
-------
Total liabilities.............. 75,102
Stockholders' equity............... 10,302
-------
Total liabilities and
stockholders' equity........... $85,404
-------
Net interest income; interest rate
spread (1)....................... $2,294 2.17%
------ ------
Net yield (net interest income as a
percent of average interest-
earning assets).................. 2.76%
------
Ratio of average interest-earning
assets to average interest-
bearing liabilities.............. 113.28%
------
</TABLE>
- ------------------------------
(1) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
102
<PAGE>
RATE/VOLUME TABLE. The following table describes the extent to which
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected Harvest Home Financial's interest
income and expense during the fiscal years indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (change in volume
multiplied by prior year rate), (ii) changes in rate (change in rate multiplied
by prior year volume), and (iii) total changes in rate and volume. The combined
effects of changes in both volume and rate, which cannot be separately
identified, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1999 V. 1998 1998 V. 1997
------------------------------------ ------------------------------------
INCREASE INCREASE
(DECREASE) DUE TO (DECREASE) DUE TO
---------------------- ----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable......................... $276 $ (99) $177 $190 $(76) $114
Mortgage-backed securities............... 175 (134) 41 469 (38) 431
Investment securities.................... (54) (47) (101) (269) (4) (273)
Other interest-earning assets(1)......... 21 (23) (2) 87 25 112
---- ----- ---- ---- ---- ----
Total interest income.................. 418 (303) 115 477 (93) 384
Interest expense attributable to:
Deposits(2).............................. 240 (161) 79 100 36 136
Borrowings............................... 112 (123) (11) 345 (27) 318
---- ----- ---- ---- ---- ----
Total interest expense................. 352 (284) 68 445 9 454
---- ----- ---- ---- ---- ----
Increase (decrease) in net interest
income................................... $ 47 $(70)
==== ====
</TABLE>
- ------------------------
(1) Includes interest-bearing deposits in other financial institutions and other
interest-earning assets.
(2) Includes interest-bearing escrow deposits.
LIQUIDITY AND CAPITAL RESOURCES. Harvest Home Savings Bank's principal
sources of funds are deposits, repayments on loans and mortgage-backed
securities, maturities of investment securities, and funds provided by
operations. While scheduled loan and mortgage-backed securities amortization and
maturing interest-bearing deposits and investment securities are relatively
predictable sources of funds, deposit flows and loan and mortgage-backed
securities prepayments are greatly influenced by economic conditions, the
general level of interest rates, and competition. The particular sources of
funds utilized by Harvest Home Savings Bank from time to time are selected based
on comparative costs and availability.
The FDIC requires savings banks to maintain a level of investments in
specified types of liquid assets sufficient to protect and ensure the safety and
soundness of the Harvest Home Savings Bank. The FDIC has no specific minimum
guideline for liquidity.
The primary investing activities of Harvest Home Savings Bank include
investing in loans, mortgage-backed securities and investment securities. Such
investments are funded primarily from loans and mortgage-backed securities
repayments, increases in customer deposit liabilities and borrowings from the
Federal Home Loan Bank. During the fiscal year ended September 30, 1999, loan
originations totaled $15.8 million and purchases of mortgage-backed and
investment securities totaled $18.0 million, representing the deployment of
funds from deposit growth, proceeds from Federal Home Loan Bank advances and
proceeds from maturity of investment securities. Customer deposits increased
during the
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<PAGE>
fiscal year ended September 30, 1999, by $6.0 million and increased during the
fiscal year ended September 30, 1998 by $1.4 million.
The FDIC has adopted risk-based capital ratio guidelines to which Harvest
Home Savings Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk weighted categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
I") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debts and the allowance for loan and lease losses, subject to
certain limitations, less required deductions. Savings banks are required to
maintain a total risk-based capital (the sum of Tier 1 and Tier 2 capital) ratio
of 8%, of which 4% must be Tier I capital. The FDIC may, however, set higher
capital requirements when a bank's particular circumstances warrant. Banks
experiencing or anticipating significant growth are expected to maintain a Tier
I leverage ratio, including tangible capital positions, well above the minimum
levels.
In addition, the FDIC established guidelines prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
The following table sets forth the regulatory capital of Harvest Home
Savings Bank at September 30, 1999:
<TABLE>
<S> <C>
Total Capital to Risk-Weighted Assets....................... 23.5%
Tier I Capital to Risk-Weighted Assets...................... 23.2%
Tier I Leverage Ratio....................................... 9.8%
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
Harvest Home Financial's consolidated financial statements and related
financial data presented herein have been prepared in accordance with generally
accepted accounting principles, which generally require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of Harvest Home Financial's
assets and liabilities are monetary in nature. As a result, interest rates
generally have a more significant impact on Harvest Home Financial's performance
than does the effect of inflation. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services,
since such prices are affected by inflation to a larger extent than interest
rates.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
Statement of Financial Accounting Standards No. 130 established standards for
reporting and display of comprehensive income and its components
104
<PAGE>
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. Statement of Financial Accounting Standards No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
Statement of Financial Accounting Standards No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital. Statement of Financial Accounting Standards No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Management adopted Statement of Financial Accounting Standards No. 130 effective
October 1, 1998, as required, without material impact on Harvest Home
Financial's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Statement of Financial Accounting Standards
No. 131 significantly changes the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about reportable segments in
interim financial reports issued to shareholders. It also established standards
for related disclosures about products and services, geographic areas and major
customers. Statement of Financial Accounting Standards No. 131 uses a
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, Statement of Financial Accounting Standards No. 131 requires
significantly more information to be disclosed for each reportable segment than
is presently being reported in annual financial statements and also requires
that selected information be reported in interim financial statements. Statement
of Financial Accounting Standards No. 131 is effective for fiscal years
beginning after December 15, 1997. Management adopted Statement of Financial
Accounting Standards No. 131 effective October 1, 1998, as required, without
material impact on Harvest Home Financial's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires entities to recognize all derivatives in
their financial statements as either assets or liabilities measured at fair
value. Statement of Financial Accounting Standards No. 133 also specifies new
methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally requires
no significant initial investment and can be settled net or by delivery of an
asset that is readily convertible to cash. Statement of Financial Accounting
Standards No. 133 applies to derivatives embedded in other contracts, unless the
underlying of the embedded derivative is clearly and closely related to the host
contract.
Statement of Financial Accounting Standards No. 133, as amended by Statement
of Financial Accounting Standards No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. Statement of Financial Accounting Standards No. 133 is
not expected to have a material impact on Harvest Home Financial's financial
statements.
105
<PAGE>
BUSINESS OF PEOPLES COMMUNITY BANCORP
Peoples Community Bancorp is a Delaware corporation organized in
December 1999 by People's Savings for the purpose of becoming a unitary savings
and loan holding company of Peoples Community Bank. Peoples Community Bancorp
will purchase all of the capital stock of Peoples Community Bank to be issued in
the conversion in exchange for 50% of the net conversion proceeds and will
retain the remaining 50% of the net proceeds as Peoples Community Bancorp's
initial capitalization. Immediately following the conversion, Peoples Community
Bancorp's only significant assets will be the capital stock of Peoples Community
Bank, Peoples Community Bancorp's loan to the Peoples employee stock ownership
plan, and the remainder of the net conversion proceeds retained by Peoples
Community Bancorp. The business and management of Peoples Community Bancorp will
initially primarily consist of the business and management of Peoples Community
Bank.
BUSINESS OF PEOPLE'S SAVINGS AND OAKLEY
OVERVIEW
People's Savings and Oakley are traditional mutual-form savings and loan
associations operating in the Cincinnati area. Immediately prior to the
conversion, Oakley will merge into People's Savings with People's Savings
surviving. Described below is the business of each of People's Savings and
Oakley. Because People's Savings is significantly larger than Oakley and because
People's Savings will follow its own business plan after the Oakley merger, the
description of business is focused on People's Savings, although the business
practices of Oakley, which have been very similar to those of People's Savings,
also are described below.
MARKET AREA OF PEOPLE'S SAVINGS, OAKLEY AND HARVEST HOME FINANCIAL
People's Savings conducts operations through two full service branch offices
in southwestern Ohio. People's Savings' branch network serves Warren and Clinton
Counties, with its largest market presence being in Warren County where it is
currently headquartered. Oakley's sole office facility is located in Cincinnati,
which is part of Hamilton County. Harvest Home Financial operates three full
service branch offices in Hamilton County.
People's Savings' primary market area will include a mixture of rural,
suburban and urban markets, with Hamilton County being the most populous and
more urban of the markets that will be served by its branches. People's Savings'
market area has a fairly diversified economy, with services, wholesale/ retail
trade, manufacturing, and state and local government constituting the basis of
the three county primary market area served by People's Savings, Oakley and
Harvest Home Financial.
MARKET AREA DEMOGRAPHICS
Demographic and economic growth trends, measured by changes in population,
number of households, and median household income, provide key insight into the
health of People's Savings' market area. In the 1990s, the primary market area
served by People's Savings, Oakley and Harvest Home Financial exhibited mixed
growth characteristics as measured by population and household growth. Hamilton
County, which has the largest population among People's Savings' primary market
area counties, posted a slight decline in population growth from 1990 to 1999.
Comparatively, Warren and Clinton Counties experienced growth in population
during the 1990s, with the more populous Warren County posting a stronger annual
growth rate than Clinton County (3.2 percent versus 1.5 percent for Clinton
County). Population growth rates for both Warren and Clinton Counties exceeded
the U.S. and Ohio growth rates in 1990s. Warren County's comparatively higher
population growth reflects its central location between Cincinnati and Dayton
and the outward expansion of those markets. Accordingly, the more affordable
housing of the Warren County market has become an
106
<PAGE>
increasingly attractive characteristic for individuals commuting to jobs in the
Cincinnati and Dayton markets.
Median household income measures for the primary market area counties
indicate Warren County is a relatively affluent market area, reflecting the
impact of population growth among white collar professionals who commute to jobs
in either Cincinnati or Dayton. Median household income measures for Clinton and
Hamilton Counties are fairly comparable and are not materially different from
the U.S. and Ohio household income measures. Household income distribution
measures further imply that Warren County is a relatively affluent market area,
based on Warren County's higher percentage of households with incomes of
$100,000 or more.
PEOPLE'S SAVINGS' LENDING ACTIVITIES
GENERAL. At September 30, 1999, the net loan portfolio of People's Savings
totalled $83.9 million, representing approximately 92.9% of total assets at that
date. The principal lending activity of People's Savings is the origination of
one- to four-family (which are also known as single-family) residential loans.
At September 30, 1999, conventional first mortgage, one- to four-family
residential loans (including construction loans) amounted to $80.7 million or
92.3% of the total loan portfolio. To a lesser extent, People's Savings
originates commercial real estate and land loans and multi-family residential
mortgage loans. At September 30, 1999, commercial real estate and land loans
totalled $5.6 million or 6.5% of the total loan portfolio, before net items, and
multi-family residential mortgage loans amounted to $982,000, or 1.1% of the
total loan portfolio.
Oakley also focuses its lending efforts on one- to four- family residential
mortgage loans. At September 30, 1999, Oakley's single-family residential
mortgage loans totalled $9.7 million or 86.0% of Oakley's total loan portfolio.
The types of loans that People's Savings and Oakley may originate are
subject to federal and state laws and regulations. Interest rates charged on
loans are affected principally by the demand for such loans and the supply of
money available for lending purposes and the rates offered by its competitors.
These factors are, in turn, affected by general and economic conditions, the
monetary policy of the federal government, including the Federal Reserve Board,
legislative and tax policies, and governmental budgetary matters.
A savings institution generally may not make loans to one borrower and
related entities in an amount which exceeds the greater of (i) 15% of its
unimpaired capital and surplus, although loans in an amount equal to an
additional 10% of unimpaired capital and surplus may be made to a borrower if
the loans are fully secured by readily marketable securities, and
(ii) $500,000. At September 30, 1999, People's Savings' regulatory limit on
loans-to-one borrower was $1.8 million and its five largest loans or groups of
loans-to-one borrower, including related entities, aggregated $1.3 million,
$922,000, $900,000, $851,000 and $805,000. All of People's Savings' five largest
loans or groups of loans were performing in accordance with their terms at
September 30, 1999. See "--Asset Quality--Classified Assets."
As a result of the conversion, the Oakley merger and the Harvest Home
merger, People's Savings will have significantly more unimpaired capital and
surplus. This will increase People's Savings' loans-to-one borrower limit and
will permit making larger loans than can be made now.
107
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of People's Savings' loans at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential............... $80,690 92.28% $75,564 91.56% $73,320 90.98%
Multi-family residential................ 982 1.12 1,036 1.26 143 0.18
Commercial real estate and land......... 5,647 6.46 5,801 7.03 6,980 8.66
------- ------ ------- ------ ------- ------
Total mortgage loans.................. 87,319 99.86 82,401 99.85 80,443 99.82
Other loans................................. 124 0.14 129 0.15% 150 0.18
------- ------ ------- ------ ------- ------
Total loans receivable................ 87,443 100.00% 82,530 100.00 80,593 100.00%
====== ====== ======
Less:
Undisbursed portion of loans in
process............................... 2,797 2,214 1,340
Allowance for losses on loans........... 365 210 182
Deferred loan fees...................... 354 359 349
------- ------- -------
Loans receivable, net....................... $83,927 $79,747 $78,722
======= ======= =======
</TABLE>
The following table sets forth the composition of Oakley's loans at the
dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential............... $ 9,680 85.97% $ 9,844 91.38% $10,032 89.15%
Multi-family residential................ 606 5.38 575 5.34 750 6.66
Commercial real estate and land......... 965 8.57 342 3.17 451 4.01
------- ------ ------- ------ ------- ------
Total mortgage loans.................. 11,251 99.92 10,761 99.89 11,233 99.82
Other loans................................. 9 0 .08 12 0.11 20 0 .18
------- ------ ------- ------ ------- ------
Total loans receivable................ 11,260 100.00% 10,773 100.00% 11,253 100.00%
====== ====== ======
Less:
Undisbursed portion of loans in
process............................... 540 -- --
Allowance for losses on loans........... 50 25 25
Deferred loan fees...................... 46 47 50
------- ------- -------
Loans receivable, net....................... $10,624 $10,701 $11,178
======= ======= =======
</TABLE>
ORIGINATION OF LOANS. The lending activities of People's Savings are
subject to the written underwriting standards and loan origination procedures
established by the Board of Directors and management. Loan originations are
obtained through a variety of sources, including referrals from real estate
brokers, builders and existing customers. Written loan applications are taken by
loan officers. The loan officers also supervise the procurement of credit
reports, appraisals and other documentation involved with a loan. Property
valuations are performed by independent outside appraisers approved by the Board
of Directors of People's Savings.
108
<PAGE>
Under the real estate lending policy of People's Savings, a title opinion
must be obtained for each real estate loan. People's Savings also requires fire
and extended coverage casualty insurance, in order to protect the properties
securing its real estate loans. Borrowers must also obtain flood insurance
policies when the property is in a flood hazard area as designated by the
Department of Housing and Urban Development. People's Savings does not require
borrowers to advance funds to an escrow account for the payment of real estate
taxes or hazard insurance premiums.
People's Savings' loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. All real estate loans must be
approved by the Board of Directors.
ACTIVITY IN LOANS. The following table shows the activity in People's
Savings loans during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Total loans held at beginning of period..................... $82,530 $80,593 $75,261
Originations of loans:
Mortgage loans:
Single-family residential............................... 24,516 18,983 19,311
Multi-family residential................................ 246 900 --
Commercial real estate and land......................... 1,864 1,914 2,303
Other loans................................................. 41 43 50
------- ------- -------
Total originations.................................... 26,667 21,840 21,664
------- ------- -------
Purchases of loans.......................................... -- -- --
------- ------- -------
Total originations and purchases...................... 26,667 21,840 21,664
------- ------- -------
Loans sold.................................................. -- -- --
Transfers to real estate owned.............................. -- -- --
Charge-offs................................................. -- 15 --
Repayments.................................................. 22,449 20,534 16,700
------- ------- -------
Net activity in loans....................................... 4,218 1,291 4,964
------- ------- -------
Gross loans held at end of period........................... $87,443 $82,530 $80,593
======= ======= =======
</TABLE>
109
<PAGE>
The following table shows the activity in Oakley's loans during the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Total loans held at beginning of period..................... $10,773 $11,253 $11,097
Originations of loans:
Mortgage loans:
Single-family residential............................... 3,146 1,640 1,897
Multi-family residential................................ 238 -- --
Commercial real estate and land......................... 650 -- --
Other loans................................................. 9 12 20
------- ------- -------
Total originations(1)................................. 4,043 1,652 1,917
------- ------- -------
Purchases of loans.......................................... -- -- --
------- ------- -------
Total originations and purchases...................... 4,043 1,652 1,917
------- ------- -------
Loans sold.................................................. -- -- --
Transfers to real estate owned.............................. -- -- --
Charge-offs................................................. -- -- --
Repayments.................................................. 3,556 2,132 1,761
------- ------- -------
Net activity in loans....................................... 487 (480) 156
------- ------- -------
Gross loans held at end of period........................... $11,260 $10,773 $11,253
======= ======= =======
</TABLE>
- ------------------------
(1) Includes undisbursed portion of construction loans.
Although federal laws and regulations permit savings institutions to
originate and purchase loans secured by real estate located throughout the
United States, People's Savings as well as Oakley, confines its lending activity
to its primary market area in southwestern Ohio. More specifically, People's
Savings lends in Warren and Clinton counties and Oakley lends to residents in
Hamilton County, Ohio. Subject to its loans-to-one borrower limitation, People's
Savings and Oakley are permitted to invest without limitation in residential
mortgage loans and up to 400% of their capital in loans secured by
non-residential or commercial real estate. People's Savings and Oakley may also
invest in secured and unsecured consumer loans in an amount not exceeding 35% of
total assets. This 35% limitation may be exceeded for certain types of consumer
loans, such as home equity and property improvement loans secured by residential
real property. In addition, People's Savings and Oakley may invest up to 10% of
their total assets in secured and unsecured loans for commercial, corporate,
business or agricultural purposes. At September 30, 1999, People's Savings and
Oakley were well within each of the above lending limits.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary real estate
lending activity of People's Savings is the origination of loans secured by
first mortgage liens on one- to four-family residences. At September 30, 1999,
$80.7 million or 92.3% of the total loan portfolio of People's Savings, before
net items, consisted of conventional first mortgage, one- to four-family
residential loans (including single-family construction loans).
The loan-to-value ratio, maturity and other provisions of the loans made by
People's Savings generally have reflected the policy of making less than the
maximum loan permissible under applicable regulations, in accordance with sound
lending practices, market conditions and underwriting standards established by
People's Savings. People's Savings' lending policies on one- to four-family
residential mortgage loans generally limit the maximum loan-to-value ratio to
80% of the lesser of the appraised
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<PAGE>
value or purchase price of the property. Residential mortgage loans are
amortized on a monthly basis with principal and interest due each month. The
loans generally include "due-on-sale" clauses.
The residential mortgages originated by People's Savings consist of
fixed-rate loans maturing in 25 years. The single-family residential mortgage
loans of People's Savings contain a three-year demand provision which permits
People's Savings to accelerate the due date of a mortgage loan at any time at or
after three years from the date of origination (although People's Savings has
never utilized this provision). Other than this demand provision, the
single-family residential mortgage loans of People's Savings generally conform
to Fannie Mae and Freddie Mac requirements.
People's Savings and Oakley have the authority to originate and purchase
mortgage loans which provide for periodic interest rate adjustments subject to
certain limitations. While People's Savings has not offered adjustable-rate
mortgages in the past, after the conversion People's Savings plans to offer
adjustable rate mortgage loans on which the interest rate adjusts every one or
three years based upon the one-year or three-year rate on T-bills plus a
specified margin. In addition, People's Savings plans to introduce a traditional
fixed-rate mortgage loan without the three-year demand/adjustment provision.
Oakley currently originates one-year and three-year adjustable rate mortgage
loans based upon the National Average Contract Mortgage Rate.
People's Savings' one- to four-family residential mortgage loans also
include loans to construct single-family residences. At September 30, 1999,
People's Savings had approximately $6.6 million in single-family residential
construction loans. The construction loans of People's Savings are comprised
largely of loans made to borrowers to construct individual pre-sold homes.
Generally, the construction loan and the permanent mortgage loan are originated
at one closing as a construction/permanent loan. Interest-only payments are
required during the construction period, which is typically six months. People's
Savings also originates a limited amount of construction loans to local
developers to build homes on a speculative basis.
Construction lending is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, owner-occupied real estate
because of the uncertainties of construction, including the possibility of costs
exceeding the initial estimates and the need to obtain a tenant or purchaser if
the property will not be owner-occupied. People's Savings generally attempts to
mitigate the risks associated with construction lending by, among other things,
lending in its market area, using conservative underwriting guidelines, and
monitoring the construction process.
COMMERCIAL REAL ESTATE AND LAND LOANS. People's Savings' commercial real
estate and land loan portfolio primarily consists of loans secured by
professional offices and churches located within People's Savings' primary
market area. Commercial real estate and land loans amounted to $5.6 million or
6.5% of the total loan portfolio of People's Savings at September 30, 1999, with
an average loan balance of approximately $73,000.
The commercial real estate loans of People's Savings typically have a
loan-to-value ratio of 75% or less and generally have higher interest rates than
single-family residential mortgage loans. The maximum term of People's Savings'
commercial real estate loans is 25 years. Otherwise, the commercial real estate
loans of People's Savings have terms which are substantially similar to its
single-family residential mortgage loans, including the three-year demand
provision. The land loans of People's Savings also have a loan-to-value ratio of
75% or less and are amortized over a five-year period or over a 15-year period
with a balloon payment of the remaining principal amount due at five years from
the date of origination. Land loans generally are secured by single-family
residential lots or undeveloped land being held for residential development.
Upon completion of the conversion, People's Savings expects to increase the
amount of commercial real estate loans that People's Savings originates.
People's Savings believes that after the conversion and mergers it can be a
niche lender to small and medium sized businesses in its market area. People's
Savings plans to increase its originations of
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<PAGE>
commercial real estate loans because they generally have higher yields and
shorter terms to maturity than single-family residential mortgage loans.
At September 30, 1999, Oakley's commercial real estate and land loans
amounted to $965,000 or 8.6% of its total portfolio. Oakley's practices in
underwriting commercial real estate and land loans have been substantially
similar to ours.
Commercial real estate lending is generally considered to involve a higher
degree of risk than one- to four-family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or
groups of related borrowers for rental or business properties. In addition, the
payment experience on loans secured by income-producing properties is typically
dependent on the success of the operation of the related project and thus is
typically affected by adverse conditions in the real estate market and in the
economy. People's Savings generally attempts to mitigate the risks associated
with its commercial real estate lending by, among other things, lending
primarily in its market area and using low loan-to-value ratios in the
underwriting process.
Land development and acquisition loans involve significant additional risks
when compared with loans on existing residential properties. These loans may
involve larger loan balances to single borrowers, and the payment experience may
be dependent on the successful development of the land and the sale of the lots.
These risks can be significantly impacted by supply and demand conditions.
MULTI-FAMILY RESIDENTIAL AND OTHER LOANS. People's Savings also has a
relatively small amount of multi-family (over four units) residential loans and
a nominal amount of other loans. The multi-family residential mortgage loans of
People's Savings are underwritten on substantially the same basis as its
commercial real estate loans, although loan-to-value ratios may be up to 80%. At
September 30, 1999, People's Savings had $982,000 in multi-family residential
mortgage loans which amounted to 1.1% of People's Savings' total portfolio. At
such date, Oakley had $606,000 of multi-family residential loans. People's
Savings' other loans consist of loans secured by deposit accounts. After the
conversion, People's Savings plans to expand its consumer lending activities by
offering a home equity line of credit loan which is a product that Harvest Home
Financial already offers.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans,
People's Savings and Oakley receive loan origination fees or "points" for
originating loans. Loan points are a percentage of the principal amount of the
mortgage loan and are charged to the borrower in connection with the origination
of the loan.
In accordance with Statement of Financial Accounting Standards No. 91, which
deals with the accounting for non-refundable fees and costs associated with
originating or acquiring loans, loan origination fees and certain related direct
loan origination costs are offset, and the resulting net amount is deferred and
amortized as interest income over the contractual life of the related loans as
an adjustment to the yield of such loans. At September 30, 1999, People's
Savings had $354,000 of deferred loan fees and Oakley had $46,000 of deferred
loan fees which will be amortized into interest income as a yield adjustment
over the contractual maturities of the related loans.
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<PAGE>
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization of People's Savings loans at
September 30, 1999 as well as the dollar amount of such loans which are
scheduled to mature after one year which have fixed or adjustable interest
rates. Demand loans, loans having no schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
PRINCIPAL REPAYMENTS CONTRACTUALLY DUE
IN YEAR(S) ENDED SEPTEMBER 30,
TOTAL AT --------------------------------------------------------------------------
SEPTEMBER 30, 2003- 2005- 2011- THERE-
1999 2000 2001 2002 2004 2010 2016 AFTER
------------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential.... $80,690 $2,308 $2,445 $2,606 $5,761 $19,212 $36,674 $11,684
Multi-family residential..... 982 28 30 32 70 234 446 142
Commercial real estate and
land....................... 5,647 162 171 182 403 1,345 2,567 817
Other loans.................... 124 124 -- -- -- -- -- --
------- ------ ------ ------ ------ ------- ------- -------
Total(1)................... $87,443 $2,622 $2,646 $2,820 $6,234 $20,791 $39,687 $12,643
======= ====== ====== ====== ====== ======= ======= =======
</TABLE>
- ------------------------
(1) All of the $84.8 million of loan principal repayments contractually due
after September 30, 2000 have fixed rates of interest (with a call provision
after three years) and none had adjustable rates of interest.
The following table sets forth scheduled contractual amortization of
Oakley's loans at September 30, 1999 as well as the dollar amount of such loans
which are scheduled to mature after one year which have fixed or adjustable
interest rates. Demand loans, loans having no schedule of repayments and no
stated maturity and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
PRINCIPAL REPAYMENTS CONTRACTUALLY DUE
IN YEAR(S) ENDED SEPTEMBER 30,
TOTAL AT --------------------------------------------------------------------------
SEPTEMBER 30, 2003- 2005- 2011- THERE-
1999 2000 2001 2002 2004 2010 2016 AFTER
------------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential.... $ 9,680 $ 269 $ 285 $ 303 $ 668 $ 2,200 $ 4,033 $ 1,922
Multi-family residential..... 606 14 15 16 35 108 168 250
Commercial real estate and
land....................... 965 23 24 25 55 172 268 398
Other loans.................... 9 9 -- -- -- -- -- --
------- ------ ------ ------ ------ ------- ------- -------
Total(1)................... $11,260 $ 315 $ 324 $ 344 $ 758 $ 2,480 $ 4,469 $ 2,570
======= ====== ====== ====== ====== ======= ======= =======
</TABLE>
- ------------------------
(1) Of the $10.9 million of loan principal repayments contractually due after
September 30, 2000, approximately $5.8 million have fixed rates of interest
and $5.2 million have adjustable rates of interest.
Scheduled contractual maturities of loans do not necessarily reflect the
actual expected term of the loan portfolio. The average life of mortgage loans
is substantially less than their average contractual terms because of
prepayments. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on current mortgage loans are lower than
existing mortgage loan rates (due to refinancing of
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<PAGE>
adjustable-rate and fixed-rate loans at lower rates). Under the latter
circumstance, the weighted average yield on loans decreases as higher yielding
loans are repaid or refinanced at lower rates.
ASSET QUALITY
GENERAL. People's Savings mails delinquent notices to borrowers when a
borrower fails to make a required payment within 15 days of the date due.
Additional notices begin when a loan becomes 30 days past due. If a loan becomes
60 days past due, People's Savings refers it to an attorney to commence
foreclosure. In most cases, deficiencies are cured promptly. While People's
Savings generally prefers to work with borrowers to resolve such problems,
People's Savings will institute foreclosure or other collection proceedings when
necessary to minimize any potential loss.
Loans are placed on non-accrual status when management believes the
probability of collection of interest is insufficient to warrant further
accrual. When a loan is placed on non-accrual status, previously accrued but
unpaid interest is deducted from interest income. As a matter of policy,
People's Savings generally discontinues the accrual of interest income when the
loan becomes 90 days past due as to principal or interest.
Real estate acquired by People's Savings as a result of foreclosure or by
deed-in-lieu of foreclosure are classified as real estate owned until sold.
Neither People's Savings nor Oakley had any real estate owned at September 30,
1999, 1998 or 1997.
DELINQUENT LOANS. The following table sets forth information concerning
delinquent mortgage loans at the dates indicated, in dollar amounts and as a
percentage of each category of People's Savings' loan portfolio. The amounts
presented represent the total outstanding principal balances of the related
loans, rather than the actual payment amounts which are past due.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
60-89 DAYS 60-89 DAYS 60-89 DAYS
DELINQUENT DELINQUENT DELINQUENT
--------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
LOAN LOAN LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
Single-family....................... $1,001 1.24% $ 903 1.20% $679 0.93%
Multi-family........................ -- -- -- -- -- --
Commercial real estate and land....... 111 1.97% 126 2.17% -- --
------ ------ ----
Total............................. $1,112 1.27% $1,029 1.25% $679 0.84%
====== ====== ====
</TABLE>
The following table sets forth information concerning delinquent mortgage
loans at the dates indicated, in dollar amounts and as a percentage of each
category of Oakley's loan portfolio. The
114
<PAGE>
amounts presented represent the total outstanding principal balances of the
related loans, rather than the actual payment amounts which are past due.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
60-89 DAYS 60-89 DAYS 60-89 DAYS
DELINQUENT DELINQUENT DELINQUENT
--------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
LOAN LOAN LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
Single-family.............................. $111 1.15% $141 1.43% $93 0.93%
Multi-family............................... -- -- -- -- -- --
Commercial real estate and land.............. -- -- -- -- -- --
---- ---- ---
Total.................................... $111 0.99% $141 1.31% $93 0.83%
==== ==== ===
</TABLE>
NON-PERFORMING ASSETS. The following table sets forth information with
respect to non-performing assets identified by People's Savings, including
non-accrual loans, loans more than 90 days past due and still accruing interest
and other real estate owned.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans past due 90 days or more and still accruing:
Single-family residential....................... $ 223 $ 147 $ 666
Commercial real estate and land................. 166 -- 14
------ ----- -----
Total......................................... 389 147 680
------ ----- -----
Non-accrual loans:
Single-family residential....................... 652 557 315
Multi-family residential........................ -- -- --
Commercial real estate and land................. -- -- --
Other loans..................................... -- -- --
------ ----- -----
Total non-accruing loans...................... 652 557 315
------ ----- -----
Total non-performing loans...................... 1,041 704 995
------ ----- -----
Other real estate owned, net...................... -- -- --
------ ----- -----
Total non-performing assets..................... $1,041 $ 704 $ 995
====== ===== =====
Non-performing assets to total assets............. 1.15% 0.79% 1.11%
Non-performing loans to total loans............... 1.24% 0.88% 1.26%
</TABLE>
115
<PAGE>
The following table sets forth information with respect to non-performing
assets identified by Oakley, including non-accrual loans and other real estate
owned. Oakley had no accruing loans 90 days or more past due as to principal or
interest at any of the below-referenced dates.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------
1999 1998 1997
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
Single-family residential........................ $ 38 $ -- $ 15
Multi-family residential......................... -- -- --
Commercial real estate and land.................. -- -- --
Other loans........................................ -- -- --
----- --------- -----
Total non-accruing loans......................... 38 -- 15
----- --------- -----
Total non-performing loans....................... 38 -- 15
----- --------- -----
Other real estate owned, net......................... -- -- --
----- --------- -----
Total non-performing assets...................... $ 38 $ -- $ 15
===== ========= =====
Non-performing assets to total assets................ 0.22% --% 0.09%
Non-performing loans to total loans.................. 0.36% --% 0.13%
</TABLE>
If the $652,000 of non-accruing loans of People's Savings has been current
in accordance with their terms during fiscal 1999, the gross income on such
loans would have been approximately $26,000. A total of approximately $7,000 of
interest income was actually recorded by People's Savings on such loans in the
fiscal year ended September 30, 1999.
If the $38,000 of non-accruing loans of Oakley had been current in
accordance with their terms during fiscal 1999, the gross income on such loans
would have been approximately $1,100. No interest income was actually recorded
by Oakley on such loans in the fiscal year ended September 30, 1999.
CLASSIFIED ASSETS. Federal regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. 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 insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a higher possibility of loss.
An asset classified loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. Another
category designated "special mention" also must be established and maintained
for assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification as substandard, doubtful or loss.
Assets classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge-off such amount. General loss allowances established
to cover possible losses related to assets classified substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses do not qualify as regulatory
capital. Federal examiners may disagree with an insured institution's
classifications and amounts reserved.
People's Savings' total classified assets at September 30, 1999 (excluding
loss assets specifically reserved for) amounted to $2.7 million, all of which
was classified as substandard. The largest classified
116
<PAGE>
asset at September 30, 1999 consisted of a $249,000, residential loan. The
remaining $2.4 million of substandard assets at September 30, 1999 consisted of
$1.9 million of residential real estate loans and $478,000 of commercial real
estate loans. The $249,000 loan referenced above is part of a group of three
residential real estate loans and two commercial real estate loans aggregating
$900,000 to one borrower all of which are classified as substandard.
At September 30, 1999, Oakley had $38,000 in total classified assets, all of
which was classified as substandard.
ALLOWANCE FOR LOAN LOSSES. At September 30, 1999, People's Savings'
allowance for loan losses amounted to $365,000 or 0.43% of the total loan
portfolio. At such date Oakley's allowance for loan losses was $50,000 or 0.47%
of its total loan portfolio. The loan portfolios of both People's Savings and
Oakley consist primarily of residential mortgage loans. Due to the predominance
in residential mortgage loans, neither People's Savings nor Oakley allocates its
respective allowance for loan losses to particular types of loans. The
allocation of the loan loss reserve based on portfolio percentages at
September 30, 1999 was as follows:
<TABLE>
<CAPTION>
BALANCE PERCENT
-------- --------
<S> <C> <C>
People's Savings
Residential real estate................................. $343,000 94.0%
Non-Residential real estate............................. 22,000 6.0
-------- ------
$365,000 100.0%
======== ======
Oakley
Residental real estate.................................. $ 50,000 100.0%
======== ======
</TABLE>
The loan loss allowance is maintained by management at a level considered
adequate to cover estimated losses inherent in the existing portfolio based on
prior loan loss experience, known and probable risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, general economic conditions, and other factors and
estimates which are subject to change over time. People's Savings increased its
allowance for loan losses in fiscal 1999 by recording a $150,000 provision for
loan losses. Such increase in the provision for loan losses by People's Savings
in fiscal 1999 was primarily in response to the $337,000 increase in total
non-performing loans during the year. This increase was due to increases in
single-family residential and commercial real estate and land loans past due
90 days or more and still accruing interest and non-performing single-family
residential loans. While management believes that it determines the size of the
allowance based on the best information available at the time, the allowance
will need to be adjusted as circumstances change and assumptions are updated.
Future adjustments to the allowance could significantly affect net income.
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<PAGE>
The following table sets forth the activity in People's Savings' allowance
for loan losses during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance at beginning of period................... $ 215 $ 182 $ 182
----- ----- -----
Provisions......................................... 150 48 --
Charge-offs:
Mortgage loans:
Single-family residential.................... -- 15 --
Multi-family residential..................... -- -- --
Commercial real estate and land.............. -- -- --
Construction and land development
Other loans.................................... -- -- --
----- ----- -----
Total charge-offs............................ -- 15 --
Recoveries:
Mortgage loans:
Single-family residential.................... -- -- --
Multi-family residential..................... -- -- --
Commercial real estate and land.............. -- -- --
Construction and land development
Other loans.................................... -- -- --
----- ----- -----
Total recoveries............................. -- -- --
----- ----- -----
Net loans charged-off to allowance for losses
on loans..................................... -- (15) --
----- ----- -----
Allowance at end of period......................... $ 365 $ 215 $ 182
===== ===== =====
Allowance for loan losses to total nonperforming
loans at end of period........................... 35.06% 30.54% 18.29%
Allowance for loan losses to total loans at end of
period........................................... 0.43% 0.27% 0.23%
</TABLE>
118
<PAGE>
The following table sets forth the activity in Oakley's allowance for loan
losses during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance at beginning of period............... $ 25 $ 25 $ 24
------- ----- -------
Provisions..................................... 25 -- 1
Charge-offs:
Mortgage loans:
Single-family residential................ -- -- --
Multi-family residential................. -- -- --
Commercial real estate and land.......... -- -- --
Other loans................................ -- -- --
------- ----- -------
Total charge-offs........................
Recoveries:
Mortgage loans:
Single-family residential................ -- -- --
Multi-family residential................. -- -- --
Commercial real estate and land.......... -- -- --
Other loans................................ -- -- --
------- ----- -------
Total recoveries......................... -- -- --
------- ----- -------
Net loans charged-off to allowance for
losses on loans.......................... -- -- --
------- ----- -------
Allowance at end of period..................... $ 50 $ 25 $ 25
======= ===== =======
Allowance for loan losses to total
nonperforming loans at end of period......... 131.58% --% 166.67%
Allowance for loan losses to total loans at end
of period.................................... 0.47% 0.23% 0.22%
</TABLE>
INVESTMENT SECURITIES
People's Savings and Oakley have authority to invest in various types of
securities, including mortgage-backed securities, United States Treasury
obligations, securities of various federal agencies and of state and municipal
governments, certificates of deposit at federally-insured banks and savings
institutions, certain bankers' acceptances and federal funds. Each significant
purchase of an investment security is approved by the Board of Directors.
At September 30, 1999, People's Savings' investment securities portfolio
consisted of $1.1 million of mortgage-backed securities, $798,000 of U.S.
government and agency obligations and $850,000 in stock of the Federal Home Loan
Bank. At such date, Oakley had investments of $2.0 million in stock of the
Federal Home Loan Mortgage Corporation, $502,000 of U.S. Government and agency
obligations, $81,000 of mortgage-backed securities, $400,000 in certificates of
deposit at other institutions and $171,000 in Federal Home Loan Bank stock.
119
<PAGE>
The following table sets forth information regarding the carrying and fair
value of People's Savings' securities at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available for sale (at fair value):
Mortgage-backed securities..................... $1,110 $1,110 $1,419 $1,419 $1,398 $1,398
U.S. Government and agency obligations......... 798 798 1,303 1,303 1,702 1,702
------ ------ ------ ------ ------ ------
Total...................................... $1,908 $1,908 $2,722 $2,722 $3,100 $3,100
====== ====== ====== ====== ====== ======
HELD TO MATURITY:
Certificates of deposit........................ $ -- $ -- $ 400 $ 400 $ 425 $ 425
Federal Home Loan Bank stock................... 850 850 792 792 738 738
------ ------ ------ ------ ------ ------
Total...................................... $ 850 $ 850 $1,192 $1,192 $1,163 $1,163
====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the activity in People's Savings aggregate
securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Securities at beginning of period.................. $ 3,914 $4,263 $4,005
Purchases(1)....................................... 53 326 504
Sales of available for sale securities............. -- -- --
Repayments, prepayments and maturities............. (1,205) (675) (246)
Decrease in unrealized gains on available-for-sale
securities....................................... (4) -- --
------- ------ ------
Securities at end of period(2)..................... $ 2,758 $3,914 $4,263
======= ====== ======
</TABLE>
- ------------------------
(1) Includes increases in Federal Home Loan Bank stock from purchases and
dividends.
(2) At September 30, 1999, $1.1 million or 40.2% of People's Savings' securities
portfolio consisted of adjustable rate securities, as compared to
$1.4 million or 36.5% and $1.4 million or 32.9% at September 30, 1998 and
1997, respectively.
120
<PAGE>
The following table sets forth information regarding the carrying and fair
value of Oakley's securities at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available for sale (at fair value):
Federal Home Loan Mortgage Corporation stock... $1,950 $1,950 $1,940 $1,940 $1,415 $1,415
U.S. Government and agency obligations......... 502 502 502 502 749 749
Mortgage-backed securities..................... 81 81 110 110 130 130
------ ------ ------ ------ ------ ------
Total...................................... $2,533 $2,533 $2,552 $2,552 $2,294 $2,294
====== ====== ====== ====== ====== ======
Held to maturity:
Certificates of deposit........................ $ 400 $ 400 $ 500 $ 500 $ 300 $ 300
Federal Home Loan Bank Stock................... 171 171 159 159 146 146
------ ------ ------ ------ ------ ------
Total...................................... $ 571 $ 571 $ 659 $ 659 $ 446 $ 446
====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the activity in Oakley's aggregate securities
portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Securities at beginning of period................... $3,211 $2,740 $2,084
Purchases (1)....................................... 508 713 756
Sales of available for sale securities.............. -- (93) --
Repayments, prepayments and maturities.............. (629) (770) (522)
Increase in unrealized gains on available-for-sale
securities........................................ 14 621 422
------ ------ ------
Securities at end of period(2)...................... $3,104 $3,211 $2,740
====== ====== ======
</TABLE>
- ------------------------
(1) Includes increases from Federal Home Loan Bank stock dividends.
(2) At September 30, 1999, $41,000 or 1.3% of Oakley's securities portfolio
consisted of adjustable rate securities, as compared to $55,000 or 1.7% and
$65,000 or 2.4% at September 30, 1998 and 1997, respectively.
Mortgage-backed securities represent a participation interest in a pool of
one- to four-family or multi-family mortgages. The mortgage originators use
intermediaries (generally U.S. Government agencies and government-sponsored
enterprises) to pool and repackage the participation interests in the form of
securities, with investors receiving the principal and interest payments on the
mortgages. Such U.S. Government agencies and government-sponsored enterprises
guarantee the payment of principal and interest to investors.
Mortgage-backed securities are typically issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security approximates the life of the underlying
mortgages.
121
<PAGE>
The mortgage-backed securities of People's Savings consist entirely of
Government National Mortgage Association ("Ginnie Mae") securities. Ginnie Mae
is a government agency within the Department of Housing and Urban Development
which is intended to help finance government-assisted housing programs. Ginnie
Mae securities are backed by loans insured by the Federal Housing
Administration, or guaranteed by the Veterans Administration, and the timely
payment of principal and interest on Ginnie Mae securities are guaranteed by
Ginnie Mae and backed by the full faith and credit of the U.S. Government.
At September 30, 1999, People's Savings' mortgage-backed securities amounted
to $1.1 million, all of which are accounted for as available for sale.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of People's Savings.
The following table sets forth certain information regarding the maturities
of People's Savings' investment securities at September 30, 1999.
<TABLE>
<CAPTION>
CONTRACTUALLY MATURING
-------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
UNDER 1 AVERAGE 1-5 AVERAGE 6-10 AVERAGE OVER 10 AVERAGE
YEAR YIELD YEARS YIELD YEARS YIELD YEARS YIELD
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage backed securities............... $ -- --% $ 21 9.09% $493 7.07% $596 6.61%
U.S. Government and federal agency
obligations............................ 597 5.96 200 6.25 -- -- -- --
Federal Home Loan Bank stock............. 850 7.15 -- -- -- -- -- --
------ ---- ---- ---- ---- ---- ---- ----
$1,447 6.66% $221 6.52% $493 7.07% $596 6.61%
====== ==== ==== ==== ==== ==== ==== ====
</TABLE>
The following table sets forth certain information regarding the maturities
of Oakley's other securities at September 30, 1999.
<TABLE>
<CAPTION>
CONTRACTUALLY MATURING
--------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
UNDER 1 AVERAGE 1-5 AVERAGE 6-10 AVERAGE OVER 10 AVERAGE
YEAR YIELD YEARS YIELD YEARS YIELD YEARS YIELD
-------- -------- -------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation
stock(1)............................... $1,950 .8% $ -- --% $ -- --% $ -- --%
U.S. Government obligations.............. 502 5.44 -- -- -- -- -- --
Mortgage-backed securities............... -- -- -- -- -- -- 81 9.62
Certificates of deposit.................. 400 4.78 -- -- -- -- -- --
Federal Home Loan Bank stock............. -- -- -- -- -- 171 7.15
------ ---- ---- ---- --------- -------- ---- ----
$2,852 2.21% $ --% $ --% $252 7.94%
====== ==== ==== ==== ========= ======== ==== ====
</TABLE>
- ------------------------
(1) Stock has no stated maturity and is marked-to-market quarterly.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of People's Savings and Oakley's
funds for lending and other investment purposes. In addition to deposits,
principal and interest payments on loans and mortgage-backed securities are a
source of funds. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and
122
<PAGE>
money market conditions. Borrowings may also be used on a short-term basis to
compensate for reductions in the availability of funds from other sources and on
a longer-term basis for general business purposes.
DEPOSITS. Deposits are attracted by People's Savings and Oakley principally
from within their primary market area. Deposit account terms vary, with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate. To date, both People's
Savings and Oakley have offered only traditional passbook savings accounts,
money market accounts and certificates of deposit. Upon consummation of the
conversion, People's Savings expects to introduce checking accounts.
People's Savings and Oakley obtain deposits primarily from residents of
southwestern Ohio. Neither People's Savings nor Oakley has solicited deposits
from outside Ohio or paid fees to brokers to solicit funds for deposit.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established on a periodic basis. Management determines the rates and terms
based on rates paid by competitors, the need for funds or liquidity, growth
goals and federal and state regulations.
The following table sets forth the activity in People's Savings deposits
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance................................ $73,691 $72,290 $69,812
Net increase (decrease) before interest
credited....................................... 2,056 (589) 553
Interest credited................................ 1,944 1,990 1,925
------- ------- -------
Net increase in deposits......................... 4,000 1,401 2,478
------- ------- -------
Ending balance................................... $77,691 $73,691 $72,290
======= ======= =======
</TABLE>
The following table sets forth by various interest rate categories the
certificates of deposit with People's Savings at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
0.00% to 2.99%................................... $ 198 $ -- $ 100
3.00% to 3.99%................................... -- -- --
4.00% to 4.99%................................... 17,548 2,943 2,840
5.00% to 6.99%................................... 38,682 39,295 38,803
7.00% to 8.99%................................... -- 9,972 11,030
------- ------- -------
Total.......................................... $56,428 $52,210 $52,773
======= ======= =======
</TABLE>
123
<PAGE>
The following table sets forth the amount and remaining maturities of
People's Savings certificates of deposit at September 30, 1999.
<TABLE>
<CAPTION>
OVER SIX OVER ONE OVER TWO
MONTHS YEAR YEARS
SIX MONTHS THROUGH ONE THROUGH TWO THROUGH OVER THREE
AND LESS YEAR YEARS THREE YEARS YEARS
---------- ----------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
0.00% to 1.99%....................... $ 198 $ -- $ -- $ -- $ --
2.00% to 2.99%....................... -- -- -- -- --
3.00% to 3.99%....................... -- -- -- -- --
4.00% to 4.99%....................... 5,310 12,238 -- -- --
5.00% to 6.99%....................... 10,583 4,876 9,604 9,594 4,025
------- ------- ------ ------ ------
Total.............................. $16,091 $17,114 $9,604 $9,594 $4,025
======= ======= ====== ====== ======
</TABLE>
As of September 30, 1999, the aggregate amount of outstanding time
certificates of deposit at People's Savings in amounts greater than or equal to
$100,000, was approximately $23.0 million. The following table presents the
maturity of these time certificates of deposit at such dates.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------
(IN THOUSANDS)
<S> <C>
3 months or less............................................ $ 2,880
Over 3 months through 6 months.............................. 2,304
Over 6 months through 12 months............................. 5,762
Over 12 months.............................................. 12,096
-------
$23,042
=======
</TABLE>
The following table sets forth the dollar amount of deposits in various
types of deposits offered by People's Savings at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts........................ $ 4,008 5.16% $ 4,855 6.59 $ 4,531 6.27
Certificates of deposit.................. 56,428 72.63 52,210 70.85 51,324 71.00
Money market accounts.................... 17,255 22.21 16,626 22.56 16,434 22.73
------- ------ ------- ------ ------- ------
Total.................................. $77,691 100.00% $73,691 100.00% $72,289 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth the activity in Oakley's deposits during the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance................................ $13,633 $13,145 $12,887
Net increase (decrease) before interest
credited....................................... (640) 125 (84)
Interest credited................................ 334 363 342
------- ------- -------
Net increase (decrease) in deposits.............. (306) 488 258
------- ------- -------
Ending balance................................... $13,327 $13,633 $13,145
======= ======= =======
</TABLE>
124
<PAGE>
The following table sets forth by various interest rate categories the
certificates of deposit with Oakley at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
0.00% to 2.99%.................................... $ -- $ -- $ --
3.00% to 3.99%.................................... -- -- --
4.00% to 4.99%.................................... 3,410 30 --
5.00% to 6.99%.................................... 5,648 9,464 9,408
7.00% to 8.99%.................................... 768 731 721
------ ------- -------
Total........................................... $9,826 $10,225 $10,129
====== ======= =======
</TABLE>
The following table sets forth the amount and remaining maturities of
Oakley's certificates of deposit at September 30, 1999.
<TABLE>
<CAPTION>
OVER SIX OVER ONE OVER TWO
MONTHS YEAR YEARS
SIX MONTHS THROUGH ONE THROUGH TWO THROUGH OVER THREE
AND LESS YEAR YEARS THREE YEARS YEARS
---------- ----------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
0.00% to 1.99%....... $ -- $ -- $ -- $ -- $ --
2.00% to 2.99%....... -- -- -- -- --
3.00% to 3.99%....... -- -- -- -- --
4.00% to 4.99%....... 852 2,558 -- -- --
5.00% to 6.99%....... 639 2,408 1,602 332 667
7.00% to 8.99%....... 390 378 -- -- --
------ ------ ------ ---- ----
Total.............. $1,881 $5,344 $1,602 $332 $667
====== ====== ====== ==== ====
</TABLE>
As of September 30, 1999, the aggregate amount of outstanding time
certificates of deposit at Oakley in amounts greater than or equal to $100,000,
was approximately $1.2 million. The following table presents the maturity of
these time certificates of deposit at such dates.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------
(IN THOUSANDS)
<S> <C>
3 months or less............................................ $ 145
Over 3 months through 6 months.............................. 200
Over 6 months through 12 months............................. 300
Over 12 months.............................................. 600
------
$1,245
======
</TABLE>
125
<PAGE>
The following table sets forth the dollar amount of deposits in various
types of deposits offered by Oakley at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts...................... $ 1,400 10.50% $ 1,607 11.79% $ 1,293 9.84%
Certificates of deposit................ 9,826 73.73 10,225 75.00 10,129 77.06
Money market accounts.................. 2,101 15.77 1,801 13.21 1,723 13.10
------- ------ ------- ------ ------- ------
Total................................ $13,327 100.00% $13,633 100.00% $13,145 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
People's Savings and Oakley attempt to control the flow of deposits by
pricing their accounts to remain generally competitive with other financial
institutions in its market area.
BORROWINGS. People's Savings and Oakley may obtain advances from the
Federal Home Loan Bank of Cincinnati upon the security of the common stock they
own in that bank and certain of its residential mortgage loans and
mortgage-backed securities, provided certain standards related to
creditworthiness have been met. These advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Federal Home Loan Bank advances are generally available to meet
seasonal and other withdrawals of deposit accounts and to permit increased
lending.
The following table shows certain information regarding the borrowings of
People's Savings at or for the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED SEPTEMBER 30,
----------------------
1999 1998
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Federal Home Loan Bank advances:
Average balance outstanding............................... $ 710 $3,530
Maximum amount outstanding at any month-end during the
period.................................................. $4,000 $6,000
Balance outstanding at end of period...................... $ -- $4,000
Average interest rate during the period................... 5.49% 5.35%
Weighted average interest rate at end of period........... N/A 5.45%
</TABLE>
As of September 30, 1999, People's Savings was permitted to borrow up to an
aggregate total of $10.0 million from the Federal Home Loan Bank of Cincinnati
and Oakley was permitted to borrow $4.0 million. At such date, neither People's
Savings nor Oakley had any outstanding borrowings. During fiscal 1999, People's
Savings' average balance of Federal Home Loan Bank advances was $710,000
compared to $3.5 million during fiscal 1998. Oakley did not utilize borrowings
during the past two fiscal years. After the conversion is completed, People's
Savings expects to increase its use of borrowings in order to leverage its
balance sheet.
NO SUBSIDIARIES
At September 30, 1999, neither People's Savings nor Oakley had any
subsidiaries.
TOTAL EMPLOYEES
People's Savings had sixteen full-time employees and one part-time employee
at September 30, 1999 and Oakley had four full-time employees and one part-time
employee at such date. None of these employees are represented by a collective
bargaining agent, and People's Savings and Oakley believe that they enjoy good
relations with their personnel.
126
<PAGE>
COMPETITION
People's Savings and Oakley face significant competition both in attracting
deposits and in making loans. Their most direct competition for deposits has
come historically from commercial banks, credit unions and other savings
institutions located in their primary market area, including many large
financial institutions which have greater financial and marketing resources
available to them. In addition, they face significant competition for investors'
funds from short-term money market securities, mutual funds and other corporate
and government securities. Neither People's Savings nor Oakley rely upon any
individual group or entity for a material portion of their deposits. The ability
of People's Savings and Oakley to attract and retain deposits depends on their
ability to generally provide a rate of return, liquidity and risk comparable to
that offered by competing investment opportunities.
People's Savings and Oakley's competition for real estate loans comes
principally from mortgage banking companies, commercial banks, other savings
institutions and credit unions. They compete for loan originations primarily
through the interest rates and loan fees they charge, and the efficiency and
quality of services they provide borrowers. Factors which affect competition
include general and local economic conditions, current interest rate levels and
volatility in the mortgage markets. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions and the anticipated slowing of refinancing activity.
PROPERTIES
The following table sets forth certain information relating to People's
Savings' offices at September 30, 1999.
<TABLE>
<CAPTION>
NET BOOK VALUE OF
PROPERTY AND
LEASEHOLD
LEASE IMPROVEMENTS AT
OWNED OR EXPIRATION SEPTEMBER 30, DEPOSITS AT
LOCATION LEASED DATE 1999 SEPTEMBER 30, 1999
- -------- -------- ---------- ----------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
11 South Broadway
Lebanon, Ohio 45036.................... Owned N/A $1,011 $70,744
112 E. Main Street
Blanchester, Ohio 45107................ Leased 6/03 26 6,947
</TABLE>
The following table sets forth certain information relating to Oakley's
office at September 30, 1999.
<TABLE>
<CAPTION>
NET BOOK VALUE OF
PROPERTY AND
LEASE LEASEHOLD
OWNED OR EXPIRATION IMPROVEMENTS AT DEPOSITS AT
LOCATION LEASED DATE SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
- -------- -------- ---------- ------------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
3924 Isabella
Cincinnati, Ohio 45209................ Owned N/A $25 $13,327
</TABLE>
After completion of the conversion and the mergers, People's Savings plans
to upgrade its office network. People's Savings plans to open a new branch
office in Lebanon, Ohio, to renovate the office currently owned by Oakley, to
replace the Blanchester office and to build a new corporate headquarters, with
an additional branch office, between Lebanon and Cincinnati. People's Savings
expects that its total capital expenditures with respect to these office
upgrades will be approximately $5.0 million.
NO MATERIAL LEGAL PROCEEDINGS
People's Savings and Oakley are involved in routine legal proceedings
occurring in the ordinary course of business which, in the aggregate, are
believed by management to be immaterial to the financial condition and results
of operations of People's Savings and Oakley.
127
<PAGE>
BUSINESS OF HARVEST HOME FINANCIAL
GENERAL
As a community oriented financial institution, Harvest Home Savings Bank
seeks to serve the financial needs of the families and community businesses in
its market area. Harvest Home Savings Bank is principally engaged in the
business of attracting deposits from the general public (which are insured to
applicable limits by the Savings Association Insurance Fund) and using such
deposits to originate residential loans in its primary market area. To a lesser
extent, Harvest Home Savings Bank also originates construction loans and loans
secured by multi-family residential real estate, nonresidential real estate, and
deposits. In addition, Harvest Home Savings Bank invests in mortgage-backed
securities, other investment grade securities, and short-term liquid assets.
Harvest Home Savings Bank also offers a Visa credit card program through a
commercial bank.
Harvest Home Savings Bank conducts business from its main office in Cheviot,
Ohio and from two full-service branch offices located in the Cincinnati area.
Harvest Home Savings Bank's primary market area consists of western Hamilton
County, Ohio, although its market also extends to the remainder of Hamilton
County and to the townships contiguous to Hamilton County in the counties of
Butler, Clermont, and Warren.
LENDING ACTIVITIES
GENERAL. Harvest Home Savings Bank's primary lending activity is the
origination of conventional mortgage loans for its own portfolio secured by one-
to four-family residential properties located in Harvest Home Savings Bank's
primary market area. To a lesser extent, loans for the construction of one- to
four-family homes, mortgage loans on multifamily properties containing five
units or more and nonresidential properties, and secured home equity loans are
also offered by Harvest Home Savings Bank. In addition to mortgage lending,
Harvest Home Savings Bank makes a limited amount of consumer loans secured by
deposits.
128
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information with respect to the composition of Harvest Home Savings Bank's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------- --------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Residential real estate loans:
Construction loans............ $ 5,964 11.3% $ 4,663 9.6% $ 1,513 3.4% $ 3,290 7.8%
1-4 family and multi-family
(1)......................... 46,741 88.5 43,856 89.8 42,353 93.6 38,210 90.4
Nonresidential real estate and
land.......................... 3,085 5.8 3,024 6.2 2,554 5.7 3,281 7.8
Deposit accounts................ 20 0.1 25 0.1 45 0.1 42 0.1
------- ----- ------- ----- ------- ----- ------- -----
55,810 105.7 51,568 105.7 46,465 102.8 44,823 106.1
Less:
Loans in process................ (2,823) (5.3) (2,556) (5.2) (1,019) (2.3) (2,320) (5.5)
Deferred loan origination
fees.......................... (58) (0.1) (88) (0.2) (102) (0.2) (125) (0.3)
Allowance for loan losses....... (139) (0.3) (127) (0.3) (115) (0.3) (111) (0.3)
------- ----- ------- ----- ------- ----- ------- -----
Total Loans............... $52,790 100.0% $48,797 100.0% $45,229 100.0% $42,267 100.0%
======= ===== ======= ===== ======= ===== ======= =====
Type of Security:
Residential real estate:
1-4 family.................... $50,527 95.7% $47,152 96.6% $42,464 93.9% $39,978 94.6%
Other dwelling................ 2,178 4.1 1,367 2.8 1,402 3.1 1,522 3.6
Nonresidential real estate...... 3,085 5.8 3,024 6.2 2,554 5.7 3,281 7.8
Deposit accounts................ 20 0.1 25 0.1 45 0.1 42 0.1
------- ----- ------- ----- ------- ----- ------- -----
55,810 105.7 51,568 105.7 46,465 102.8 44,823 106.1
Less:
Loans in process................ (2,823) (5.3) (2,556) (5.2) (1,019) (2.3) (2,320) (5.5)
Deferred loan origination
fees.......................... (58) (0.1) (88) (0.2) (102) (0.2) (125) (0.3)
Allowance for loan losses....... (139) (0.3) (127) (0.3) (115) (0.3) (111) (0.3)
------- ----- ------- ----- ------- ----- ------- -----
Total Loans............... $52,790 100.0% $48,797 100.0% $45,229 100.0% $42,267 100.0%
======= ===== ======= ===== ======= ===== ======= =====
<CAPTION>
AT SEPTEMBER 30,
---------------------
1995
---------------------
PERCENT OF
TOTAL
AMOUNT LOANS
-------- ----------
<S> <C> <C>
Type of Loan:
Residential real estate loans:
Construction loans............ $ 1,505 3.9%
1-4 family and multi-family
(1)......................... 34,002 88.9
Nonresidential real estate and
land.......................... 3,341 8.8
Deposit accounts................ 83 0.2
------- -----
38,931 101.8
Less:
Loans in process................ (428) (1.1)
Deferred loan origination
fees.......................... (148) (0.4)
Allowance for loan losses....... (110) (0.3)
------- -----
Total Loans............... $38,245 100.0%
======= =====
Type of Security:
Residential real estate:
1-4 family.................... $34,117 89.2%
Other dwelling................ 1,390 3.6
Nonresidential real estate...... 3,341 8.8
Deposit accounts................ 83 0.2
------- -----
38,931 101.8
Less:
Loans in process................ (428) (1.1)
Deferred loan origination
fees.......................... (148) (0.4)
Allowance for loan losses....... (110) (0.3)
------- -----
Total Loans............... $38,245 100.0%
======= =====
</TABLE>
- ------------------------
(1) Includes home equity lines of credit underwritten on the same basis as first
mortgage loans.
129
<PAGE>
LOAN MATURITY. The following table sets forth certain information as of
September 30, 1999 regarding the dollar amount of loans maturing in Harvest Home
Savings Bank's portfolio based on their contractual terms to maturity. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
DUE DURING THE YEARS DUE 20 OR
SEPTEMBER 30, DUE 3-5 DUE 5-10 DUE 10-20 MORE YEARS
------------------------------ YEARS AFTER YEARS AFTER YEARS AFTER AFTER
2000 2001 2002 9/30/99 9/30/99 9/30/99 9/30/99 TOTAL
-------- -------- -------- ----------- ----------- ----------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1)(2)
One- to four-family
residential:
Adjustable................... $1,480 $ 11 $ 8 $160 $ 624 $12,579 $6,270 $21,132
Fixed........................ 19 486 247 441 5,154 17,282 2,746 26,375
Multi-family residential:
Adjustable................... -- -- 23 -- 286 1,357 512 2,178
Non-residential................ 30 5 95 -- 882 2,073 -- 3,085
Deposit account loans.......... 20 -- -- -- -- -- -- 20
------ ---- ---- ---- ------ ------- ------ -------
Total loans.................... $1,549 $502 $373 $601 $6,946 $33,291 $9,528 $52,790
====== ==== ==== ==== ====== ======= ====== =======
</TABLE>
- ------------------------------
(1) Amounts shown are net of loans in process of $2,823,000, deferred loan
origination fees of $58,000 and allowance for loan losses of $139,000.
(2) Includes construction loans and land loans.
The following table sets forth the dollar amount of all loans due after one
year from September 30, 1999, which have predetermined interest rates and
floating or adjustable interest rates:
<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATES ADJUSTABLE RATE TOTAL
------------- --------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage Loans:
One- to four-family residential........................ $26,356 $19,652 $46,008
Multi-family residential............................... -- 2,178 2,178
Nonresidential......................................... -- 3,055 3,055
------- ------- -------
Total loans:......................................... $26,356 $24,885 $51,241
======= ======= =======
</TABLE>
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of Harvest Home Savings Bank has been the origination of permanent
conventional loans secured by one- to four-family residences, primarily
single-family residences, located within Harvest Home Savings Bank's primary
market area. In addition, Harvest Home Savings Bank makes second mortgage loans,
as well as home equity lines of credit underwritten on the same basis as first
mortgage loans. Harvest Home Savings Bank also has a small percentage of loans
secured by property located outside its primary market area including a small
percentage secured by real estate located in nearby southeastern Indiana. Each
of such loans is secured by a mortgage on the underlying real estate and
improvements thereon, if any.
Regulations limit the amount which Harvest Home Savings Bank may lend in
relationship to the appraised value of the real estate and improvements at the
time of loan origination. Within the parameters of such regulations, Harvest
Home Savings Bank makes fixed rate loans on single-family, owner occupied
residences up to 80% of the value of the real estate and improvements (the
"loan-to-value ratio") for terms not to exceed 20 years and adjustable-rate
mortgage loans up to 95% loan-to-value ratio not to exceed 30 years. Harvest
Home Savings Bank does not require private mortgage insurance for such loans.
Harvest Home Savings Bank also offers loans to low and moderate income borrowers
for first time purchase of single family owner occupied residences. These loans
can
130
<PAGE>
be obtained for up to 95% of the property's purchase price at a discounted fixed
interest rate for a period of up to 25 years. No private mortgage insurance is
required for any of these loan products.
Adjustable rate mortgage loans are offered by Harvest Home Savings Bank for
terms of up to 30 years. The interest rate adjustment period on the adjustable
rate mortgage loans is three years which is tied to changes in the weekly
average yield on U.S. Treasury securities, adjusted to a constant maturity of
one year as made available by the Board of Governors of the Federal Reserve
System (the "Index"). The interest rate for the next three-year period is
increased or decreased by the amount of the change in the Index between the date
the interest rate was set and the date of the three-year adjustment rounded to
the nearest one-quarter percent. The maximum allowable adjustment at each
adjustment date is usually 2% with a maximum adjustment of 5% over the term of
the loan. Adjustable rate mortgage loans generally have an increased risk of
delinquency in periods of rising interest rates due to the increasing monthly
payments required of borrowers. Harvest Home Savings Bank has in the past issued
three-year adjustable rate mortage loans tied to different indexes. One such
index is tied to a one-year (our most current index) constant maturity U.S.
Treasury Index. Another index is tied to the interest rates being charged by
Harvest Home Savings Bank for similar type loans at the time of the interest
rate change. Borrowers are qualified at the contract rate at the time of
origination of the loan.
Harvest Home Savings Bank's one- to four-family residential real estate loan
portfolio, including construction loans, was approximately $50.5 million at
September 30, 1999, and represented 95.7% of total loans at such date. At such
date, loans secured by one- to four-family residential real estate with
outstanding balances of $25,000, or .05%, of the total one- to four-family
residential real estate loan balance, were non-performing. See "--Delinquent
Loans, Non-Performing Assets and Classified Assets."
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans on one- to
four-family properties, Harvest Home Savings Bank makes loans secured by
multi-family properties containing over four units. Multi-family loans generally
have terms of up to 20 years and a maximum loan-to-value ratio of 80%. Such
loans are currently made with adjustable interest rates.
Multi-family lending is generally considered to involve a higher degree of
risk because the loan amounts are larger and the borrower typically depends upon
income generated by the project to cover operating expenses and debt service.
The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower.
Harvest Home Savings Bank attempts to reduce the risk associated with
multi-family lending by evaluating the credit-worthiness of the borrower and the
projected income from the project, and by obtaining personal guarantees on loans
made to corporations and partnerships, and, where deemed necessary, Harvest Home
Savings Bank obtains additional collateral. Harvest Home Savings Bank may
require that borrowers agree to submit financial statements annually to enable
Harvest Home Savings Bank to monitor the loan, although no such requirement
existed until 1993.
At September 30, 1999, Harvest Home Savings Bank had $2.2 million of
multi-family residential real estate loans, representing 4.1% of total loans at
that date. At this date, no such loans were non-performing.
CONSTRUCTION LOANS. Harvest Home Savings Bank makes construction loans for
residential and non-residential real estate. Such loans are structured to become
permanent loans upon completion of construction. Residential construction loans
are offered at fixed rates for terms up to 20 years, and at adjustable rates up
to 30 years. Non-residential construction loans are offered at adjustable rates
for terms up to 20 years. The majority of the construction loans originated by
Harvest Home Savings Bank are made to owner-occupants for construction of single
family homes. These loans are typically one year in duration and require only
interest payments until the loan becomes a permanent loan upon completion of
construction. The remainder are made for non-owner occupied properties to
builders for small projects, some of which have not been pre-sold, and to other
small commercial developers.
131
<PAGE>
Construction loans for non-owner occupied properties generally involve
greater underwriting and default risks than do loans secured by mortgages on
existing properties due to the concentration of principal in a limited number of
loans and borrowers and the effects of general economic conditions on real
estate developments, developers, managers and builders. In addition,
construction loans in general are more difficult to evaluate and monitor. Loan
funds are advanced upon the security of the project under construction, which is
more difficult to value before the completion of construction. Moreover, because
of the uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the loan-to-value ratios and the total loan
funds required to complete a project. In the event a default on a construction
loan occurs and foreclosure follows, Harvest Home Savings Bank would have to
take control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. Harvest Home Savings Bank's
construction loans generally are secured by property located in Harvest Home
Savings Bank's primary market area. Construction loans secured by property
outside the primary lending area are secured by property in Eastern Hamilton
County and surrounding counties, all within the State of Ohio; such loans are
made on the same terms and conditions as those within the primary lending area
and pose no more risk than those within the primary lending area.
At September 30, 1999, Harvest Home Savings Bank had $6.0 million of
construction loans, or 11.3% of its loan portfolio, none of which were
non-performing.
NONRESIDENTIAL REAL ESTATE LOANS AND LAND LOANS. Harvest Home Savings Bank
also makes loans secured by nonresidential real estate consisting primarily of
retail stores, warehouses, and office buildings. Such nonresidential loans are
made only with adjustable rates of interest. Such loans have terms of up to
20 years and a maximum loan-to-value ratio of 75%. The largest loan of this type
at September 30, 1999 had a principal balance of $468,600 and was secured by a
retail shopping center and the residence of the borrower, both located in
Harvest Home Savings Bank's primary market area.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Harvest Home Savings Bank has endeavored to
reduce such risk by evaluating the credit history and past performance of the
borrower, the location of the real estate, the quality of the management
constructing and operating the property, the debt service ratio, the quality and
characteristics of the income stream generated by the property, and appraisals
supporting the property's valuation. Harvest Home Savings Bank may require
borrowers to agree to submit financial statements annually to allow Harvest Home
Savings Bank to monitor the loan, although no such requirement existed until
1993.
At September 30, 1999, Harvest Home Savings Bank had a total of
$3.0 million invested in nonresidential real estate loans. Such loans comprised
approximately 5.8% of Harvest Home Savings Bank's total loans at such date. At
such date, none of the nonresidential real estate loans were non-performing.
DEPOSIT ACCOUNT LOANS. Harvest Home Savings Bank makes consumer loans,
exclusively to depositors on the security of their deposit accounts. Such loans
are made at adjustable rates of interest, and the principal amount of the loan
cannot exceed the face value of the pledged deposit. Interest is due quarterly,
and principal is due on demand.
At September 30, 1999, Harvest Home Savings Bank had approximately $20,000
or .1% of total loans, invested in deposit loans.
HOME EQUITY LINES OF CREDIT AND SECOND MORTGAGES. Harvest Home Savings Bank
offers home equity lines of credit. These are typically secured by second
mortgages, but with some being secured by
132
<PAGE>
first mortgages. The line of credit agreements currently being offered by
Harvest Home Savings Bank provide that borrowers can obtain advances up to their
credit limit for a period of fifteen years, and after that time, the borrowers
must repay the outstanding balance over a period of the next ten years. Harvest
Home Savings Bank has offered in the past home equity lines of credit which are
open ended and have no required repayment period or fixed termination date.
These lines of credit may, however, be terminated at any time by either party.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a
number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by Harvest Home Savings
Bank's lending staff, and walk-in customers.
Loan applications for permanent mortgage loans are taken by loan personnel.
Harvest Home Savings Bank obtains a credit report, verification of employment,
and other documentation concerning the credit-worthiness of the borrower. An
appraisal of the fair market value of the real estate which will be given as
security for the loan is prepared by an independent fee appraiser approved by
the Board of Directors. For residential properties, an environmental study is
conducted only if the appraiser or management has reason to believe that an
environmental problem may exist. For most nonresidential properties, an
environmental report is required. For most multi-family and nonresidential
mortgage loans, a personal guarantee is required. Upon the completion of the
appraisal and the receipt of information on the borrower, the application for a
loan is submitted to the Executive Committee and/or the Board of Directors for
approval or rejection. Loan applications which do not exceed $200,000 generally
can be approved by the Harvest Home Savings Bank's designated loan officer as
long as the loan conforms to all underwriting requirements.
If a mortgage loan application is approved, an attorney's opinion of title
is obtained on the real estate which will secure the mortgage loan. Harvest Home
Savings Bank does not obtain title insurance. Borrowers are required to carry
satisfactory fire and casualty insurance and flood insurance, if applicable, and
to name Harvest Home Savings Bank as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building plans,
construction specifications, and estimates of construction costs. Harvest Home
Savings Bank also evaluates the feasibility of the proposed construction project
and the experience and record of the builder.
Harvest Home Savings Bank's loans contain provisions that the entire balance
of the loan is due upon sale of the property securing the loan.
LOAN ORIGINATIONS, PURCHASES, AND SALES. During the past several years,
Harvest Home Savings Bank has been actively originating new fixed-rate and
adjustable-rate loans. All loans originated during that period have been held in
portfolio. Harvest Home Savings Bank has not sold a loan since 1984. Harvest
Home Savings Bank does not process loans on forms accepted in the secondary
market. Management believes other significant secondary market guidelines are
followed. While there are no current plans to do so, Harvest Home Savings Bank
may sell loans in the future if management deems it in the best interest of
Harvest Home Savings Bank. Prior to 1981, Harvest Home Savings Bank originated
mortgage loans only at fixed rates. Beginning in 1981, Harvest Home Savings Bank
originated only adjustable-rate loans. In the late '80s, Harvest Home Savings
Bank again began originating a limited amount of fixed-rate mortgage loans, up
to maximum terms of 20 years, which are held in its portfolio in addition to
adjustable rate mortgage loans.
Harvest Home Savings Bank generally does not participate in loans originated
by other institutions. Harvest Home Savings Bank will consider participation in
loans if management deems it to be in the interest of Harvest Home Savings Bank.
The following table presents Harvest Home Savings Bank's
133
<PAGE>
mortgage loan originations and mortgage-backed securities purchases and sales
activity for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans Originated:
Construction.................................. $ 3,046 $ 1,540 $ 1,625 $ 3,488 $ 962
1 to 4 Family................................. 10,768 11,256 6,271 7,082 5,466
Home equity line of credit.................... 883 212 532 570 385
5 or more units............................... 710 433 -- 220 --
Nonresidential real estate.................... 431 438 485 844 --
Deposit accounts.............................. 6 43 -- 56 85
------- ------- ------- ------- ------
Total loans originated...................... $15,844 $13,922 $ 8,913 $12,260 $6,898
======= ======= ======= ======= ======
Mortgage-backed securities purchased:
Insured, guaranteed or collaterized mortgage-
backed securities........................... $11,967 $26,992 $18,205 $12,972 $2,013
======= ======= ======= ======= ======
Mortgage-backed securities sold................. $ -- $ 1,878 $ 141 $ 267 $ --
======= ======= ======= ======= ======
</TABLE>
FEDERAL LENDING LIMIT. Regulations generally limit the aggregate amount
that a savings bank can lend to one borrower to an amount equal to 15% of the
savings bank's unimpaired capital and surplus. A savings bank may loan to one
borrower an additional amount not to exceed 10% of the association's unimpaired
capital and surplus if the additional amount is fully secured by certain forms
of "readily marketable collateral." Real estate is not considered "readily
marketable collateral." In applying these limits, the regulations require that
loans to certain related or affiliated borrowers be aggregated. Based on such
limits, Harvest Home Savings Bank could have made loans in an aggregate
principal amount of $1.5 million to one borrower at September 30, 1999. At that
date, Harvest Home Savings Bank had no loans in excess of such limits.
LOAN ORIGINATION AND OTHER FEES. Harvest Home Savings Bank realizes loan
origination fee and other fee revenue from its lending activities, and also
realizes income from late payment charges, and fees for other miscellaneous
services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments, and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized as an adjustment to yield over the
life of the related loan.
DELINQUENT LOANS, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, Harvest Home Savings Bank
attempts to cause the deficiency to be cured by contacting the borrower. In most
cases, deficiencies have been cured promptly.
Loans originated by Harvest Home Savings Bank before 1981 required payment
of interest in advance. Although the mortgage documents require payments on the
first of each month, borrowers were told that payments would not be treated as
delinquent if made by the last working day of that month.
Loans originated commencing in 1981 require interest in arrears, and
payments are due on the first day of the following month.
134
<PAGE>
The following collection procedures are generally used:
- When a loan payment is in arrears beyond the late payment date, a notice
of late payment is generated by the on-line computer system and mailed to
the borrower. A copy of the notice is filed in the loan file.
- When a loan payment exceeds the due date by thirty days, the loan is
scheduled for individual attention. Additional late notices are sent to
the borrower followed by a telephone call, if necessary.
- When a loan payment exceeds the due date by sixty days and personal
contact has not cured the delinquency, a thirty day collection letter is
sent to the borrower by Harvest Home Savings Bank's attorney. When a
delinquent loan account is referred to the attorney for collection, the
borrower is restricted from making any payment other than the total amount
due as of the date of payment.
- If the procedures outlined above have not cured the delinquency, legal
action is filed against the borrower.
Real estate acquired by Harvest Home Savings Bank as a result of foreclosure
proceedings is classified as real estate owned until it is sold. When property
is so acquired, it is recorded by Harvest Home Savings Bank at the lower of the
book value of the related loan or the estimated fair value of the real estate,
less selling expenses at the date of acquisition, and any write-down resulting
therefrom is charged to the allowance for loan losses. Interest accrual, if any,
ceases no later than the date of acquisition of the real estate, and all costs
incurred from such date in maintaining the property are expensed. Costs relating
to the development and improvement of the property are capitalized to the extent
of fair value. Harvest Home Savings Bank has had only two parcels of real estate
owned during the last three years.
Harvest Home Savings Bank places loans on non-accrual status when the
collectibility of the loan is in doubt or when a loan is more than ninety days
delinquent in interest payments.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------------ ------------------------------ ------------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
NUMBER AMOUNT LOANS NUMBER AMOUNT LOANS NUMBER AMOUNT LOANS
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Days delinquent for: (1)
30--59 days................ 11 $506 0.96% 6 $290 0.60% 13 $461 1.02%
60--89 days................ 5 429 0.81 4 142 0.29 5 376 0.83
90 days and over........... 1 25 0.05 1 49 0.10 2 95 0.21
--- ---- ---- --- ---- ---- --- ---- ----
Total delinquent loans... 17 $960 1.82% 11 $481 0.99% 20 $932 2.06%
=== ==== ==== === ==== ==== === ==== ====
</TABLE>
- ------------------------------
(1) At September 30, 1999, delinquencies include 15 one-to-four family
residential loans with principal balances totaling $735,531, one
multi-family residential loan with a principal balance of $195,122 and one
nonresidential loan with a principal balance of $29,777.
135
<PAGE>
The following table sets forth the amounts and categories of Harvest Home
Savings Bank's non-performing assets as indicated by the dates on the accrual
status when they become past due 90 days or more.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accruing loans delinquent 90 days or more................... $ -- $ -- $ --
===== ===== =====
Loans accounted for on a nonaccrual basis:
Real Estate:
Residential............................................... $ 25 $ 49 $ 64
Nonresidential............................................ -- -- 31
Deposit account........................................... -- -- --
----- ----- -----
Total nonaccrual loans...................................... 25 49 95
Other non-performing assets................................. -- -- --
----- ----- -----
Total non-performing assets................................. $ 25 $ 49 $ 95
===== ===== =====
Total non-performing assets as a percentage of total
assets.................................................... .03% .05% .10%
Specific loan loss allowance................................ $ -- $ -- $ --
General loan loss allowance (unallocated as to any specific
loan type)................................................ 139 127 115
----- ----- -----
Total loan loss allowance................................... $ 139 $ 127 $ 115
===== ===== =====
Loan loss allowance as a percent of non-performing loans.... 556.0% 259.2% 121.1%
Loan loss allowance as a percent of non-performing assets... 556.0% 259.2% 121.1%
</TABLE>
Harvest Home Savings Bank had one non-performing loan at both September 30,
1999 and 1998. During the periods shown, Harvest Home Savings Bank had no
restructured loans within the meaning of Statement of Financial Accounting
Standards No. 114.
Harvest Home Savings Bank's classification policy provides for the
classification of loans and other assets such as debt and equity securities
considered to be of lesser quality as "substandard," "doubtful" or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that Harvest Home Savings Bank will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories, but possess
weaknesses, are designated "special mention" by management. An insured
institution is required to establish general allowances for loan losses in an
amount deemed prudent by management for loans classified substandard or
doubtful, as well as for other problem loans. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
Generally, Harvest Home Savings Bank classifies as "substandard" all loans
that are more than 90 days delinquent unless management believes the delinquency
status is short-term due to unusual
136
<PAGE>
circumstances. Loans delinquent fewer than 90 days may also be classified if the
loans have the characteristics described above rendering classification
appropriate.
The aggregate amounts of Harvest Home Savings Bank's classified assets at
the dates indicated were as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Substandard................................................. $524 $228 $219
Doubtful.................................................... -- -- --
Loss........................................................ -- -- --
---- ---- ----
Total classified assets................................... $524 $228 $219
==== ==== ====
</TABLE>
Federal and state examiners are authorized to classify a savings bank's
assets. If a savings bank does not agree with an examiner's classification of an
asset, it may appeal to regulatory authorities.
ALLOWANCE FOR LOAN LOSSES. The Board of Directors reviews on a quarterly
basis the allowance for loan losses as it relates to a number of relevant
factors, including but not limited to, trends in the level of non-performing
assets and classified loans, current and anticipated economic conditions in the
primary lending area, past loss experience, and possible losses arising from
specific problem assets. To a lesser extent, management also considers loan
concentrations to single borrowers and changes in the composition of the loan
portfolio. While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments, and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination. At September 30, 1999, 1998, and 1997, Harvest Home Savings
Bank's allowance for loan losses totaled $139,000, $127,000 and $115,000,
respectively, none of which was allocated to a particular type of loan at any
such dates. Due to the absence of any material loss on any loan in recent years,
the Board of Directors of Harvest Home Savings Bank does not believe such a
specific allocation is necessary.
The following table sets forth an analysis of Harvest Home Savings Bank's
allowance for losses on loans for the periods indicated. Harvest Home Savings
Bank had no recoveries during such periods.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year................................ $ 127 $ 115 $ 111
Loans charged-off........................................... -- -- (5)
Recoveries.................................................. -- -- --
Provision for losses on loans (charged to operations)....... 12 12 9
----- ----- -----
Balance at end of period.................................... $ 139 $ 127 $ 115
===== ===== =====
Ratio of allowance for losses on loans to non-accrual
loans..................................................... 556.0% 259.2% 121.1%
Ratio of allowance for losses on loans to total loans....... 0.26% 0.25% 0.25%
</TABLE>
The allocation of loan loss reserves based on portfolio percentages at
September 30, 1999 was as follows:
<TABLE>
<CAPTION>
BALANCE PERCENT
-------- --------
<S> <C> <C>
Residential real estate..................................... $131,000 94.0%
Non-Residential real estate................................. 8,000 6.0
-------- -----
$139,000 100.0%
======== =====
</TABLE>
137
<PAGE>
MORTGAGE-BACKED AND RELATED SECURITIES
Harvest Home Savings Bank faces significant competition for loans in its
primary market area. This competitive factor, coupled with the declining
interest rate environment over the past several years has limited the
opportunities for originating adjustable rate mortgage loans. As a result,
Harvest Home Savings Bank has purchased adjustable rate mortgage-backed
securities, as well as mortgage related securities as interest-rate sensitive
portfolio investments.
Harvest Home Savings Bank's adjustable rate mortgage-backed securities are
guaranteed as to principal and interest by Federal National Mortgage Association
or Federal Home Loan Mortgage Corporation. At September 30, 1999,
$24.0 million, or 71.2% of Harvest Home Savings Bank's mortgage-backed
securities were adjustable rate.
CMO/REMICs are securities derived by reallocating cash flows from
mortgage-backed securities or pools of mortgage loans in order to create
multiple classes, or tranches of securities with coupon rates that differ from
the underlying collateral as a whole. Harvest Home Savings Bank invests in these
securities as an interest rate sensitive investment portfolio alternative to
mortgage loans. As of September 30, 1999, Harvest Home Savings Bank's CMO/REMICS
totaled $26.8 million, or 79.5%, of the mortgage-backed securities portfolio.
All of the CMO/REMICs owned by Harvest Home Savings Bank are insured or
guaranteed directly, or indirectly, through mortgage-backed securities
underlying the obligations by Federal National Mortgage Association or Federal
Home Loan Mortgage Corporation. CMOs and REMICs can be classified by federal
regulators under certain economic scenarios as "high risk" derivatives and are
therefore potentially subject to forced divestiture. However, due to the nature
of Harvest Home Savings Bank's investments, i.e., relatively short-term to
maturity, the probability of such occurrence is viewed by management as remote.
At September 30, 1999, Harvest Home Financial's investment and market value
information of mortgage-backed securities designated as available for sale was
comprised of the following:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES MARKET VALUE
--------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation
participation certificates...................... $ 4,901 $ -- $ 128 $ 4,773
Federal Home Loan Mortgage Corporation CMOs....... 22,236 -- 858 21,378
Federal National Mortgage Association
participation certificates...................... 2,158 2 52 2,108
Federal National Mortgage Association CMOs........ 5,420 33 1 5,452
------- ---- ------ -------
Total........................................... $34,715 $ 35 $1,039 $33,711
======= ==== ====== =======
</TABLE>
INVESTMENT ACTIVITIES
Federal and state regulations require Harvest Home Savings Bank to maintain
a prudent amount of liquid assets to protect the safety and soundness of Harvest
Home Savings Bank. Therefore, the Board of Directors of Harvest Home Savings
Bank has established an investment policy to maintain safety and soundness and
to provide control and guidelines for investments purchased by the institution.
In accordance with the investment policy, Harvest Home Savings Bank invests in
U.S. Treasury obligations, U.S. Federal agency and federally sponsored agency
obligations, federal funds sold and certificates of deposit at insured banks.
138
<PAGE>
The following table sets forth the composition of Harvest Home Financial's
interest-bearing deposits and investment portfolio at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------- ----------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST % OF TOTAL VALUE % OF TOTAL COST % OF TOTAL VALUE % OF TOTAL
--------- ---------- -------- ---------- --------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government and Agency
obligations.............. $6,000 65.0% $5,951 64.8% $4,005 57.2% $4,032 57.4%
Other investments:
Interest-bearing deposits
in other financial
institutions............. 1,402 15.2 1,402 15.3 1,182 16.9 1,182 16.8
Federal funds sold......... 100 1.1 100 1.1 200 2.9 200 2.8
Federal Home Loan Bank
Stock.................... 1,723 18.7 1,723 18.8 1,606 23.0 1,606 23.0
------ ----- ------ ----- ------ ----- ------ -----
Total investment
securities,
interest-bearing deposits
and other................ $9,225 100.0% $9,176 100.0% $6,993 100.0% $7,020 100.0%
====== ===== ====== ===== ====== ===== ====== =====
<CAPTION>
SEPTEMBER 30,
----------------------------------------------
1997
----------------------------------------------
AMORTIZED MARKET
COST % OF TOTAL VALUE % OF TOTAL
--------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Government and Agency
obligations.............. $ 7,972 57.4% $ 8,039 57.6%
Other investments:
Interest-bearing deposits
in other financial
institutions............. 2,106 15.1 2,106 15.1
Federal funds sold......... 2,600 18.7 2,600 18.6
Federal Home Loan Bank
Stock.................... 1,219 8.8 1,219 8.7
------- ----- ------- -----
Total investment
securities,
interest-bearing deposits
and other................ $13,897 100.0% $13,964 100.0%
======= ===== ======= =====
</TABLE>
139
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Harvest Home Savings Bank's investment
securities at September 30, 1999. All of such securities mature in three years
or less.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
---------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS
------------------------------ ------------------------------
AMORTIZED COST AVERAGE YIELD AMORTIZED COST AVERAGE YIELD
-------------- ------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency securities.... $ -- $ -- $6,000 5.50%
====== ====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
----------------------------------------------------------------
TOTAL INVESTMENT SECURITIES
----------------------------------------------------------------
AVERAGE LIFE IN WEIGHTED AVERAGE
YEARS AMORTIZED COST FAIR VALUE YIELD
--------------- -------------- ---------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency securities.... 1.5 $6,000 $5,951 5.50%
=== ====== ====== ====
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of Harvest
Home Savings Bank's funds for use in lending and other investment activities. In
addition to deposits, Harvest Home Savings Bank derives funds from interest
payments and principal repayments on loans and mortgage-backed securities,
income on earning assets, and service charges. Loan payments are a relatively
stable source of funds, while deposit inflows and outflows fluctuate more in
response to general interest rates and money market conditions.
DEPOSITS. Deposits are attracted principally from within Harvest Home
Savings Bank's primary market area through the offering of a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") accounts,
Super NOW accounts, money market deposit accounts, regular passbook savings
accounts, term certificate accounts, and individual retirement accounts
("IRAs"). Interest rates paid, maturity terms, service fees, and withdrawal
penalties for the various types of accounts are established periodically by
management of Harvest Home Savings Bank based on Harvest Home Savings Bank's
liquidity requirements, growth goals, and interest rates paid by competitors.
Harvest Home Savings Bank has never used brokers to attract deposits.
At September 30, 1999, Harvest Home Savings Bank's certificates of deposit
totaled $47.0 million, or 71.0% of total deposits. Of such amount, approximately
$34.4 million in certificates of deposit will mature within one year. Based on
past experience and Harvest Home Savings Bank's prevailing pricing strategies,
management believes that a substantial percentage of such certificates will
renew with Harvest Home Savings Bank at maturity. If there is a significant
deviation from historical experience, Harvest Home Savings Bank can utilize
borrowings from the Federal Home Loan Bank of Cincinnati as an alternative to
this source of funds.
140
<PAGE>
The following table sets forth the dollar amount of deposits in the various
types of savings programs offered by Harvest Home Savings Bank at the dates
indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL TOTAL TOTAL
AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
NOW accounts(1)........................... $ 3,806 5.7% $ 3,208 5.3% $ 2,699 4.6%
Super NOW accounts(1)..................... 405 0.6 253 0.4 300 0.5
Passbook savings(2)....................... 10,437 15.8 9,494 15.8 9,143 15.6
Money market deposit account(3)........... 4,534 6.9 4,107 6.8 4,332 7.4
------- ----- ------- ----- ------- -----
Total transaction accounts.............. 19,182 29.0 17,062 28.3 16,474 28.1
Certificates of Deposit(4):
4.00-5.99%................................ 42,304 63.9 38,275 63.6 38,031 64.7
6.00-7.99%................................ 4,734 7.1 4,888 8.1 4,281 7.2
------- ----- ------- ----- ------- -----
Total certificates of deposit........... 47,038 71.0 43,163 71.7 42,312 71.9
------- ----- ------- ----- ------- -----
Total deposits............................ $66,220 100.0% $60,225 100.0% $58,786 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- ------------------------
(1) Harvest Home Savings Bank's weighted average interest rate paid on NOW
accounts fluctuates with the general movement of interest rates. At
September 30, 1999, 1998, and 1997, the weighted average rates on NOW
accounts were 1.84%, 1.84% and 2.69%, respectively. At September 30, 1999,
1998, and 1997, the weighted average rate of Super NOW accounts was 2.75%.
(2) Harvest Home Savings Bank's weighted average interest rate paid on passbook
accounts fluctuates with the general movement of interest rates. At
September 30, 1999, 1998, and 1997, the weighted average rates on passbook
accounts were 2.53%, 2.53% and 2.79%, respectively.
(3) Harvest Home Savings Bank's weighted average interest rate paid on money
market deposit accounts fluctuates with the general movement of interest
rates. At September 30, 1999, 1998, and 1997, the weighted average rate on
money market accounts was 3.00%.
(4) IRAs are generally offered under certificate of deposit programs.
The following table shows interest rate and original contractual maturity
information for Harvest Home Savings Bank's certificates of deposit as of
September 30, 1999:
<TABLE>
<CAPTION>
UP TO ONE OVER 1 YEAR OVER 2 YEARS
YEAR TO 2 YEARS TO 3 YEARS OVER 3 YEARS TOTAL
--------- ----------- ------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
4.00 - 5.99%............................ $30,622 $6,922 $1,191 $3,569 $42,304
6.00 - 7.99%............................ 3,750 984 -- -- 4,734
------- ------ ------ ------ -------
Total certificates of deposit........... $34,372 $7,906 $1,191 $3,569 $47,038
======= ====== ====== ====== =======
</TABLE>
141
<PAGE>
The following table presents the amount of Harvest Home Savings Bank's
certificates of deposit of $100,000 or more by the time remaining until maturity
as of September 30, 1999:
<TABLE>
<CAPTION>
MATURITY AT SEPTEMBER 30, 1999
- -------- ---------------------
(IN THOUSANDS)
<S> <C>
Three months or less..................................... $ 743
Over 3 months to 6 months................................ 511
Over 6 months to 12 months............................... 1,425
Over 12 months........................................... 1,440
------
Total................................................ $4,119
======
</TABLE>
The following table sets forth Harvest Home Savings Bank's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance........................................... $60,225 $58,786 $57,958
Deposits.................................................... 75,155 65,375 58,930
Withdrawals................................................. (72,135) (66,862) (60,904)
Interest credited........................................... 2,975 2,926 2,802
------- ------- -------
Ending balance.............................................. $66,220 $60,225 $58,786
======= ======= =======
Net increase................................................ $ 5,995 $ 1,439 $ 828
Percent increase............................................ 9.95% 2.45% 1.43%
</TABLE>
BORROWINGS. The Federal Home Loan Bank System functions as a central
reserve bank providing credit for its member institutions and certain other
financial institutions. As a member in good standing of the Federal Home Loan
Bank of Cincinnati, Harvest Home Savings Bank is authorized to apply for
advances from the Federal Home Loan Bank of Cincinnati, provided certain
standards of creditworthiness have been met. Under current regulations, a bank
must meet certain qualifications to be eligible for Federal Home Loan Bank
advances. All standards required are currently met by Harvest Home Savings.
Harvest Home Savings is a member of the Federal Home Loan Bank and is required
to own capital stock in the Federal Home Loan Bank. Each Federal Home Loan Bank
credit program has its own interest rate, which may be fixed or variable and
range of maturity. The Federal Home Loan Bank may prescribe the acceptable uses
for these advances as well as limitations on the size of the advances and
repayment provisions.
The following table sets forth certain information as to Harvest Home
Savings Bank's Federal Home Loan Bank advances at the date indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal Home Loan Bank advances............................. $22,600 $25,850 $24,000
Weighted average interest rate of Federal Home Loan Bank
advances.................................................. 5.23% 5.26% 5.82%
</TABLE>
142
<PAGE>
The following table sets forth the maximum balance and average balance of
Federal Home Loan Bank advances during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maximum Balance:
Federal Home Loan Bank advances........................... $26,000 $25,850 $24,000
Average Balance:
Federal Home Loan Bank advances........................... 23,827 21,738 15,615
Weighted average interest rate of Federal Home Loan Bank
advances.................................................. 5.08% 5.62% 5.78%
</TABLE>
COMPETITION
Harvest Home Savings Bank competes for deposits with other savings banks and
associations, commercial banks and credit unions, and with the issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, Harvest Home Savings Bank
competes with other savings banks and associations, commercial banks, consumer
finance companies, credit unions, leasing companies, and other lenders. Harvest
Home Savings Bank competes for loan originations primarily through the interest
rates and loan fees it charges, and through the efficiency and quality of
services it provides to borrowers. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels, and other factors which are not
readily predictable.
Due to Harvest Home Savings Bank's size relative to the many other financial
institutions in its market area, management believes that Harvest Home Savings
Bank has a small share of the deposit and loan markets.
The size of financial institutions competing with Harvest Home Savings Bank
is likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon Harvest
Home Savings Bank.
PROPERTIES
The following table sets forth certain information at September 30, 1999,
regarding the properties on which the main office and each branch office of
Harvest Home Savings Bank is located:
<TABLE>
<CAPTION>
OWNED OR NET BOOK DEPOSITS AT
LOCATION LEASED DATE ACQUIRED VALUE(1) SEPTEMBER 30, 1999
- -------- -------- ----------------- -------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MAIN OFFICE:
3621 Harrison Avenue................... Owned Various from 1926 $418 $37,865
Cheviot, OH 45211 to present
BRANCH OFFICES:
7030 Hamilton Avenue................... Owned 1975 $277 $17,379
Cincinnati, OH 45231
3663 Ebenezer Road..................... Owned 1985 $287 $10,976
Cincinnati, OH 45248
</TABLE>
- ------------------------
(1) At September 30, 1999, Harvest Home's office premises and equipment had a
total net book value of $1.2 million.
143
<PAGE>
Harvest Home Financial has contracted for the data processing and reporting
services of NCR Corporation. The cost of these data processing services is
approximately $9,000 per month.
NO MATERIAL LEGAL PROCEEDINGS
Neither Harvest Home Financial nor Harvest Home Savings Bank is presently
involved in any legal proceedings of a material nature. From time to time,
Harvest Home Savings Bank is a party to legal proceedings incidental to its
business to enforce its security interest in collateral pledged to secure loans
made by Harvest Home Savings Bank.
144
<PAGE>
REGULATION
People's Savings and Oakley currently are Ohio chartered mutual savings and
loan associations and Harvest Home Savings Bank currently is an Ohio chartered
stock-form savings bank. Each of People's Savings, Oakley and Harvest Home
Savings Bank are subject to Ohio laws and regulations governing savings and loan
associations or savings banks and to the jurisdiction of the Superintendent of
the Division of Financial Institutions of the State of Ohio. People's Savings
and Oakley also are subject to regulations by the Office of Thrift Supervision,
as their primary Federal regulator, while the Federal Deposit Insurance
Corporation is the primary Federal regulator of Harvest Home Savings. When the
conversion and the mergers are completed, People's Savings will be a Federally
chartered savings bank with the Office of Thrift Supervision as its primary
Federal regulator and it will no longer be subject to the jurisdiction of the
Superintendent of the Ohio Division of Financial Institutions. People's Savings
does not believe that its change to a Federally chartered institution from an
Ohio chartered institution will have any material effect on its financial
condition or operations.
THE FOLLOWING DISCUSSION OF CERTAIN LAWS AND REGULATIONS APPLICABLE TO
PEOPLES COMMUNITY BANCORP AND PEOPLE'S SAVINGS UPON COMPLETION OF THE MERGERS
AND CONVERSION AS WELL AS DESCRIPTIONS OF LAWS AND REGULATIONS CONTAINED
ELSEWHERE HEREIN, SUMMARIZES THE ASPECTS OF THE LAWS AND REGULATIONS WHICH ARE
DEEMED TO BE MATERIAL TO PEOPLES COMMUNITY BANCORP AND PEOPLE'S SAVINGS.
HOWEVER, THE SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO APPLICABLE LAWS AND REGULATIONS.
PEOPLES COMMUNITY BANCORP
HOLDING COMPANY ACQUISITIONS. When the conversion is completed, Peoples
Community Bancorp will become a savings and loan holding company within the
meaning of the Home Owners' Loan Act, and will be required to register with the
Office of Thrift Supervision. Federal law generally prohibits a savings and loan
holding company, without prior Office of Thrift Supervision approval, from
acquiring the ownership or control of any other savings institution or savings
and loan holding company, or all, or substantially all, of the assets or more
than 5% of the voting shares thereof. These provisions also prohibit, among
other things, any director or officer of a savings and loan holding company, or
any individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings institution not a
subsidiary of such savings and loan holding company, unless the acquisition is
approved by the Office of Thrift Supervision.
HOLDING COMPANY ACTIVITIES. Peoples Community Bancorp will operate as a
unitary savings and loan holding company. As a result of recently enacted
legislation, the activities of a new unitary savings and loan holding company
like Peoples Community Bancorp and its non-savings institution subsidiaries are
restricted to activities traditionally permitted to multiple savings and loan
holding companies and to financial holding companies under newly added
provisions of the Bank Holding Company Act. Multiple savings and loan holding
companies may:
- furnish or perform management services for a savings association
subsidiary of a savings and loan holding company;
- hold, manage or liquidate assets owned or acquired from a savings
association subsidiary of a savings and loan holding company;
- hold or manage properties used or occupied by a savings association
subsidiary of a savings and loan holding company;
- engage in activities determined by the Federal Reserve to be closely
related to banking and a proper incident thereto; and
145
<PAGE>
- engage in services and activities previously determined by the Federal
Home Loan Bank Board by regulation to be permissible for a multiple
savings and loan holding company as of March 5, 1987.
The activities financial holding companies may engage in include:
- lending, exchanging, transferring or investing for others, or safeguarding
money or securities;
- insuring, guaranteeing or indemnifying others, issuing annuities, and
acting as principal, agent or broker for purposes of the foregoing;
- providing financial, investment or economic advisory services, including
advising an investment company;
- issuing or selling interests in pooled assets that a bank could hold
directly;
- underwriting, dealing in or making a market in securities; and
- merchant banking activities.
If the Office of Thrift Supervision determines that there is reasonable
cause to believe that the continuation by a savings and loan holding company of
an activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings institution, the Office of Thrift
Supervision may impose such restrictions as deemed necessary to address such
risk. These restrictions include limiting the following:
- the payment of dividends by the savings institution;
- transactions between the savings institution and its affiliates; and
- any activities of the savings institution that might create a serious risk
that the liabilities of the holding company and its affiliates may be
imposed on the savings institution.
Every savings institution subsidiary of a savings and loan holding company
is required to give the Office of Thrift Supervision at least 30 days' advance
notice of any proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid. See "--People's
Savings--Capital Distributions."
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between a
savings institution and its "affiliates" are subject to quantitative and
qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act
and Office of Thrift Supervision regulations. Affiliates of a savings
institution generally include, among other entities, the savings institution's
holding company and companies that are controlled by or under common control
with the savings institution.
In general, a savings institution or its subsidiaries may engage in certain
"covered transactions" with affiliates up to certain limits. In addition, a
savings institution and its subsidiaries may engage in covered transactions and
certain other transactions only on terms and under circumstances that are
substantially the same, or at least as favorable to the savings institution or
its subsidiary, as those prevailing at the time for comparable transactions with
nonaffiliated companies. A "covered transaction" is defined to include a loan or
extension of credit to an affiliate; a purchase of investment securities issued
by an affiliate; a purchase of assets from an affiliate, with certain
exceptions; the acceptance of securities issued by an affiliate as collateral
for a loan or extension of credit to any party; or the issuance of a guarantee,
acceptance or letter of credit on behalf of an affiliate. In addition, a savings
institution may not:
- make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies;
- purchase or invest in securities of an affiliate other than shares of a
subsidiary;
146
<PAGE>
- purchase a low-quality asset from an affiliate; or
- engage in covered transactions and certain other transactions between a
savings institution or its subsidiaries and an affiliate except on terms
and conditions that are consistent with safe and sound banking practices.
With certain exceptions, each loan or extension of credit by a savings
institution to an affiliate must be secured by collateral with a market value
ranging from 100% to 130% (depending on the type of collateral) of the amount of
the loan or extension of credit.
FEDERAL SECURITIES LAWS. Peoples Community Bancorp has filed with the SEC a
registration statement under the Securities Act of 1933 for the registration of
the Common Stock to be issued pursuant to the conversion and to holders of
Harvest Home Financial common stock. Upon consummation of the conversion,
Peoples Community Bancorp intends to register its common stock with the SEC
under Section 12(g) of the Securities Exchange Act of 1934. Peoples Community
Bancorp will then be subject to the proxy and tender offer rules, insider
trading reporting requirements and restrictions, and certain other requirements
under the Exchange Act. Pursuant to Office of Thrift Supervision regulations and
the Plan of Conversion, Peoples Community Bancorp has agreed to maintain such
registration for a minimum of three years following the conversion.
The registration under the Securities Act of the shares of common stock to
be issued in the conversion does not cover the resale of such shares. Shares of
common stock purchased by persons who are not affiliates of Peoples Community
Bancorp may be sold without registration. Shares purchased by an affiliate of
Peoples Community Bancorp will be subject to the resale restrictions of
Rule 144 under the Securities Act. If Peoples Community Bancorp meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of Peoples Community Bancorp who complies with the other
conditions of Rule 144 would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (a) 1% of the outstanding shares of Peoples Community Bancorp or
(b) the average weekly volume of trading in such shares during the preceding
four calendar weeks.
PEOPLE'S SAVINGS
GENERAL. As part of the conversion, People's Savings will convert from an
Ohio chartered savings and loan association in mutual form to a federally
chartered stock savings bank. The Office of Thrift Supervision will be the
chartering authority and primary federal regulator of Peoples Community Bank.
The Office of Thrift Supervision has extensive authority over the operations of
federally chartered savings institutions. As part of this authority, federally
chartered savings institutions are required to file periodic reports with the
Office of Thrift Supervision and are subject to periodic examinations by the
Office of Thrift Supervision and the FDIC. People's Savings also is subject to
regulation and examination by the FDIC and to requirements established by the
Federal Reserve Board. The investment and lending authority of savings
institutions are prescribed by federal laws and regulations, and such
institutions are prohibited from engaging in any activities not permitted by
such laws and regulations. Such regulation and supervision is primarily intended
for the protection of depositors and the Savings Association Insurance Fund.
The Office of Thrift Supervision's enforcement authority over all savings
institutions and their holding companies 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 Office of Thrift
Supervision.
147
<PAGE>
INSURANCE OF ACCOUNTS. The deposits of People's Savings, Oakley and Harvest
Home Savings are insured to the maximum extent permitted by the Savings
Association Insurance Fund, which is administered by the FDIC, and are backed by
the full faith and credit of the U.S. Government. As insurer, the FDIC 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 threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the Office of Thrift Supervision an
opportunity to take such action.
On September 30, 1996, new legislation required all Savings Association
Insurance Fund member institutions to pay a one-time special assessment to
recapitalize the Savings Association Insurance Fund, with the aggregate amount
to be sufficient to bring the reserve ratio to 1.25% of insured deposits.
Currently, FDIC deposit insurance rates generally range from zero basis
points to 27 basis points, depending on the assessment risk classification
assigned to the depository institution. From 1998 through 1999, Savings
Association Insurance Fund members paid 6.4 basis points, while Bank Insurance
Fund member institutions paid approximately 1.3 basis points.
The FDIC may terminate the deposit insurance of any insured depository
institution, including People's Savings, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the deposit insurance of People's Savings, Oakley or Harvest Home
Savings.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions are
required to maintain minimum levels of regulatory capital. The Office of Thrift
Supervision has established capital standards applicable to all savings
institutions. These standards generally must be as stringent as the comparable
capital requirements imposed on national banks. The Office of Thrift Supervision
also is authorized to impose capital requirements in excess of these standards
on individual institutions on a case-by-case basis.
Current Office of Thrift Supervision capital standards require savings
institutions to satisfy three different capital requirements. Under these
standards, savings institutions must maintain "tangible" capital equal to at
least 1.5% of adjusted total assets, "core" capital equal to at least 3.0% of
adjusted total assets and "total" capital (a combination of core and
"supplementary" capital) equal to at least 8.0% of "risk-weighted" assets. Core
capital generally consists of common stockholders' equity (including retained
earnings). Tangible capital generally equals core capital minus intangible
assets, with only a limited exception for purchased mortgage servicing rights.
In determining compliance with the risk-based capital requirement, a savings
institution is allowed to include both core capital and supplementary capital in
its total capital, provided that the amount of supplementary capital included
does not exceed the savings institution's core capital. Supplementary capital
generally consists of general allowances for loan losses up to a maximum of
1.25% of risk-weighted assets, together with certain other items. In determining
the required amount of risk-based capital, total assets, including certain
off-balance sheet items, are multiplied by a risk weight based on the risks
inherent in the type of assets. The risk weights range from 0% for cash and
securities issued by the U.S. Government or unconditionally backed by the full
faith and credit of the
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U.S. Government to 100% for loans (other than qualifying residential loans
weighted at 80%) and repossessed assets.
In August 1993, the Office of Thrift Supervision adopted a final rule
incorporating an interest-rate risk component into the risk-based capital
regulation. Under the rule, an institution with greater than "normal" interest
rate risk will be subject to a deduction of its interest rate risk component
from total capital for purposes of calculating its risk-based capital. As a
result, such an institution will be required to maintain additional capital in
order to comply with the risk-based capital requirement. An institution has
greater than "normal" interest rate risk if it would suffer a loss of net
portfolio value exceeding 2.0% of the estimated market value of its assets in
the event of a 200 basis point increase or decrease in interest rates. The
interest rate risk component will be calculated, on a quarterly basis, as
one-half of the difference between an institution's measured interest rate risk
and 2.0% multiplied by the market value of its assets. The rule also authorizes
the Office of Thrift Supervision to waive or defer an institution's interest
rate risk component on a case-by-case basis. Because of continuing delays by the
Office of Thrift Supervision, the interest rate risk component has never been
operative.
Savings institutions must value securities available for sale at amortized
cost for regulatory capital purposes. This means that in computing regulatory
capital, savings institutions should add back any unrealized losses and deduct
any unrealized gains, net of income taxes, on debt securities reported as a
separate component of generally accepted accounting principles capital.
At September 30, 1999, People's Savings exceeded all of its regulatory
capital requirements, with tangible, core and risk-based capital ratios of
13.1%, 13.1% and 24.4%, respectively. At such date, Oakley and Harvest Home
Savings also exceeded all of their regulatory capital requirements.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the Office of Thrift Supervision or
the FDIC. Such actions could include a capital directive, a cease and desist
order, civil money penalties, the establishment of restrictions on the
institution's operations, termination of federal deposit insurance and the
appointment of a conservator or receiver. The Office of Thrift Supervision's
capital regulation provides that such actions, through enforcement proceedings
or otherwise, could require one or more of a variety of corrective actions.
PROMPT CORRECTIVE ACTION. The following table shows the amount of capital
associated with the different capital categories set forth in the prompt
corrective action regulations.
<TABLE>
<CAPTION>
TOTAL TIER 1 TIER 1
CAPITAL CATEGORY RISK-BASED CAPITAL RISK-BASED CAPITAL LEVERAGE CAPITAL
- ---------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Well capitalized..... 10% or more 6% or more 5% or more
Adequately 8% or more 4% or more 4% or more
capitalized........
Undercapitalized..... Less than 8% Less than 4% Less than 4%
Significantly Less than 6% Less than 3% Less than 3%
undercapitalized...
</TABLE>
In addition, an institution is "critically undercapitalized" if it has a
ratio of tangible equity to total assets that is equal to or less than 2.0%.
Under specified circumstances, a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized).
An institution generally must file a written capital restoration plan which
meets specified requirements within 45 days of the date that the institution
receives notice or is deemed to have notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized. A federal banking
agency must provide the institution with written notice of approval or
disapproval within 60 days after
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receiving a capital restoration plan, subject to extensions by the agency. An
institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. In addition, undercapitalized institutions are subject to various
regulatory restrictions, and the appropriate federal banking agency also may
take any number of discretionary supervisory actions.
At September 30, 1999, People's Savings was deemed a well capitalized
institution for purposes of the above regulations and as such is not subject to
the above mentioned restrictions. Oakley and Harvest Home Savings were also
deemed well capitalized at such date under applicable regulations.
SAFETY AND SOUNDNESS GUIDELINES. The Office of Thrift Supervision and the
other federal banking agencies have established guidelines for safety and
soundness, addressing operational and managerial standards, as well as
compensation matters for insured financial institutions. Institutions failing to
meet these standards are required to submit compliance plans to their
appropriate federal regulators. The Office of Thrift Supervision and the other
agencies have also established guidelines regarding asset quality and earnings
standards for insured institutions. People's Savings believes that it, as well
as Oakley and Harvest Home Savings are in compliance with these guidelines and
standards.
LIQUIDITY REQUIREMENTS. All savings institutions 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. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. People's Savings, Oakley and Harvest Home Savings all
are in compliance with the liquidity requirements.
CAPITAL DISTRIBUTIONS. Office of Thrift Supervision regulations govern
capital distributions by savings institutions, which include cash dividends,
stock repurchases and other transactions charged to the capital account of a
savings institution to make capital distributions. A savings institution must
file an application for Office of Thrift Supervision approval of the capital
distribution if either (1) the total capital distributions for the applicable
calendar year exceed the sum of the institution's retained net income for that
year to date plus the institution's retained net income for the preceding two
years, (2) the institution would not be at least adequately capitalized
following the distribution, (3) the distribution would violate any applicable
statute, regulation, agreement or OTS-imposed condition, or (4) the institution
is not eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions which are a subsidiary of a holding
company (as well as certain other institutions) must still file a notice with
the Office of Thrift Supervision at least 30 days before the board of directors
declares a dividend or approves a capital distribution.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings institutions
have a responsibility under the Community Reinvestment Act of 1977 and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of Community Reinvestment Act could, at a minimum, result in
regulatory restrictions on its activities. Failure to comply with fair lending
laws could result in enforcement actions by the Office of Thrift Supervision, as
well as other federal regulatory agencies and the Department of Justice.
QUALIFIED THRIFT LENDER TEST. All savings institutions are required to meet
a qualified thrift lender test to avoid certain restrictions on their
operations. A savings institution can comply with the qualified thrift lender
test by either qualifying as a domestic building and loan association as defined
in the
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Internal Revenue Code or by maintaining at least 65% of its portfolio assets in
certain housing and consumer-related assets such as:
- loans made to purchase, refinance, construct, improve or repair domestic
residential housing;
- home equity loans;
- most mortgage-backed securities;
- stock issued by the Federal Home Loan Bank of Cincinnati; and
- direct or indirect obligations of the FDIC.
A savings institution that does not meet the qualified thrift lender test
must either convert to a bank charter or comply with certain restrictions on its
operations.
At September 30, 1999, the qualified thrift investments of People's were
approximately 96.3% of its portfolio assets. At such date, Oakley and Harvest
Home Savings also satisfied the qualified thrift lender test.
FEDERAL HOME LOAN BANK SYSTEM. People's Savings, Oakley and Harvest Home
Savings Bank are members of the Federal Home Loan Bank of Cincinnati, which is
one of 12 regional Federal Home Loan Banks that administers the home financing
credit function of savings institutions. Each Federal Home Loan Bank 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
Federal Home Loan Bank System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of
the Federal Home Loan Bank.
As a member, People's Savings is required to purchase and maintain stock in
the Federal Home Loan Bank of Cincinnati in an amount equal to at least 1% of
its aggregate unpaid residential mortgage loans or similar obligations at the
beginning of each year. At September 30, 1999, People's Savings had $850,000 in
Federal Home Loan Bank stock, which was in compliance with this requirement. In
addition, each of Oakley and Harvest Home Savings Bank were in compliance with
this requirement at September 30, 1999.
The Federal Home Loan Banks are required to provide funds for the resolution
of troubled savings institutions and to contribute to affordable housing
programs through direct loans or interest subsidies on advances targeted for
community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of Federal Home Loan Bank
dividends paid in the past and could do so in the future. These contributions
also could have an adverse effect on the value of Federal Home Loan Bank stock
in the future.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. Because
required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets.
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TAXATION
FEDERAL TAXATION
GENERAL. Peoples Community Bancorp and People's Savings are subject to the
corporate tax provisions of the Internal Revenue Code, and People's Savings is
subject to certain additional provisions which apply to thrifts and other types
of financial institutions. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters relevant
to the taxation of Peoples Community Bancorp and People's Savings and is not a
comprehensive discussion of the tax rules applicable to Peoples Community
Bancorp and People's Savings.
FISCAL YEAR. Peoples Community Bancorp and People's Savings will file
federal income tax returns on the basis of a calendar year ending on
December 31, and it is expected that separate returns will be filed for 2000 and
2001.
BAD DEBT RESERVES. In 1996, legislation, the Small Business Protection Act
of 1996, was enacted that repealed the reserve method of accounting (including
the percentage of taxable income method) previously used by many savings
institutions to calculate their bad debt reserve for federal income tax
purposes. Savings institutions with $500 million or less in assets may, however,
continue to use the experience method. People's Savings must recapture that
portion of its reserve which exceeds the amount that could have been taken under
the experience method for post-1987 tax years. At December 31, 1995, People's
Savings' post-1987 excess reserves amounted to approximately $627,000. The
recapture will occur over a six-year period, which commenced January 1, 1998.
The legislation also requires savings institutions 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. This change in accounting method and
recapture of excess bad debt reserves is adequately provided for in People's
Savings' deferred tax liability.
At September 30, 1999, the federal income tax reserves of People's Savings
and Harvest Home Savings Bank included $1.9 million and $1.3 million,
respectively, for which no federal income tax has been provided. Because of
these federal income tax reserves and the liquidation account to be established
for the benefit of certain depositors of People's Savings in connection with the
conversion, the retained earnings of People's Savings are substantially
restricted.
DISTRIBUTIONS. If People's Savings were to distribute cash or property to
its stockholders, and the distribution was treated as being from its accumulated
bad debt reserves, the distribution would cause People's Savings to have
additional taxable income. A distribution is from accumulated bad debt reserves
if (a) the reserves exceed the amount that would have been accumulated on the
basis of actual loss experience, and (b) the distribution is a "non-qualified
distribution." A distribution with respect to its stock is a non-qualified
distribution to the extent that, for federal income tax purposes,
- it is in redemption of its shares,
- it is pursuant to a liquidation of the institution, or
- in the case of a current distribution, together with all other such
distributions during the taxable year, it exceeds the institution's
current and post-1951 accumulated earnings and profits.
The amount of additional taxable income created by a non-qualified
distribution is an amount that when reduced by the tax attributable to it is
equal to the amount of the distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of 20%.
The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income") and
is payable to the extent such alternative minimum taxable income is in excess of
an exemption amount. Tax preference items include the following:
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- depreciation, and
- 75% of the excess (if any) of
(1) alternative minimum taxable income determined without regard to this
preference and prior to reduction by net operating losses, over
(2) adjusted current earnings as defined in the Code.
Neither People's Savings nor Harvest Home Financial has been subject to the
alternative minimum tax or have any such amounts available as credits for carry
over.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate net
capital gains are taxed at a maximum rate of 35%. Corporations which own 20% or
more of the stock of a corporation distributing a dividend may deduct 80% of the
dividends received. Corporations which own less than 20% of the stock of a
corporation distributing a dividend may deduct 70% of the dividends received.
However, a corporation that receives dividends from a member of the same
affiliated group of corporations may deduct 100% of the dividends received.
OTHER MATTERS. Federal legislation is introduced from time to time that
would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on consumer
loans. Significant increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect People's Savings.
People's Savings' federal income tax returns for the tax years ended 1999,
1998 and 1997 are open under the statute of limitations and are subject to
review by the IRS. People's Savings has not been audited by the IRS during the
last five years.
STATE TAXATION
OHIO TAXATION. People's Community Bancorp is subject to the Ohio
corporation franchise tax, which is a tax measured by both net earnings and net
worth. The rate of tax is the greater of (i) 5.1% on the first $50,000 of
computed Ohio taxable income and 8.9% of computed Ohio taxable income in excess
of $50,000 or (ii) 0.582% times taxable net worth.
In computing Peoples Community Bancorp's tax under the net worth method,
100% of the investment in the capital stock of People's Savings after the
conversion may be excluded, as reflected on the balance sheet, in computing
taxable net worth as long as Peoples Community Bancorp owns at least 25% of the
issued and outstanding capital stock of People's Savings. The calculation of the
exclusion from net worth is based on the ratio of the excludable investment (net
of any appreciation or goodwill included in such investment) to total assets
multiplied by the net value of the stock. As a holding company, Peoples
Community Bancorp may be entitled to various other deductions in computing
taxable net worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations, including
Peoples Community Bancorp, subject to the Ohio corporation franchise tax other
than "financial institutions." If the franchise tax is paid on the net income
basis, the litter tax is equal to 0.11% of the first $50,000 of computed Ohio
taxable income and 0.22% of computed Ohio taxable income in excess of $50,000.
If the franchise tax is paid on the net worth basis, the litter tax is equal to
0.014% times taxable net worth.
People's savings is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of
People's Savings' book net worth determined in accordance with generally
accepted accounting principles. As a "financial institution", People's Savings
is not subject to any tax based upon net income or net profits imposed by the
State of Ohio.
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DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, Peoples Community Bancorp is exempt from Delaware corporate income
tax but is required to file an annual report with and pay an annual franchise
tax to the State of Delaware. The tax is imposed as a percentage of the capital
base of Peoples Community Bancorp with an annual maximum of $150,000.
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MANAGEMENT
MANAGEMENT OF PEOPLES COMMUNITY BANCORP
Peoples Community Bancorp's Board of Directors is divided into three
classes, each of which contains approximately one-third of the Board. The
directors will be elected by stockholders for staggered three-year terms, or
until their successors are elected and qualified. No director is related to any
other director or executive officer of Peoples Community Bancorp or People's
Savings. The following table sets forth certain information regarding Peoples
Community Bancorp's directors, all of whom are also directors of People's
Savings.
In connection with the completion of the mergers, Peoples Community Bancorp
and People's Savings agreed to appoint Thomas J. Noe and John E. Rathkamp to
their Boards of Directors.
<TABLE>
<CAPTION>
DIRECTOR OF YEAR
PEOPLE'S TERM
NAME AGE(1) POSITION WITH PEOPLE'S SAVINGS SAVINGS SINCE EXPIRES
- ---- -------- ------------------------------ ------------- --------
<S> <C> <C> <C> <C>
Paul E. Hasselbring.................. 75 Chairman of the Board 1967 2001
Jerry D. Williams.................... 50 Director, President and Chief 1980 2000
Executive Officer
Richard S. Johnston.................. 71 Director 1998 2001
Zane M. Brant........................ 80 Director 1974 2001
John L. Buchanan..................... 50 Director 1996 2000
Donald L. Hawke...................... 67 Director 1987 2002
Nicholas N. Nelson................... 53 Director 1990 2000
James R. Van DeGrift................. 60 Director 1994 2002
</TABLE>
- ------------------------
(1) Age as of September 30, 1999.
Set forth below is information with respect to the principal occupations
during at least the last five years for the directors of People's Savings.
PAUL E. HASSELBRING. Mr. Hasselbring has served as Chairman of the Board of
People's Savings since 1990. He currently works part time for
King--Hasselbring & Assoc. since November 1996. Previously, Mr. Hasselbring
served as a senior partner with Hasselbring & Assoc., an engineering firm
located in Lebanon, Ohio from 1951 to 1996.
JERRY D. WILLIAMS. Mr. Williams currently serves as President and Chief
Executive Officer of People's Savings and has done so since June 1998.
Previously, Mr. Williams served as Managing Officer and Chief Executive Officer
from 1979 to 1998.
RICHARD S. JOHNSTON. Mr. Johnston is currently retired. Mr. Johnston
retired as President from The People's Building & Loan Company located in
Blanchester, Ohio in 1998.
ZANE M. BRANT. Mr. Brant is President of Brant's Inc., a hardware retailer
located in Lebanon, Ohio which he has operated since 1946.
JOHN L. BUCHANAN. Mr. Buchanan is currently President of Buchanan's Power
Equipment Center, Inc., a John Deere dealership located in Lebanon, Ohio which
he has operated since 1971.
DONALD L. HAWKE. Mr. Hawke is currently retired.
NICHOLAS N. NELSON. Mr. Nelson is County Auditor for Warren County, Ohio,
serving in such position since March 1987.
JAMES R. VAN DEGRIFT. Mr. Van DeGrift has been a trustee of Turtlecreek
Township in Lebanon, Ohio since 1992. Previously, Mr. Van DeGrift was the
athletic director and a teacher at Lebanon High School.
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Upon completion of the mergers, Messrs. Noe and Rathkamp will be appointed
as directors of Peoples Community Bancorp and Peoples Community Bank in the
class whose term expires in 2002 and 2001, respectively. In addition, Mr. Noe
will be appointed Chief Financial Officer of Peoples Community Bancorp and
Peoples Community Bank and Mr. Rathkamp will be appointed Chief Lending Officer
of Peoples Community Bancorp and Peoples Community Bank. Set forth below is
certain biographical information with respect to Messrs. Noe and Rathkamp.
THOMAS J. NOE. Mr. Noe, age 39 years, has served as the Managing Officer of
Oakley since August 1999. Between January 1994 and May 1999, Mr. Noe served as
the Chief Financial Officer for Enterprise Federal Bancorp, Inc., a unitary
savings and loan holding company for Enterprise Federal Savings Bank, West
Chester, Ohio.
JOHN E. RATHKAMP. Mr. Rathkamp, age 57 years, joined Harvest Home Savings
Bank in 1965 as Treasurer. He became Secretary and Managing Officer in 1976. He
has been a Director of Harvest Home Savings Bank since 1971. In 1991 he was
elected President of Harvest Home Savings Bank and currently is serving as
President, Secretary and Managing Officer of Harvest Home Savings Bank and
President of Harvest Home Financial.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Set forth below is information with respect to the principal occupations
during at least the last five years for each of Peoples Community Bancorp's
executive officers who do not serve as a director.
LORI MARION HENN. Age 36 years. Ms. Henn has served as Vice President of
People's Savings since 1998. She served as a Compliance Officer of People's
Savings from October 1997 to 1998. Previously, Ms. Henn was an examiner with the
Office of Thrift Supervision in Cincinnati, Ohio from 1984 to 1995.
DAVID A. COOK. Age 40 years. Mr. Cook has served as Vice President of
People's Savings since November 1988 and Secretary since 1984.
BETH DARLENE PENNINGTON. Age 36 years. Ms. Pennington has served as Vice
President of People's Savings since June 1998 and Treasurer since January 1996.
Previously, Ms. Pennington served as Secretary from 1996 to 1998 and Assistant
Secretary from 1994 to 1995.
In connection with the completion of the mergers, Dennis J. Slattery,
currently the Executive Vice President and Treasurer of Harvest Home Savings
Bank, will be appointed Chief Operating Officer of Peoples Community Bancorp and
Peoples Community Bank. Mr. Slattery joined Harvest Home Savings Bank in 1978
and became Treasurer in 1981. In 1991, Mr. Slattery was elected Executive Vice
President and served as Treasurer and Executive Vice President in 1994.
Directors of Peoples Community Bancorp initially will not be compensated by
Peoples Community Bancorp but will serve with and be compensated by Peoples
Community Bank. It is not anticipated that separate compensation will be paid to
Peoples Community Bancorp's directors until such time as such persons devote
significant time to the separate management of Peoples Community Bancorp's
affairs, which is not expected to occur until Peoples Community Bancorp becomes
actively engaged in additional businesses other than holding the stock of
Peoples Community Bank. Peoples Community Bancorp may determine that such
compensation is appropriate in the future.
Peoples Community Bancorp's executive officers are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors.
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MANAGEMENT OF PEOPLE'S SAVINGS
The directors and executive officers of People's Savings are the same as
Peoples Community Bancorp's directors and executive officers. Information
concerning the names, ages, principal occupations during the past five years and
term of office of the directors and executive officers of People's Savings is
set forth under "--Management of Peoples Community Bancorp." People's Savings'
mutual constitution requires the Board of Directors to be divided into three
classes as nearly equal in number as possible. Similarly, after the conversion,
the federal stock charter of Peoples Community Bank will require the Board of
Directors to be divided into three classes as nearly equal in number as
possible. The members of each class will be elected for a term of three years or
until their successors are elected and qualified, with one class of directors
elected annually.
BOARD MEETINGS AND COMMITTEES
Regular meetings of the Board of Directors of People's Savings are held
weekly and special meetings of the Board of Directors of People's Savings are
held from time-to-time as needed. There were 53 meetings of the Board of
Directors of People's Savings held during the year ended September 30, 1999. No
director attended fewer than 75% of the total number of meetings of the Board of
Directors of People's Savings held during the year ended September 30, 1999 and
no fewer than 75% of the total number of meetings held by all committees of the
Board on which the director served during such year.
The Board of Directors does not have any separate executive, audit,
compensation or nominating committees. All directors are appointed to serve on
an appraisal committee and construction inspection committee.
DIRECTORS' COMPENSATION
Each director of People's Savings receives $225 for each regular meeting of
the Board of Directors. Directors are paid only for meetings attended, however,
eight paid absences are permitted. Directors also are paid $25 each for each
appraisal review and $30 for each construction inspection review.
During 1994 People's Savings established an unfunded, non-qualified,
deferred compensation arrangement to provide retirement benefits to its Board of
Directors. The benefits are based on years of service and director compensation
during the year preceding retirement. The plan also provides for death benefit
payments to a surviving spouse, beneficiaries or the estate of the director.
People's Savings has elected not to establish a trust for the holding or
investing of assets. Pension accruals for the plan are not deductible for
federal income tax purposes until benefits are paid. Accruals are intended to
provide not only for the benefits attributed to service to date but also for
those expected to be earned in the future.
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EXECUTIVE COMPENSATION
The following table shows the compensation paid by People's Savings to its
President and Chief Executive Officer during the fiscal year ended
September 30, 1999.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL --------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OTHER(2) COMPENSATION
- --------------------------- -------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Jerry D. Williams............................. 1999 $88,847 $13,350 $ -- $ --
President and Chief Executive Officer
</TABLE>
- ------------------------
(1) Includes directors' fees of $225 per week in fiscal 1999.
(2) Annual compensation does not include amounts attributable to other
miscellaneous benefits received by Mr. Williams. The costs to People's
Savings of providing such benefits during fiscal 1999 did not exceed 10% of
the total salary and bonus paid to or accrued for the benefit of such
individual executive officer.
EMPLOYMENT AGREEMENTS
Peoples Community Bancorp and Peoples Community Bank, as employers, intend
to enter into employment agreements with each of Messrs. Jerry D. Williams,
Thomas J. Noe, John E. Rathkamp and Dennis J. Slattery when the conversion is
completed. These agreements will supercede any existing employment agreements
with such persons. The employers have agreed to employ Mr. Williams as President
and Chief Executive Officer of Peoples Community Bancorp and Peoples Community
Bank, Mr. Noe as Chief Financial Officer of Peoples Community Bancorp and
Peoples Community Bank, Mr. Rathkamp as Chief Lending Officer of Peoples
Community Bancorp and Peoples Community Bank and Mr. Slattery as Chief Operating
Officer of Peoples Community Bancorp and Peoples Community Bank, in each case
for a term of three years. The agreements provide that Messrs. Williams, Noe,
Rathkamp and Slattery will initially be paid salary levels of $100,000, $75,000,
$75,000 and $75,000, respectively. The executives' compensation and expenses
shall be paid by Peoples Community Bancorp and Peoples Community Bank in the
same proportion as the time and services actually expended by the executives on
behalf of each employer. The employment agreements will be reviewed annually.
The term of the executives' employment agreements shall be extended each year
for a successive additional one-year period upon the approval of the employers'
Boards of Directors, unless either party elects, not less than 30 days prior to
the annual anniversary date, not to extend the employment term.
Each of the employment agreements shall be terminable with or without cause
by the employers. The executives shall have no right to compensation or other
benefits pursuant to the employment agreements for any period after voluntary
termination or termination by the employers for cause, disability or retirement.
The agreements provide for certain benefits in the event of the executive's
death. In the event that
(1) either executive terminates his or her employment because the
employers either fail to comply with any material provision of the
employment agreement or change the executive's title or duties, or
(2) the employment agreement is terminated by the employers other than
for cause, disability, retirement or death or by the executive as a result
of certain adverse actions which are taken with respect to the executive's
employment following a change in control of Peoples Community Bancorp, as
defined,
then the executive will be entitled to a cash severance amount equal to three
times his average annual compensation for the last five calendar years (or such
shorter period that he has worked with People's Savings), plus the continuation
of certain miscellaneous fringe benefits, subject to reduction pursuant to
Section 280G of the Code as set forth below in the event of a change in control.
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A change in control is generally defined in the employment agreements to
include any change in control of Peoples Community Bancorp required to be
reported under the federal securities laws, as well as (1) the acquisition by
any person of 20% or more of Peoples Community Bancorp's outstanding voting
securities and (2) a change in a majority of the directors of Peoples Community
Bancorp during any three-year period without the approval of at least two-thirds
of the persons who were directors of Peoples Community Bancorp at the beginning
of such period.
Each employment agreement provides that, in the event any of the payments to
be made thereunder or otherwise upon termination of employment are deemed to
constitute "parachute payments" within the meaning of Section 280G of the Code,
then such payments and benefits shall be reduced by the minimum necessary to
result in the payments not exceeding three times the recipient's average annual
compensation from the employers which was includable in the recipient's gross
income during the most recent five taxable years (the "Section 280G Limit"). As
a result, none of the severance payments will be subject to a 20% excise tax,
and the employers will be able to deduct such payments as compensation expense
for federal income tax purposes. If a change in control was to occur in 2000
after the conversion is completed, the severance payments would be approximately
$300,000 for Mr. Williams, $225,000 for Mr. Noe, $225,000 for Mr. Rathkamp and
$225,000 for Mr. Slattery.
Although the above-described employment agreements could increase the cost
of any acquisition of control, Peoples Community Bancorp and Peoples Community
Bank do not believe that the terms thereof would have a significant
anti-takeover effect. We may determine to enter into similar employment
agreements with other officers in the future.
CHANGE IN CONTROL AGREEMENTS
Upon conversion, Peoples Community Bank intends to enter into one-year
change in control agreements with certain officers of People's, none of whom
will be covered by employment contracts. Commencing on the first anniversary
date and continuing on each anniversary thereafter, these change in control
agreements may be renewed by the Board of Directors for an additional year.
These agreements will provide that in the event voluntary or involuntary
termination follows a change in control of Peoples Community Bancorp or Peoples
Community Bank, the officer would be entitled to receive a severance payment
equal to one times the officer's average annual compensation for the five most
recent taxable years. In the event of a change in control of Peoples Community
Bancorp or Peoples Community Bank, the total payments that would be due under
these agreements, based solely on the current annual compensation paid to the
officers covered by these agreements and excluding any benefits under any
employee benefit plan which may be payable would be approximately $250,000.
DEFINED CONTRIBUTORY PENSION PLAN
People's Savings maintains a Simplified Employee Pension Plan for its
employees. Each employee who (i) is at least age 21 and (ii) has performed
services for People's Savings in at least 53 of the immediately preceding 260
weeks is eligible to participate. People's Savings may make discretionary
contributions to the plan which are shared pro-rata among all eligible employees
based on their compensation for that calendar year. No employee may be allocated
funds under the plan in any one year in excess of 15% of his compensation for
that calendar year. During fiscal 1999 and 1998, People's Savings made
contributions to the plan in amounts equaling 10% of participants' compensation.
People's Savings contributions to the plan amounted to $35,000 and $60,000 for
fiscal 1999 and 1998, respectively. Participants are immediately vested in
employer contributions as well as their elective deferrals and may withdraw
either at any time. Amounts withdrawn, however, are includable in a
participant's income and may be subject to a 10% penalty tax.
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NEW STOCK BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. Peoples Community Bancorp established the
employee stock ownership plan for its employees to become effective upon the
conversion. Peoples Community Bancorp's full-time employees who have been
credited with at least 1,000 hours of service during a 12-month period and who
have attained age 21 are eligible to participate in the employee stock ownership
plan.
As part of the conversion, in order to fund the purchase of up to 8% of the
common stock sold in the offering, Peoples Community Bancorp anticipates that
the employee stock ownership plan will borrow funds from Peoples Community
Bancorp. It is anticipated that such loan will equal 100% of the aggregate
purchase price of the common stock acquired by the employee stock ownership
plan. The loan to the employee stock ownership plan will be repaid principally
from contributions to the employee stock ownership plan over a period of
10 years, and the collateral for the loan will be the common stock purchased by
the employee stock ownership plan. The interest rate for the employee stock
ownership plan loan is expected to be a fixed rate of 8.5%. Peoples Community
Bancorp may, in any plan year, make additional discretionary contributions for
the benefit of plan participants in either cash or shares of common stock, which
may be acquired through the purchase of outstanding shares in the market or from
individual stockholders, upon the original issuance of additional shares by
Peoples Community Bancorp or upon the sale of treasury shares by Peoples
Community Bancorp. Such purchases, if made, would be funded through additional
borrowings by the employee stock ownership plan or additional contributions from
Peoples Community Bancorp. The timing, amount and manner of future contributions
to the employee stock ownership plan will be affected by various factors,
including prevailing regulatory policies, the requirements of applicable laws
and regulations and market conditions.
Shares purchased by the employee stock ownership plan with the loan proceeds
will be held in a suspense account and released to participants on a pro rata
basis as debt service payments are made. Shares released from the employee stock
ownership plan will be allocated to each eligible participant's employee stock
ownership plan account based on the ratio of each such participant's base
compensation to the total base compensation of all eligible employee stock
ownership plan participants. Forfeitures will be reallocated among remaining
participating employees and may reduce any amount Peoples Community Bancorp
might otherwise have contributed to the employee stock ownership plan. Credit is
given for years of service with People's Savings prior to adoption of the
employee stock ownership plan. In the case of a "change in control," as defined,
however, participants will become immediately fully vested in their account
balances. Benefits may be payable upon retirement or separation from service.
Peoples Community Bancorp's contributions to the employee stock ownership plan
are not fixed, so benefits payable under the employee stock ownership plan
cannot be estimated.
Under the employee stock ownership plan, trustees of the employee stock
ownership plan must generally vote all allocated shares held in the employee
stock ownership plan in accordance with the instructions of the participating
employees, and unallocated shares will generally be voted in the same ratio on
any matter as those allocated shares for which instructions are given, in each
case subject to the requirements of applicable law and the fiduciary duties of
the trustees.
Generally accepted accounting principles require that any third party
borrowing by the employee stock ownership plan be reflected as a liability on
Peoples Community Bancorp's statement of financial condition. Since the employee
stock ownership plan is borrowing from Peoples Community Bancorp, the loan will
not be treated as a liability but rather will be excluded from stockholders'
equity. If the employee stock ownership plan purchases newly issued shares from
Peoples Community Bancorp, total stockholders' equity would neither increase nor
decrease, but per share stockholders' equity and per share net earnings would
decrease as the newly issued shares are allocated to the employee stock
ownership plan participants.
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The employee stock ownership plan will be subject to the requirements of the
Employee Retirement Income Security Act of 1974, and the regulations of the IRS
and the Department of Labor thereunder.
STOCK OPTION PLAN. Following consummation of the conversion, Peoples
Community Bancorp intends to adopt a stock option plan, which will be designed
to attract and retain qualified personnel in key positions, provide directors,
officers and key employees with a proprietary interest in Peoples Community
Bancorp as an incentive to contribute to Peoples Community Bancorp's success and
reward key employees for outstanding performance. The stock option plan will
provide for the grant of incentive stock options intended to comply with the
requirements of Section 422 of the Internal Revenue Code, non-incentive or
compensatory stock options and stock appreciation rights (collectively, awards).
Awards may be granted to Peoples Community Bancorp's directors, advisory board
directors and key employees. The stock option plan will be administered and
interpreted by a committee of the Board of Directors. Unless sooner terminated,
the stock option plan shall continue in effect for a period of 10 years from the
date the stock option plan is adopted by the Board of Directors.
Under the stock option plan, the plan committee will determine which
directors, officers and key employees will be granted awards, whether options
will be incentive or compensatory options, the number of shares subject to each
award, the exercise price of each option, whether options may be exercised by
delivering other shares of common stock and when such options become
exercisable. The per share exercise price of an incentive stock option must at
least equal the fair market value of a share of common stock on the date the
option is granted (110% of fair market value in the case of incentive stock
options granted to employees who are 10% stockholders).
At a meeting of Peoples Community Bancorp's stockholders after the
conversion, which under applicable Office of Thrift Supervision regulations may
be held no earlier than six months after the completion of the conversion,
Peoples Community Bancorp intends to present the stock option plan to
stockholders for approval and to reserve an amount equal to 10% of the shares of
common stock sold in the conversion (161,000 shares or 185,150 shares based on
the maximum and 15% above the maximum of the offering range, respectively), for
issuance under the stock option plan. Currently, Peoples Community Bancorp
intends to present the stock option plan to stockholders at least one year after
completion of the conversion. Office of Thrift Supervision regulations provide
that, in the event such plan is implemented within one year after the
conversion, no individual officer or employee of People's Savings may receive
more than 25% of the options granted under the stock option plan and
non-employee directors may not receive more than 5% individually, or 30% in the
aggregate of the options granted under the stock option plan. Office of Thrift
Supervision regulations also provide that the exercise price of any options
granted under any such plan must be at least equal to the fair market value of
the common stock as of the date of grant. Each stock option or portion thereof
will be exercisable at any time on or after it vests and will be exercisable
until 10 years after its date of grant or for periods of up to five years
following the death, disability or other termination of the optionee's
employment or service as a director. However, failure to exercise incentive
stock options within three months after the date on which the optionee's
employment terminates may result in the loss of incentive stock option
treatment.
At the time an award is granted pursuant to the stock option plan, the
recipient will not be required to make any payment in consideration for such
grant. With respect to incentive or compensatory stock options, the optionee
will be required to pay the applicable exercise price at the time of exercise in
order to receive the underlying shares of common stock. The shares reserved for
issuance under the stock option plan may be authorized but previously unissued
shares, treasury shares, or shares purchased by Peoples Community Bancorp on the
open market or from private sources. In the event of a stock split, reverse
stock split or stock dividend, the number of shares of common stock under the
stock option plan, the number of shares to which any award relates and the
exercise price per share under any option or stock appreciation right shall be
adjusted to reflect such increase or
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decrease in the total number of shares of common stock outstanding. If Peoples
Community Bancorp declares a special cash dividend or return of capital after
Peoples Community Bancorp implements the stock option plan in an amount per
share which exceeds 10% of the fair market value of a share of common stock as
of the date of declaration, the per share exercise price of all previously
granted options which remain unexercised as of the date of such declaration
shall, subject to certain limitations, be proportionately adjusted to give
effect to the special cash dividend or return of capital as of the date of
payment of such special cash dividend or return of capital.
Under current provisions of the Code, the federal income tax treatment of
incentive stock options and compensatory stock options is different. A holder of
incentive stock options who meets certain holding period requirements will not
recognize income at the time the option is granted or at the time the option is
exercised, and a federal income tax deduction generally will not be available to
Peoples Community Bancorp at any time as a result of such grant or exercise.
With respect to compensatory stock options, the difference between the fair
market value on the date of exercise and the option exercise price generally
will be treated as compensation income upon exercise, and Peoples Community
Bancorp will be entitled to a deduction in the amount of income so recognized by
the optionee. Upon the exercise of a stock appreciation right, the holder will
realize income for federal income tax purposes equal to the amount received by
him, whether in cash, shares of stock or both, and Peoples Community Bancorp
will be entitled to a deduction for federal income tax purposes in the same
amount.
RECOGNITION PLAN. After the conversion, Peoples Community Bancorp intends
to adopt a recognition plan for its directors, officers and employees. The
objective of the recognition plan will be to enable Peoples Community Bancorp to
provide directors, officers and employees with a proprietary interest in Peoples
Community Bancorp as an incentive to contribute to its success. Peoples
Community Bancorp intends to present the recognition plan to its stockholders
for their approval at a meeting of stockholders which, pursuant to applicable
Office of Thrift Supervision regulations, may be held no earlier than six months
after the conversion.
The recognition plan will be administered by a committee of Peoples
Community Bancorp's Board of Directors, which will have the responsibility to
invest all funds contributed to the trust created for the recognition plan.
Peoples Community Bancorp will contribute sufficient funds to the recognition
plan trust so that the trust can purchase, following the receipt of stockholder
approval, a number of shares equal to an aggregate of 4% of the common stock
sold in the conversion (64,400 shares or 74,040 shares based on the maximum and
15% above the maximum of the offering range, respectively). Shares of common
stock granted pursuant to the recognition plan generally will be in the form of
restricted stock vesting at a rate to be determined by the Board of Directors or
a committee thereof. For accounting purposes, compensation expense in the amount
of the fair market value of the common stock at the date of the grant to the
recipient will be recognized pro rata over the period during which the shares
are payable. A recipient will be entitled to all voting and other stockholder
rights, except that the shares, while restricted, may not be sold, pledged or
otherwise disposed of and are required to be held in the trust. Under the terms
of the recognition plan, recipients of awards will be entitled to instruct the
trustees of the recognition plan as to how the underlying shares should be
voted, and the trustees will be entitled to vote all unallocated shares in their
discretion. If a recipient's employment is terminated as a result of death or
disability, all restrictions will expire and all allocated shares will become
unrestricted. Peoples Community Bancorp can terminate the recognition plan at
any time, and if Peoples Community Bancorp does so, any shares not allocated
will revert to Peoples Community Bancorp. Recipients of grants under the
recognition plan will not be required to make any payment at the time of grant
or when the underlying shares of common stock become vested, other than payment
of withholding taxes.
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INDEBTEDNESS OF MANAGEMENT
In the ordinary course of business, People's Savings makes loans available
to its directors, officers and employees. Such loans are made in the ordinary
course of business on the same terms, including interest rates and collateral,
as comparable loans to other borrowers. It is the belief of management that
these loans neither involve more than the normal risk of collectibility nor
present other unfavorable features. At September 30, 1999, four loans were
outstanding to directors and executive officers of People's Savings, or members
of their immediate families. These loans totalled approximately $214,000 or 1.8%
of People's Savings' total equity at September 30, 1999. Any loans to directors,
officers and employees that are defined as insiders will comply with all
applicable regulatory requirements
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RESTRICTIONS ON ACQUISITION OF
PEOPLES COMMUNITY BANCORP AND PEOPLE'S SAVINGS
GENERAL
As described below, certain provisions in Peoples Community Bancorp's
Certificate of Incorporation and Bylaws and in the proposed benefit plans,
together with provisions of Delaware corporate law and Office of Thrift
Supervision regulations, may have anti-takeover effects. In addition, regulatory
restrictions may make it difficult for persons or companies to acquire control
of Peoples Community Bancorp and People's Savings.
RESTRICTIONS IN PEOPLES COMMUNITY BANCORP'S CERTIFICATE OF INCORPORATION AND
BYLAWS
GENERAL. A number of provisions of Peoples Community Bancorp's Certificate
of Incorporation and Bylaws deal with matters of corporate governance and
certain rights of stockholders. The following discussion of the Certificate of
Incorporation and Bylaws summarizes the material provisions which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual stockholders may deem to be in their
best interests or in which stockholders may receive a substantial premium for
their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of Peoples Community
Bancorp's current Board of Directors or management more difficult. The following
description of certain of the provisions of the Certificate of Incorporation and
Bylaws is necessarily general and reference should be made in each case to such
Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
LIMITATION ON VOTING RIGHTS. Article 12.B of the Certificate of
Incorporation provides that no person shall directly or indirectly offer to
acquire or acquire the beneficial ownership of
(1) more than 10% of the issued and outstanding shares of any class of
an equity security of Peoples Community Bancorp, or
(2) any securities convertible into, or exercisable for, any of Peoples
Community Bancorp's equity securities if, assuming conversion or exercise by
such person of all securities of which such person is the beneficial owner
which are convertible into, or exercisable for, such equity securities (but
of no securities convertible into, or exercisable for, such equity
securities of which such person is not the beneficial owner), such person
would be the beneficial owner of more than 10% of any class of an equity
security of Peoples Community Bancorp.
The terms "person" and "beneficial ownership" are broadly defined to prevent
circumvention of this restriction.
The foregoing restrictions do not apply to the following:
- any offer with a view toward public resale made exclusively to Peoples
Community Bancorp by underwriters or a selling group acting on Peoples
Community Bancorp's behalf,
- any tax-qualified employee benefit plan or arrangement established by
Peoples Community Bancorp and any trustee of such a plan or arrangement,
or
- any other offer or acquisition approved in advance by the affirmative vote
of two-thirds of the entire Board of Directors.
In the event that shares are acquired in violation of Article 12.B, all shares
beneficially owned by any person in excess of 10% shall be considered excess
shares and shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matters
submitted to stockholders for a vote, and Peoples Community Bancorp's Board of
Directors may cause
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such excess shares to be transferred to an independent trustee for sale on the
open market or otherwise, with the expenses of such trustee to be paid out of
the proceeds of sale.
BOARD OF DIRECTORS. Article 7.A of the Certificate of Incorporation
contains provisions relating to the Board of Directors and provides, among other
things, that the Board of Directors shall be divided into three classes as
nearly equal in number as possible, with the term of office of one class
expiring each year. See "Management--Management of Peoples Community Bancorp."
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of Peoples Community Bancorp's incumbent Board of Directors.
Cumulative voting in the election of directors is not permitted.
Directors may be removed only for cause at a duly constituted meeting of
stockholders called expressly for that purpose upon the vote of the holders of
at least 80% of the total votes eligible to be cast by stockholders. Cause for
removal shall exist only if the director whose removal is proposed has been
either declared of unsound mind by an order of a court of competent
jurisdiction, convicted of a felony or of an offense punishable by imprisonment
for a term of more than one year by a court of competent jurisdiction, or deemed
liable by a court of competent jurisdiction for gross negligence or misconduct
in the performance of such director's duties to Peoples Community Bancorp. Any
vacancy occurring in the Board of Directors for any reason (including an
increase in the number of authorized directors) may be filled by the affirmative
vote of a majority of the remaining directors, whether or not a quorum of the
Board of Directors is present, or the sole remaining director of Peoples
Community Bancorp, and a director appointed to fill a vacancy shall serve until
the expiration of the term to which he was appointed and until his successor is
elected and qualified.
The Bylaws govern nominations for election to the Board, and require all
nominations for election to the Board of Directors other than those made by the
Board to be made by a stockholder eligible to vote at an annual meeting of
stockholders who has complied with the notice provisions in that section.
Written notice of a stockholder nomination must be delivered to, or mailed to
and received at, Peoples Community Bancorp's principal executive offices not
later than 120 days prior to the anniversary date of the initial mailing of
proxy materials by Peoples Community Bancorp in connection with the immediately
preceding annual meeting of stockholders, provided that, with respect to the
first scheduled annual meeting following completion of the conversion, notice
must be received no later than the close of business on Friday, September 29,
2000. As specified in Section 4.15 of the Bylaws, each such notice shall set
forth the following:
(a) the name, age, business address and residence address of the
stockholder who intends to make the nomination and of the person or persons
to be nominated;
(b) the principal occupation or employment of the stockholder submitting
the notice and of each person being nominated;
(c) the class and number of shares of Peoples Community Bancorp stock
beneficially owned by the stockholder submitting the notice, by any person
who is acting in concert with or who is an affiliate or associate of such
stockholder (as such terms are defined in the Certificate of Incorporation),
by any person who is a member of any group with such stockholder with
respect to Peoples Community Bancorp stock or who is known by such
stockholder to be supporting such nominee(s) on the date the notice is given
to Peoples Community Bancorp, by each person being nominated, and by each
person who is in control of, is controlled by or is under common control
with any of the foregoing persons (if any of the foregoing persons is a
partnership, corporation, limited liability company, association or trust,
information must be provided regarding the name and address of, and the
class and number of shares of Peoples Community Bancorp stock which are
beneficially owned by, each partner in such partnership, each director,
executive officer and stockholder in such corporation, each member in such
limited liability company or association, and
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each trustee and beneficiary of such trust, and in each case each person
controlling such entity and each partner, director, executive officer,
stockholder, member or trustee of any entity which is ultimately in control
of such partnership, corporation, limited liability company, association or
trust);
(d) a representation that the stockholder is a holder of record of
Peoples Community Bancorp stock entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice;
(e) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder;
(f) such other information regarding the stockholder submitting the
notice, each nominee proposed by such stockholder and any other person
covered by clause (c) of this paragraph as would be required to be included
in a proxy statement filed pursuant to the proxy rules of the SEC; and
(g) the consent of each nominee to serve as a director of Peoples
Community Bancorp if so elected.
Peoples Community Bancorp's Certificate of Incorporation provides that the
personal liability of its directors and officers for monetary damages shall be
eliminated to the fullest extent permitted by the Delaware General Corporation
Law as it exists on the effective date of the Certificate of Incorporation or as
such law may be thereafter in effect. Section 102(b)(7) of the Delaware
corporate law currently provides that directors (but not officers) of
corporations that have adopted such a provision will not be so liable, except
for:
- any breach of the director's duty of loyalty to Peoples Community Bancorp
or its stockholders,
- any acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- any unlawful dividend, stock repurchase or redemption, or
- any transaction from which the director derived an improper personal
benefit.
This provision would absolve directors of personal liability for negligence in
the performance of their duties, including gross negligence. It would not permit
a director to be exculpated, however, for liability for actions involving
conflicts of interest or breaches of the traditional "duty of loyalty" to
Peoples Community Bancorp and its stockholders, and it would not affect the
availability of injunctive or other equitable relief as a remedy.
The Certificate of Incorporation also provides that Peoples Community
Bancorp shall indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director, officer, employee or agent of Peoples
Community Bancorp, or is or was serving at Peoples Community Bancorp's request
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. Such indemnification is furnished to
the full extent provided by law against expenses (including attorneys' fees),
judgments, fines, excise taxes and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit or proceeding to the
fullest extent authorized by the Delaware corporate law, provided that Peoples
Community Bancorp shall not be liable for any amounts which may be due in
connection with a settlement of any action, suit or proceeding effected without
its prior written consent or any action, suit or proceeding initiated by any
person seeking indemnification thereunder without its prior written consent. The
indemnification provisions also permit Peoples Community Bancorp to pay
reasonable expenses in advance of the final disposition of any action, suit
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or proceeding as authorized by Peoples Community Bancorp's Board of Directors,
provided that the indemnified person undertakes to repay Peoples Community
Bancorp if it is ultimately determined that such person was not entitled to
indemnification.
The rights of indemnification provided in Peoples Community Bancorp's
Certificate of Incorporation are not exclusive of any other rights which may be
available under Peoples Community Bancorp's Bylaws, any insurance or other
agreement, by vote of stockholders or directors (regardless of whether directors
authorizing such indemnification are beneficiaries thereof) or otherwise. In
addition, the Certificate of Incorporation authorizes Peoples Community Bancorp
to maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of Peoples Community Bancorp, whether or not Peoples Community
Bancorp would have the power to provide indemnification to such person. These
provisions are designed to reduce, in appropriate cases, the risks incident to
serving as a director, officer, employee or agent and to enable Peoples
Community Bancorp to attract and retain the best personnel available.
The provisions regarding director elections and other provisions in the
Certificate of Incorporation and Bylaws are generally designed to protect the
ability of the Board of Directors to negotiate with the proponent of an
unfriendly or unsolicited proposal to take over or restructure Peoples Community
Bancorp by making it more difficult and time-consuming to change majority
control of the Board, whether by proxy contest or otherwise. The effect of these
provisions will be to generally require at least two (and possibly three) annual
stockholders' meetings, instead of one, to effect a change in control of Peoples
Community Bancorp's Board of Directors even if holders of a majority of Peoples
Community Bancorp capital stock believed that a change in the composition of the
Board of Directors was desirable. Because a majority of the directors at any
given time will have prior experience as directors, these requirements will help
to ensure continuity and stability of Peoples Community Bancorp's management and
policies and facilitate long-range planning for its business. The provisions
relating to removal of directors and filling of vacancies are consistent with
and supportive of a classified board of directors.
The procedures regarding stockholder nominations will provide Peoples
Community Bancorp's Board of Directors with sufficient time and information to
evaluate a stockholder nominee to the Board and other relevant information, such
as existing stockholder support for the nominee. The proposed procedures,
however, will provide incumbent directors advance notice of a dissident slate of
nominees for directors, and will make it easier for the Board to solicit proxies
in opposition to such nominees. This may make it easier for the incumbent
directors to retain their status as directors, even when certain stockholders
view the stockholder nominations as in the best interests of Peoples Community
Bancorp or its stockholders.
AUTHORIZED SHARES. Article 4 of the Certificate of Incorporation authorizes
the issuance of 11,000,000 shares of stock, of which 1,000,000 shares will be
shares of preferred stock, and 10,000,000 will be common stock. The shares of
common stock and preferred stock were authorized in an amount greater than that
to be issued in the conversion to provide Peoples Community Bancorp with as much
flexibility as possible to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and employee stock options. However,
these additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
Peoples Community Bancorp. The Board of Directors also has sole authority to
determine the terms of any one or more series of preferred stock, including
voting rights, conversion rates, and liquidation preferences. As a result of the
ability to fix voting rights for a series of preferred stock, the Board has the
power, to the extent consistent with its fiduciary duty, to issue a series of
preferred stock to persons friendly to management in order to attempt to block a
post-tender offer merger or other transaction by which a third party seeks
control, and thereby assist management to retain its position. Peoples Community
Bancorp currently has no plans for the issuance of additional shares, other than
the issuance of additional shares pursuant to stock benefit plans.
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MEETINGS OF STOCKHOLDERS AND STOCKHOLDER PROPOSALS. The Certificate of
Incorporation provides that any action required or permitted by Delaware
corporate law or the Certificate of Incorporation to be approved by or consented
to by Peoples Community Bancorp stockholders, must be effected at a duly called
annual or special meeting of stockholders and may not be effected by written
consent by stockholders in lieu of a meeting of stockholders. The Certificate of
Incorporation further provides that, with limited exceptions, special meetings
of stockholders may be called only by a three-fourths vote of the Board of
Directors.
Peoples Community Bancorp's Bylaws provide that only such business as shall
have been properly brought before an annual meeting of stockholders shall be
conducted at the annual meeting. In order to be properly brought before an
annual meeting following completion of the conversion, business must be brought
before the meeting by or at the direction of the Board of Directors or by a
stockholder who has given timely and complete notice thereof in writing to
Peoples Community Bancorp. For stockholder proposals to be included in Peoples
Community Bancorp's proxy materials, the stockholder must comply with all the
timing and informational requirements of Rule 14a-8 of the Exchange Act. With
respect to stockholder proposals to be considered at the annual meeting of
stockholders but not included in Peoples Community Bancorp's proxy materials,
the stockholder's notice must be delivered to or mailed and received at Peoples
Community Bancorp's principal executive offices not later than 120 days prior to
the anniversary date of the initial mailing of proxy materials in connection
with the immediately preceding annual meeting; provided, however, that with
respect to the first scheduled annual meeting following completion of the
conversion, such written notice must be received by Peoples Community Bancorp
not later than the close of business on Friday, September 29, 2000. A
stockholder's notice shall set forth as to each matter the stockholder proposes
to bring before the annual meeting the following:
(a) a description of the proposal desired to be brought before the
annual meeting;
(b) the name and address, as they appear on Peoples Community Bancorp's
books, of the stockholder proposing such business, and, to the extent known,
any other stockholders known by such stockholder to be supporting such
proposal;
(c) the class and number of shares of Peoples Community Bancorp which
are beneficially owned by the stockholder; and, to the extent known, by any
other stockholders known by such stockholder to be supporting such proposal
on the date of such shareholder notice;
(d) the identification of any person retained to make stockholder
solicitations or recommendations with respect to such proposal; and
(e) any material interest of the stockholder in such business.
The procedures regarding stockholder proposals are designed to provide the
Board with sufficient time and information to evaluate a stockholder proposal
and other relevant information, such as existing stockholder support for the
proposal. The proposed procedures, however, will give incumbent directors
advance notice of a stockholder proposal. This may make it easier for the
incumbent directors to defeat a stockholder proposal, even when certain
stockholders view such proposal as in the best interests of Peoples Community
Bancorp or its stockholders.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Article 13 of the
Certificate of Incorporation generally provides that any amendment of the
Certificate of Incorporation must be first approved by a majority of the Board
of Directors and then by the holders of at least 80% of Peoples Community
Bancorp shares entitled to vote in an election of directors. However, if the
amendment is approved by at least two-thirds of the Board of Directors, the
amendment shall only need stockholder approval if required by Delaware corporate
law and then only by the affirmative vote of the holders of a majority of the
shares entitled to vote in an election of directors.
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The Bylaws may be amended by a majority of the Board of Directors or by the
affirmative vote of a majority of the shares entitled to vote in an election of
directors, except that the affirmative vote of at least 80% of the shares shall
be required to amend, adopt, alter, change or repeal any provision inconsistent
with certain specified provisions of the Bylaws.
DELAWARE CORPORATE LAW
In addition to the provisions contained in the Certificate of Incorporation,
Delaware corporate law includes certain provisions applicable to Delaware
corporations, such as Peoples Community Bancorp, which may be deemed to have an
anti-takeover effect. Such provisions give stockholders the right to receive the
fair value of their shares of stock following a control transaction from a
controlling person or group and set forth requirements relating to certain
business combinations.
Section 203 of Delaware corporate law imposes certain restrictions on
business combinations between Peoples Community Bancorp and large shareholders.
Specifically, Section 203 prohibits a "business combination" (as defined in
Section 203, generally including mergers, sales and leases of assets, issuances
of securities and similar transactions) between Peoples Community Bancorp or a
subsidiary and an "interested shareholder" (as defined in Section 203, generally
the beneficial owner of 15% or more of Peoples Community Bancorp common stock)
within three years after the person or entity becomes an interested shareholder,
unless
- prior to the person or entity becoming an interested shareholder, the
business combination or the transaction pursuant to which such person or
entity became an interested shareholder shall have been approved by the
Board of Directors,
- upon consummation of the transaction in which the interested shareholder
became such, the interested shareholder holds at least 85% of Peoples
Community Bancorp common stock (excluding shares held by persons who are
both officers and directors and shares held by certain employee benefit
plans), or
- the business combination is approved by the Board of Directors and by the
holders of at least two-thirds of the outstanding common stock, excluding
shares owned by the interested shareholders.
One of the effects of Section 203 may be to prevent highly leveraged
takeovers, which depend upon getting access to the acquired corporation's assets
to support or repay acquisition indebtedness and certain coercive acquisition
tactics. By requiring approval of the holders of two-thirds of the shares held
by disinterested shareholders for business combinations involving an interested
shareholder, Section 203 may prevent any interested shareholder from taking
advantage of its position as a substantial, if not controlling, shareholder and
engaging in transactions with Peoples Community Bancorp that may not be fair to
other shareholders or that may otherwise not be in Peoples Community Bancorp's
best interests, or the best interests of its shareholders and other
constituencies.
For similar reasons, however, these provisions may make more difficult or
discourage an acquisition of Peoples Community Bancorp or the acquisition of
control of Peoples Community Bancorp by a principal shareholder, and thus the
removal of incumbent management. In addition, to the extent that Section 203
discourages takeovers that would result in the change of Peoples Community
Bancorp's management, such a change may be less likely to occur.
ANTI-TAKEOVER EFFECTS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS AND
MANAGEMENT
REMUNERATION ADOPTED IN THE CONVERSION
The foregoing provisions of Peoples Community Bancorp's Certificate of
Incorporation and Bylaws and Delaware law could have the effect of discouraging
an acquisition of Peoples Community Bancorp or stock purchases in furtherance of
an acquisition, and could accordingly, under certain circumstances,
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<PAGE>
discourage transactions which might otherwise have a favorable effect on the
price of Peoples Community Bancorp common stock.
In addition, the proposed employment agreements with Peoples Community
Bancorp's executive officers and certain provisions in the proposed stock
benefit plans provide for accelerated benefits to participants in the event of a
change in control of Peoples Community Bancorp. See "Management--Employment
Agreements" and "--New Stock Benefit Plans." The foregoing provisions and
limitations may make it more costly for companies or persons to acquire control
of Peoples Community Bancorp.
Peoples Community Bancorp's Board of Directors believes that the provisions
described above are prudent and will reduce vulnerability to takeover attempts
and certain other transactions that are not negotiated with and approved by the
Board of Directors. The Board of Directors believes that these provisions are in
the best interests of Peoples Community Bancorp and its future stockholders. In
the Board of Directors' judgment, the Board of Directors is in the best position
to determine Peoples Community Bancorp's true value and to negotiate more
effectively for what may be in the best interests of its stockholders.
Accordingly, the Board of Directors believes that it is in the best interests of
Peoples Community Bancorp and future stockholders to encourage potential
acquirors to negotiate directly with the Board of Directors and that these
provisions will encourage such negotiations and discourage hostile takeover
attempts. It is also the Board of Directors' view that these provisions should
not discourage persons from proposing a merger or other transaction at prices
reflective of Peoples Community Bancorp's true value and where the transaction
is in the best interests of all stockholders.
Despite the Board of Directors' belief as to the benefits to Peoples
Community Bancorp's stockholders of the foregoing provisions, these provisions
also may have the effect of discouraging a future takeover attempt in which
stockholders might receive a substantial premium for their shares over then
current market prices and may tend to perpetuate existing management. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. The Board of Directors, however, has concluded
that the potential benefits of these provisions outweigh their possible
disadvantages.
Peoples Community Bancorp is not aware of any effort that might be made to
acquire control of it.
REGULATORY RESTRICTIONS
Applicable law provides that no person, acting directly or indirectly or
through or in concert with one or more other persons, may acquire control of a
savings institution unless the Office of Thrift Supervision has been given at
least 60 days' prior written notice. The Home Owners' Loan Act provides that no
company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock, of a savings institution where certain enumerated "control factors" are
also present in the acquisition. The Office of Thrift Supervision may prohibit
an acquisition if
- it would result in a monopoly or substantially lessen competition,
- the financial condition of the acquiring person might jeopardize the
financial stability of the institution, or
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- the competence, experience or integrity of the acquiring person indicates
that it would not be in the interest of the depositors or of the public to
permit the acquisition of control by such person.
The foregoing restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plan or plans do not have beneficial ownership in the
aggregate of more than 25% of any class of equity security of the savings
institution.
For three years following the conversion, Office of Thrift Supervision
regulations prohibit any person from acquiring, either directly or indirectly,
or making an offer to acquire more than 10% of the stock of any converted
savings institution or its holding company, without the prior written approval
of the Office of Thrift Supervision, except for
(1) any offer with a view toward public resale made exclusively to the
institution or its holding company or to underwriters or a selling group
acting on its behalf,
(2) offers that if consummated would not result in the acquisition by
such person during the preceding 12-month period of more than 1% of such
stock,
(3) offers in the aggregate for up to 24.9% by Peoples Community
Bancorp's employee stock ownership plan or other tax-qualified plans, and
(4) an offer to acquire or acquisition of beneficial ownership of more
than 10% of the common stock of the savings institution or its holding
company by a corporation whose ownership is or will be substantially the
same as the ownership of the savings institution, provided that the offer or
acquisition is made more than one year following the date of completion of
the conversion. Such prohibition also is applicable to the acquisition of
the common stock.
In the event that any person, directly or indirectly, violates this regulation,
the securities beneficially owned by such person in excess of 10% shall not be
counted as shares entitled to vote and shall not be voted by any person or
counted as voting shares in connection with any matters submitted to a vote of
stockholders. The definition of beneficial ownership for this regulation extends
to persons holding revocable or irrevocable proxies for the stock of an
institution or its holding company under circumstances that give rise to a
conclusive or rebuttable determination of control under Office of Thrift
Supervision regulations.
In addition to the foregoing, the Plan prohibits any person, prior to the
completion of the conversion, from offering, or making an announcement of an
intent to make an offer, to purchase subscription rights for common stock. See
"The Subscription Offering--Restrictions on Transfer of Subscription Rights and
Shares."
DESCRIPTION OF PEOPLES COMMUNITY BANCORP CAPITAL STOCK
GENERAL
Peoples Community Bancorp is authorized to issue 11,000,000 shares of
capital stock, of which 10,000,000 are shares of common stock, par value $.01
per share and 1,000,000 are shares of preferred stock, par value $.01 per share.
Peoples Community Bancorp currently expects to issue up to a maximum of
1,851,500 shares of common stock and no shares of preferred stock in the
conversion and, in addition, will issue approximately 787,760 shares in the
merger with Harvest Home Financial in exchange for shares of common stock of
Harvest Home Financial. Each share of Peoples Community Bancorp common stock
issued in the conversion will have the same relative rights as, and will be
identical in all respects with, each other share of common stock issued in the
conversion. Upon payment of the purchase price for the common stock in
accordance with the Plan of Conversion, all such stock will be duly authorized,
fully paid and nonassessable based on the laws and regulations in effect as of
the date of completion of the conversion.
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PEOPLES COMMUNITY BANCORP COMMON STOCK WILL REPRESENT NONWITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY
THE FDIC.
COMMON STOCK
DIVIDENDS. Peoples Community Bancorp can pay dividends if, as and when
declared by its Board of Directors, subject to compliance with limitations which
are imposed by law. See "Peoples Community Bancorp Does Not Intend to Pay
Quarterly Cash Dividends." The holders of Peoples Community Bancorp common stock
will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors out of funds legally available therefor. If
Peoples Community Bancorp issues preferred stock, the holders of preferred stock
may have a priority over the holders of the common stock with respect to
dividends.
VOTING RIGHTS. Upon completion of the conversion, the holders of Peoples
Community Bancorp common stock will possess exclusive voting rights in Peoples
Community Bancorp. They will elect Peoples Community Bancorp's Board of
Directors and act on such other matters as are required to be presented to them
under Delaware law or Peoples Community Bancorp's Certificate of Incorporation
or as are otherwise presented to them by the Board of Directors. Except as
discussed in "Restrictions on Acquisition of Peoples Community Bancorp and
People's Savings," each holder of common stock will be entitled to one vote per
share and will not have any right to cumulate votes in the election of
directors. If Peoples Community Bancorp issues preferred stock, holders of the
preferred stock may also possess voting rights.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
People's Savings, Peoples Community Bancorp, as the sole holder of People's
Savings capital stock, would be entitled to receive, after payment or provision
for payment of all debts and liabilities of People's Savings (including all
deposit accounts and accrued interest thereon) and after distribution of the
balance in the special liquidation account to Eligible Account Holders and
Supplemental Eligible Account Holders (see "The Conversion of People's Savings
and the Mergers with Oakley and Harvest Home Financial--Liquidation Rights of
Certain Depositors"), all assets of People's Savings available for distribution.
In the event of any liquidation, dissolution or winding up of Peoples Community
Bancorp, the holders of Peoples Community Bancorp common stock would be entitled
to receive, after payment or provision for payment of all its debts and
liabilities, all of Peoples Community Bancorp's assets available for
distribution. If preferred stock is issued, the holders thereof may have a
priority over the holders of the common stock in the event of liquidation or
dissolution.
PREEMPTIVE RIGHTS. Holders of Peoples Community Bancorp common stock will
not be entitled to preemptive rights with respect to any shares which may be
issued in the future. The common stock is not subject to any required
redemption.
PREFERRED STOCK
None of Peoples Community Bancorp's authorized shares of preferred stock
will be issued in the conversion. Such stock may be issued with such preferences
and designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
EXPERTS
The financial statements of People's Savings as of September 30, 1999 and
1998 and for each of the three years in the period ended September 30, 1999,
included in this prospectus-proxy statement and Peoples Community Bancorp's
registration statement on Form S-1 have been included herein in
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reliance upon the report of Grant Thornton LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Oakley as of September 30, 1999 and 1998 and for
each of the years in the three-year period ended September 30, 1999, included in
this prospectus-proxy statement were audited by Grant Thornton LLP, independent
certified public accountants, as stated in their report appearing elsewhere
herein and are included in reliance upon the report of such firm given as
experts in accounting and auditing.
The financial statements of Harvest Home Financial as of September 30, 1999
and 1998 and for each of the years in the three-year period ended September 30,
1999, included in this prospectus-proxy statement have been audited by Grant
Thornton LLP, independent certified public accountants, as stated in their
report appearing elsewhere herein and have been so included in reliance upon the
report of such firm given as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report setting forth its opinion as to the estimated pro forma market value of
the common stock to be outstanding upon completion of the conversion and its
opinion with respect to subscription rights.
CHANGE IN AUDITORS
Prior to the fiscal year ended September 30, 1999 People's Savings'
financial statements were audited by Kennedy, Kraft, Dreyer & Noe. The
engagement of Kennedy, Kraft, Dreyer & Noe was terminated and Grant
Thornton LLP, was engaged in August 1999, and remains as the independent
auditors of People's Savings. The decision to change auditors was approved by
the Board of Directors of People's Savings. People's Savings' financial
statements as of September 30, 1999 and 1998, and for each of the years in the
three-year period ended September 30, 1999, and included in this proxy
statement-prospectus, were audited by Grant Thornton LLP.
During fiscal 1999 and 1998, there were no disagreements between People's
Savings and Kennedy, Kraft, Dreyer & Noe on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure
which, if not resolved to the satisfaction of Kennedy, Kraft, Dreyer & Noe,
would have caused it to make a reference to the subject matter of the
disagreement in connection with its reports. During fiscal 1999 and 1998,
Kennedy, Kraft, Dreyer & Noe did not issue any adverse opinion with respect to
People's Savings' financial statements or any disclaimer of opinion or any
opinion which was qualified or modified as to uncertainty, audit scope or
accounting principles.
During 1999 and 1998, People's Savings did not consult Grant Thornton LLP
prior to such firm's engagement with respect to: the application of accounting
principles to a specified transaction, either completed or proposed; the type of
audit opinion that might be rendered on People's Savings' financial statements;
or, any matter that was the subject of either a disagreement or a reportable
event, in each case, as defined in Item 304(a) of Regulation S-K under the
Securities Exchange Act of 1934, as amended.
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax consequences of
the conversion and the Harvest Home Financial merger will be passed upon by
Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C., People's Savings'
special counsel. The Ohio income tax consequences of the conversion will be
passed upon by Grant Thornton LLP, Cincinnati, Ohio. Kepley, Gilligan & Eyrich,
Cincinnati, Ohio, has passed upon the federal income tax consequences of the
Harvest Home Financial merger to Harvest Home Financial and its stockholders.
Certain legal matters will be passed upon for Keefe, Bruyette & Woods by Luse
Lehman Gorman Pomerenk & Schick, P.C. Certain legal matters will be passed upon
for Oakley by Silver, Freedman & Taff, L.L.P., Washington, D.C.
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ADDITIONAL INFORMATION
Peoples Community Bancorp filed with the SEC a Registration Statement under
the Securities Act with respect to the common stock offered hereby. As permitted
by the rules and regulations of the SEC, this prospectus-proxy statement does
not contain all the information set forth in the Registration Statement. Such
information, including the appraisal report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site that contains registration statements and
other reports regarding registrants that file electronically with the SEC (such
as Peoples Community Bancorp). The address of the SEC's web site is
http://www.sec.gov. The statements contained in this prospectus-proxy statement
as to the contents of any contract or other document filed as an exhibit to the
Registration Statement summarize the provisions of such contracts or other
documents which are deemed to be material. However, such summary is, of
necessity, a brief description of the provisions and is not necessarily
complete; each such statement is qualified by reference to such contract or
document.
People's Savings has filed an Application for Conversion with the Office of
Thrift Supervision with respect to the conversion. This prospectus-proxy
statement omits certain information contained in that application. The
application may be examined at the principal office of the Office of Thrift
Supervision, 1700 G Street, N.W., Washington, D.C. 20552 and at the Central
Regional Office of the Office of Thrift Supervision located at 200 West Madison
Street, Suite 1300, Chicago, Illinois 60606.
Peoples Community Bancorp filed with the Office of Thrift Supervision an
Application to Form a Holding Company and for permission to acquire Harvest Home
Financial. This prospectus-proxy statement omits certain information contained
in that application. Such application may be inspected at the principal office
of the Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C.
20552, and at the Central Regional Office of the Office of Thrift Supervision
located at 200 West Madison Street, Suite 1300, Chicago, Illinois 60606.
In connection with the conversion, Peoples Community Bancorp will register
its common stock with the SEC under Section 12(g) of the Exchange Act, and, upon
such registration, Peoples Community Bancorp and the holders of Peoples
Community Bancorp stock will become subject to the proxy and tender offer rules,
insider trading reporting requirements and restrictions on stock purchases and
sales by directors, officers and greater than 10% stockholders, and certain
other requirements of the Exchange Act. Under the Plan, Peoples Community
Bancorp has undertaken that it will not terminate such registration for a period
of at least three years following the conversion.
A copy of the Plan of Conversion and Peoples Community Bancorp's Certificate
of Incorporation and Bylaws and the federal stock Charter and Bylaws of People's
Savings are available without charge from People's Savings or Oakley. Requests
for such information should be directed to: David A. Cook, Secretary, The
People's Building, Loan and Savings Company, 11 South Broadway, Lebanon, Ohio
45036; or Alexis Thompson, Secretary, The Oakley Improved Building & Loan
Company, 3924 Isabella Avenue, Cincinnati, Ohio 45209.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
FINANCIAL STATEMENTS OF PEOPLE'S SAVINGS
Report of Independent Certified Public Accountants.......... F-1
Statements of Financial Condition as of September 30, 1999
and 1998.................................................. F-2
Statements of Earnings for the years ended September 30,
1999, 1998 and 1997....................................... 78
Statements of Comprehensive Income for the years ended
September 30, 1999, 1998 and 1997......................... F-3
Statements of Retained Earnings for the years ended
September 30, 1999, 1998 and 1997......................... F-4
Statements of Cash Flows for the years ended September 30,
1999, 1998 and 1997....................................... F-5
Notes to Financial Statements............................... F-6
</TABLE>
All financial statement schedules are omitted because the required
information either is not applicable or is shown in the financial statements or
in the notes thereto.
The financial statements of Peoples Community Bancorp are omitted because
Peoples Community Bancorp has not yet issued any stock, has no assets or
liabilities, and has not conducted any business other than of an organizational
nature.
<TABLE>
<S> <C>
FINANCIAL STATEMENTS OF OAKLEY
Report of Independent Certified Public Accountants.......... F-21
Statements of Financial Condition as of September 30, 1999
and 1998 (audited)........................................ F-22
Statements of Operations for the years ended September 30,
1999, 1998 and 1997 (audited)............................. 87
Statements of Comprehensive Income (Loss) for the years
ended September 30, 1999, 1998 and 1997 (audited)......... F-23
Statements of Retained Earnings for the years ended
September 30, 1999, 1998 and 1997 (audited)............... F-24
Statements of Cash Flows for the years ended September 30,
1999, 1998 and 1997 (audited)............................. F-25
Notes to Financial Statements............................... F-26
</TABLE>
All financial statement schedules are omitted because the required
information either is not applicable or is shown in the financial statements or
in the notes thereto.
<TABLE>
<S> <C>
FINANCIAL STATEMENTS OF HARVEST HOME FINANCIAL
Report of Independent Certified Public Accountants.......... F-41
Consolidated Statements of Financial Condition as of
September 30, 1999 and 1998............................... F-42
Consolidated Statements of Earnings for the years ended
September 30, 1999, 1998 and 1997......................... 95
Consolidated Statements of Comprehensive Income for the
years ended September 30, 1999, 1998 and 1997............. F-43
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 1999, 1998 and 1997............. F-44
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998
and 1997.................................................. F-45
Notes to Consolidated Financial Statements.................. F-46
</TABLE>
All financial statement schedules are omitted because the required
information either is not applicable or is shown in the financial statements or
in the notes thereto.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
The People's Building, Loan and Savings Company
We have audited the statements of financial condition of The People's
Building, Loan and Savings Company as of September 30, 1999 and 1998, and the
related statements of earnings, comprehensive income, retained earnings and cash
flows for each of the years ended September 30, 1999, 1998 and 1997. These
financial statements are the responsibility of the Company'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 financial statements referred to above present fairly,
in all material respects, the financial position of The People's Building, Loan
and Savings Company as of September 30, 1999 and 1998, and the results of its
operations and its cash flows for each of the years end September 30, 1999, 1998
and 1997, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
- ---------------------------------
Cincinnati, Ohio
December 10, 1999
F-1
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998
-------- ----------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 70 $ 79
Interest-bearing deposits in other financial institutions... 1,950 4,313
------- -------
Cash and cash equivalents............................. 2,020 4,392
Certificates of deposit in other financial institutions..... -- 400
Investment securities designated as available for sale--at
market.................................................... 798 1,303
Mortgage-backed securities designated as available for
sale--at market........................................... 1,110 1,419
Loans receivable--net....................................... 83,927 79,747
Office premises and equipment--at depreciated cost.......... 1,037 945
Federal Home Loan Bank stock--at cost....................... 850 792
Accrued interest receivable on loans........................ 355 350
Accrued interest receivable on mortgage-backed securities... 7 9
Accrued interest receivable on investments and
interest-bearing deposits................................. 21 23
Prepaid expenses and other assets........................... 174 218
Prepaid federal income taxes................................ -- 40
------- -------
Total assets.......................................... $90,299 $89,638
======= =======
LIABILITIES AND RETAINED EARNINGS
Deposits.................................................... $77,691 $73,691
Advances from the Federal Home Loan Bank.................... -- 4,000
Advances by borrowers for taxes and insurance............... 6 10
Accrued interest payable.................................... 2 16
Other liabilities........................................... 751 741
Accrued federal income taxes................................ 38 --
Deferred federal income taxes............................... 24 155
------- -------
Total liabilities........................................... 78,512 78,613
Commitments and contingencies............................... -- --
Retained earnings--substantially restricted................. 11,791 11,025
Accumulated other comprehensive income, unrealized losses on
securities designated as available for sale, net of
related tax effects....................................... (4) --
------- -------
Total retained earnings............................... 11,787 11,025
------- -------
Total liabilities and retained earnings............... $90,299 $89,638
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net earnings................................................ $766 $790 $851
Other comprehensive income, net of tax:
Unrealized holding losses on securities during the period,
net of tax benefits of $2............................... (4) -- --
---- ---- ----
Comprehensive income........................................ $762 $790 $851
==== ==== ====
Accumulated comprehensive income (loss)..................... $ (4) $ -- $ --
==== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
STATEMENTS OF RETAINED EARNINGS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at October 1, 1996 (as restated for business
combination).............................................. $ 9,384
Net earnings for the year ended September 30, 1997.......... 851
-------
Balance at September 30, 1997............................... 10,235
Net earnings for the year ended September 30, 1998.......... 790
-------
Balance at September 30, 1998............................... 11,025
Net earnings for the year ended September 30, 1999.......... 766
Unrealized losses on securities designated as available for
sale, net of related tax benefits......................... (4)
-------
Balance at September 30, 1999............................... $11,787
=======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998 1997
-------- ---------- ----------
RESTATED RESTATED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year................................. $ 766 $ 790 $ 851
Adjustments to reconcile net earnings to net cash provided
by
(used in) operating activities:
Amortization of discounts and premiums on investment
and mortgage-backed securities--net................. 3 4 4
Amortization of deferred loan origination fees........ (112) (120) (108)
Depreciation and amortization......................... 43 43 48
Provision for losses on loans......................... 150 48 --
Federal Home Loan Bank stock dividends................ (58) (55) (48)
Increase (decrease) in cash due to changes in:
Accrued interest receivable......................... (1) (5) (55)
Prepaid expenses and other assets................... 44 26 70
Other liabilities................................... 6 12 (481)
Accrued interest payable............................ (14) (4) --
Federal income taxes
Current........................................... 78 (24) 108
Deferred.......................................... (129) -- 39
------- ------- -------
Net cash provided by operating activities....... 776 715 428
Cash flows provided by (used in) investing activities:
Purchase of investment securities......................... -- -- (204)
Proceeds from maturity of investment securities........... 500 400 --
Purchase of mortgage-backed securities.................... -- (300) (300)
Principal repayments on mortgage-backed securities........ 305 275 246
Loan principal repayments................................. 22,449 20,549 16,700
Loan disbursements........................................ (26,667) (21,840) (21,664)
Purchase of office premises and equipment................. (135) (42) (9)
Purchase of Federal Home Loan Bank stock.................. -- -- (13)
Decrease in certificates of deposit in other financial
institutions............................................ 400 -- --
------- ------- -------
Net cash used in investing activities........... (3,148) (958) (5,244)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts.......................... 4,000 1,401 2,478
Proceeds from Federal Home Loan Bank advances............. 2,000 14,000 19,000
Repayment of Federal Home Loan Bank advances.............. (6,000) (16,000) (17,000)
------- ------- -------
Net cash provided by (used in) financing
activities.................................... -- (599) 4,478
------- ------- -------
Net decrease in cash and cash equivalents................... (2,372) (842) (338)
Cash and cash equivalents at beginning of year.............. 4,392 5,234 5,572
------- ------- -------
Cash and cash equivalents at end of year.................... $ 2,020 $ 4,392 $ 5,234
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes.................................... $ 437 $ 340 $ 295
======= ======= =======
Interest on deposits and borrowings..................... $ 3,927 $ 3,980 $ 3,850
======= ======= =======
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale,
net of related tax benefits............................. $ (4) $ -- $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES
The People's Building, Loan and Savings Company ("People's" or the
"Company") conducts a general banking business in southwestern Ohio which
primarily consists of attracting deposits from the general public and applying
those funds to the origination of loans for residential, consumer, and
nonresidential purposes. The Company's profitability is significantly dependent
on its net interest income, which is the difference between interest income
generated from interest-earning assets (i.e. loans and investments) and the
interest expense paid on interest-bearing liabilities (i.e. deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or received
by the Company can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management's
control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general accounting
practices within the financial services industry. In preparing financial
statements in accordance with GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from such estimates.
On November 1, 1998, the Company completed a merger with The Peoples
Building and Loan Company of Blanchester, Ohio. The merger was accounted for as
a pooling of interests and, accordingly, the financial statements have been
restated to reflect the effects of the business combination as of October 1,
1996.
The following is a summary of significant accounting policies which have
been consistently applied in the preparation of the accompanying financial
statements.
1. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Company accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires that investments be categorized as held-to-maturity, trading,
or available for sale. Securities classified as held-to-maturity are carried at
cost only if the Company has the positive intent and ability to hold these
securities to maturity. Trading securities and securities designated as
available for sale are carried at fair value with resulting unrealized gains or
losses recorded to operations or retained earnings, respectively. At
September 30, 1999, the Company's retained earnings reflected net unrealized
losses on investment and mortgage-backed securities designated as available for
sale totaling $4,000.
2. LOANS RECEIVABLE
Loans receivable are stated at the principal amount outstanding, adjusted
for deferred loan origination fees and the allowance for loan losses. Interest
is accrued as earned unless the collectibility of the loan is in doubt. Interest
on loans that are contractually past due is charged off, or an allowance is
established based on management's periodic evaluation. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's ability to
F-6
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
make periodic interest and principal payments has returned to normal, in which
case the loan is returned to accrual status. If the ultimate collectibility of
the loan is in doubt, in whole or in part, all payments received on nonaccrual
loans are applied to reduce principal until such doubt is eliminated.
3. LOAN ORIGINATION FEES
The Company accounts for loan origination fees in accordance with SFAS
No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the
provisions of SFAS No. 91, origination fees received from loans, net of certain
direct origination costs, are deferred and amortized to interest income using
the level-yield method, giving effect to actual loan prepayments. Additionally,
SFAS No. 91 generally limits the definition of loan origination costs to the
direct costs attributable to originating a loan, i.e., principally actual
personnel costs.
4. ALLOWANCE FOR LOAN LOSSES
It is the Company's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, trends in the level of delinquent
and problem loans, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current and
anticipated economic conditions in the Company's primary lending area. When the
collection of a loan becomes doubtful, or otherwise troubled, the Company
records a loan charge-off equal to the difference between the fair value of the
property securing the loan and the loan's carrying value. Major loans and major
lending areas are reviewed periodically to determine potential problems at an
early date. The allowance for loan losses is increased by charges to earnings
and decreased by charge-offs (net of recoveries).
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which requires that impaired
loans be measured based upon the present value of expected future cash flows
discounted at the loan's effective interest rate or, as an alternative, at the
loan's observable market price or fair value of the collateral. The Company's
current procedures for evaluating impaired loans result in carrying such loans
at the lower of cost or fair value.
A loan is defined as impaired under SFAS No. 114 when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Company considers its investment in
one- to four-family and consumer loans to be homogeneous and therefore excluded
from separate identification for evaluation of impairment. With respect to the
Company's investment in multi-family and nonresidential loans, and its
evaluation of impairment thereof, such loans are collateral dependent, and, as a
result, are carried as a practical expedient at the lower of cost or fair value.
It is the Company's policy to charge off unsecured credits that are more
than ninety days delinquent. Similarly, collateral dependent loans which are
more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No. 114
at that time.
F-7
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
At September 30, 1999 and 1998, the Company had no loans that would be
defined as impaired under SFAS No. 114.
5. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost), or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are recorded if
the properties' fair value subsequently declines below the value determined at
the recording date. In determining the lower of cost or fair value at
acquisition, costs relating to development and improvement of property are
capitalized. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
6. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation and
amortization are provided primarily on the straight-line and accelerated methods
over the useful lives of the assets, estimated to be forty years for the
building, ten to forty years for building improvements and five to ten years for
furniture and equipment. An accelerated method is used for tax reporting
purposes.
7. FEDERAL INCOME TAXES
The Company accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is
computed by applying the current statutory tax rates to net taxable or
deductible differences between the tax basis of an asset or liability and its
reported amount in the financial statements that will result in taxable or
deductible amounts in future periods. Deferred tax assets are recorded only to
the extent that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current period earnings, carried
back against prior years earnings, offset against taxable temporary differences
reversing in future periods, or utilized to the extent of management's estimate
of future taxable income. A valuation allowance is provided for deferred tax
assets to the extent that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes payable on
future taxable income. Deferred tax liabilities are provided on the total amount
of net temporary differences taxable in the future.
The Company's principal temporary differences between pretax financial
income and taxable income result from different methods of accounting for
deferred loan origination fees and costs, the deferred compensation plan, the
cash versus accrual basis of accounting, general loan loss allowances, the
percentage of earnings bad debt deductions, and Federal Home Loan Bank stock
dividends. Additionally, a temporary difference is recognized for depreciation
utilizing accelerated methods for federal income tax purposes.
F-8
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
8. BENEFIT PLANS
The Company has a noncontributory unfunded pension plan that covers all
directors. The Company's policy is to maintain an accrued liability equal to the
present value of all vested benefits computed using a predetermined annual
benefit amount at retirement. Each director is vested at 65% automatically with
an additional vesting of 15% after three years and 5% per year thereafter until
100% vesting is reached. This plan provides for a life annuity for 120 months,
with eligibility at age 65. The provision for pension expense was $29,000,
$114,000 and $63,000 for the years ended September 30, 1999, 1998 and 1997,
respectively.
In addition, the Company maintains a Simplified Employee Pension Plan for
its employees. Each employee who is at least 21 and has performed services for
People's in at least 53 of the immediately preceding 260 weeks is eligible to
participate. People's may make discretionary contributions to the plan which are
shared pro-rata among all eligible employees based on their compensation for
that calendar year. No employee may be allocated funds under the plan in any one
year in excess of 15% of the employee's compensation for that calendar year.
People's contribution expense for the plan amounted to $39,000, $27,000 and
$35,000 for the years ended September 30, 1999, 1998 and 1997, respectively.
Participants are immediately vested in employer contributions as well as their
elective deferrals and may withdraw either at any time. The disclosures required
under SFAS No. 87, "Accounting for Pensions," have not been provided based on
materiality.
9. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of
October 1, 1998. The Statement established standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. SFAS No. 130 requires that
companies (i) classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income or loss separately from retained earnings. Financial
statements for earlier fiscal years were restated for comparative purposes. The
Company's accumulated comprehensive income (loss) consists solely of the change
in unrealized gains and losses on securities designated as available for sale in
accordance with SFAS No. 115.
10. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-bearing deposits in other financial institutions
with original terms to maturity of less than ninety days.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets and
liabilities whether or not recognized in the statement of financial condition,
for which it is practicable to estimate that value. For financial instruments
where
F-9
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
quoted market prices are not available, fair values are based on estimates using
present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair values
presented may not represent amounts that could be realized in an exchange for
certain financial instruments.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments at September 30, 1999 and
1998:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
statements of financial condition for cash and cash equivalents are
deemed to approximate fair value.
CERTIFICATES OF DEPOSIT IN OTHER FINANCIAL INSTITUTION: The carrying
amounts presented in the statements of financial condition for
certificates of deposit are deemed to approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into categories
with similar characteristics, such as one- to four-family residential,
multi-family residential and nonresidential real estate. These loan
categories were further delineated into fixed-rate and adjustable-rate
loans. The fair values for the resultant loan categories were computed
via discounted cash flow analysis, using current interest rates offered
for loans with similar terms to borrowers of similar credit quality. For
consumer and other loans, fair values were deemed to equal the historic
carrying values. The historical carrying amount of accrued interest on
loans is deemed to approximate fair value.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the
statements of financial condition is deemed to approximate fair value.
DEPOSITS: The fair value of passbook and money market deposit accounts
is deemed to approximate the amount payable on demand. Fair values for
fixed-rate certificates of deposit have been estimated using a discounted
cash flow calculation using the interest rates currently offered for
deposits of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. At September 30,
1999 and 1998, the difference between the fair value and notional amount
of loan commitments was not material.
F-10
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Company's financial instruments at September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents............................. $ 3,163 $ 3,163 $ 3,356 $ 3,356
Certificates of deposit............................... 400 400 500 500
Investment securities................................. 2,452 2,452 2,442 2,442
Mortgage-backed securities............................ 81 81 110 110
Loans receivable...................................... 10,624 10,982 10,701 11,581
Federal Home Loan Bank stock.......................... 171 171 159 159
------- ------- ------- -------
........................................................ $16,891 $17,249 $17,268 $18,184
======= ======= ======= =======
Financial liabilities
Deposits.............................................. $13,327 $13,380 $13,633 $13,734
======= ======= ======= =======
</TABLE>
12. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1999
financial statement presentation.
NOTE B--INVESTMENT AND MORTGAGE-BACKED SECURITIES
The investment and mortgage-backed securities depicted below were classified
as held to maturity by The Peoples Building and Loan Company of Blanchester
prior to combination with the Company. Upon completion of the merger in fiscal
1999, all investment and mortgage-backed securities were classified as available
for sale to adhere to the Company's investment policies. The amortized cost and
estimated fair values of investment securities at September 30, 1999 and 1998
are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government and agency
obligations, due within one
year.............................. $799 $798 $1,294 $1,303
==== ==== ====== ======
</TABLE>
At September 30, 1999, the Company's amortized cost of investment securities
exceeded the estimated fair value by $1,000, comprised solely of gross
unrealized losses. At September 30, 1998, the Company's fair value of investment
securities exceeded amortized cost by $9,000, consisting solely of gross
unrealized gains.
F-11
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE B--INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of mortgage-backed securities at September 30, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Government National Mortgage
Association participation
certificates..................... $1,115 $8 $13 $1,110
====== == === ======
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Government National Mortgage
Association participation
certificates..................... $1,428 $7 $16 $1,419
====== == === ======
</TABLE>
The amortized cost of mortgage-backed securities, by contractual terms to
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may generally prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Due within three years...................................... $ 11 $ 30
Due in three to five years.................................. 10 16
Due in five to ten years.................................... 493 628
Due after ten years......................................... 601 754
------ ------
$1,115 $1,428
====== ======
</TABLE>
F-12
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE C--LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Residential real estate
One-to-four family...................................... $80,690 $75,564
Multi-family............................................ 982 1,036
Nonresidential real estate and land....................... 5,647 5,801
Consumer and other........................................ 124 129
------- -------
87,443 82,530
Less:
Undisbursed portion of loans-in-process................. 2,797 2,209
Deferred loan origination fees.......................... 354 359
Allowance for loan losses............................... 365 215
------- -------
$83,927 $79,747
======= =======
</TABLE>
The Company's lending efforts have historically focused on one-to-four
family and multi-family residential real estate loans adjusted for the
undisbursed portion of loans-in-process, which comprise approximately
$78.9 million, or 94%, of the total loan portfolio as of September 30, 1999 and
$74.4 million, or 93%, of the total loan portfolio as of September 30, 1998.
Generally, such loans have been underwritten on the basis of no more than an 80%
loan-to-value ratio, which has historically provided the Company with adequate
collateral coverage in the event of default. Nevertheless, the Company, as with
any lending institution, is subject to the risk that real estate values could
deteriorate in its primary lending area of southwestern Ohio, thereby impairing
collateral values. However, management is of the belief that real estate values
in the Company's primary lending area are presently stable.
In the normal course of business, the Company has made loans to some of its
directors, officers and employees. In the opinion of management, such loans are
consistent with sound lending practices and are within applicable regulatory
lending limitations. The aggregate dollar amount of loans outstanding to
directors and officers totaled approximately $214,000 and $238,000 at
September 30, 1999 and 1998, respectively.
F-13
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE D--ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN
THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................ $215 $182 $182
Provision for loan losses............................... 150 48 --
Charge-off of loans..................................... -- (15) --
---- ---- ----
Balance at end of year.................................. $365 $215 $182
==== ==== ====
</TABLE>
As of September 30, 1999, the Company's allowance for loan losses was solely
general in nature, and is includible as a component of regulatory risk-based
capital. No loan balances were charged-off during the years ended September 30,
1999 or 1997 as loan deliquencies remained manageable and well secured by
residential property.
The Company had nonperforming and nonaccrual loans totaling $1.0 million,
$704,000 and $995,000 at September 30, 1999, 1998 and 1997, respectively.
Interest income that would have been recognized had such loans been performing
in accordance with their contractual terms totaled approximately $26,000,
$21,000 and $23,000 for the years ended September 30, 1999, 1998 and 1997,
respectively. A total of approximately $7,000 of interest income was actually
recorded on such loans in the fiscal year ended September 30, 1999.
NOTE E--OFFICE PREMISES AND EQUIPMENT
At September 30, office premises and equipment were comprised of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 48 $ 48
Building and improvements................................... 851 834
Furniture and equipment..................................... 494 351
------ ------
1,393 1,233
Less accumulated depreciation and amortization.............. 356 288
------ ------
$1,037 $ 945
====== ======
</TABLE>
F-14
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE F--DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-AVERAGE INTEREST RATE 1999 1998
- ----------------------------------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Passbook..................................................
1999--3.88%............................................. $ 4,008
1998--3.62%............................................. $ 4,855
Money market deposit accounts.............................
1999--4.14%............................................. 17,255
1998--4.12%............................................. 16,626
------- -------
Total demand, transaction and passbook deposits........... 21,263 21,481
Certificates of deposit
Original maturities of:
Less than 12 months...................................
1999--4.47%......................................... 6,093
1998--4.99%......................................... 4,415
12 months to 36 months................................
1999--5.39%......................................... 30,956
1998--5.96%......................................... 26,823
36 months to 48 months................................
1999--5.18%......................................... 16,143
1998--6.95%......................................... 18,108
Individual retirement accounts
1999--5.79%............................................. 3,236
1998--6.37%............................................. 2,864
------- -------
Total certificates of deposit............................. 56,428 52,210
------- -------
Total deposit accounts.................................... $77,691 $73,691
======= =======
</TABLE>
At September 30, 1999 and 1998, the Company had certificate of deposit
accounts with balances in excess of $100,000 totaling approximately
$22.1 million and $19.1 million, respectively. Deposit balances in excess of
$100,000 are not insured by the FDIC.
Interest expense on deposits for the years ended September 30 is summarized
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook............................................ $ 156 $ 176 $ 172
Money market deposit accounts....................... 714 686 768
Certificates of deposit............................. 3,004 3,114 2,910
------ ------ ------
$3,874 $3,976 $3,850
====== ====== ======
</TABLE>
F-15
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE F--DEPOSITS (CONTINUED)
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Less than one year........................................ $33,205 $36,398
One year to three years................................... 19,198 14,126
More than three years..................................... 4,025 1,686
------- -------
$56,428 $52,210
======= =======
</TABLE>
NOTE G--ADVANCES FROM THE FEDERAL HOME LOAN BANK
At September 30, 1998, advances from the Federal Home Loan Bank consisted of
short-term borrowings with a weighted-average interest rate of 5.45%. Such
advances were collateralized by a pledge of certain residential mortgage loans
totaling $6.0 million and the Company's investment in Federal Home Loan Bank
stock.
NOTE H--FEDERAL INCOME TAXES
Federal income taxes do not differ materially from the amounts computed at
the statutory corporate tax rate for the fiscal years ended September 30, 1999,
1998 and 1997.
The composition of the Company's net deferred tax liability at September 30
is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Taxes (payable) refundable on temporary differences
at statutory rate:
Deferred tax assets:
General loan loss allowance............................... $ 124 $ 71
Deferred loan origination fees............................ 73 49
Unrealized losses on securities designated as available
for sale................................................ 2 --
Deferred compensation plan................................ 185 188
----- -----
Total deferred tax assets............................. 384 308
Deferred tax liabilities:
Federal Home Loan Bank stock dividends.................... (144) (120)
Book/tax depreciation differences......................... (63) (43)
Cash versus accrual basis of accounting................... (41) (87)
Percentage of earnings bad debt deduction................. (156) (213)
Other..................................................... (4) --
----- -----
Deferred tax liabilities.............................. (408) (463)
----- -----
Net deferred tax liability............................ $ (24) $(155)
===== =====
</TABLE>
F-16
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE H--FEDERAL INCOME TAXES (CONTINUED)
The Company has historically been allowed a special bad debt deduction,
generally limited to 8% of otherwise taxable income, and subject to certain
limitations based on aggregate loans and deposit account balances at the end of
the year. If the amounts that qualify as deductions for federal income taxes are
later used for purposes other than bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at the
then current corporate income tax rate. Retained earnings at September 30, 1999,
includes approximately $1.9 million for which federal income taxes have not been
provided. The amount of unrecognized deferred tax liability relating to the
cumulative bad debt deduction was approximately $485,000 at September 30, 1999.
Pursuant to legislation enacted in 1996, the Company is required to
recapture as taxable income approximately $640,000 of its tax bad debt reserve,
which represents the post-1987 additions to the reserve, and will be unable to
utilize the percentage of earnings method to compute its bad debt deduction in
the future. The Company has provided deferred taxes for this amount and began
amortizing the recapture of the bad debt reserve into taxable income over a six
year period commencing in fiscal 1998.
NOTE I--COMMITMENTS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
including commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the statement of financial condition. The contract or notional
amounts of the commitments reflect the extent of the Company's involvement in
such financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
At September 30, 1999, the Company had outstanding commitments of
approximately $1.0 million to originate fixed rate loans with a weighted-average
interest rate of 8.05%. In the opinion of management, all loan commitments
equaled or exceeded prevalent market interest rates as of September 30, 1999,
and will be funded from normal cash flow from operations and existing excess
liquidity.
No contingencies were recorded by the Company at September 30, 1999.
In addition to loan commitments, the company also leases the building in
which its Blanchester branch is located. This lease commitment expires in Fiscal
2003. The remaining commitment for this lease totals $27,000 as of
September 30, 1999.
NOTE J--REGULATORY CAPITAL
The Company is subject to minimum regulatory capital standards promulgated
by the Office of Thrift Supervision (the "OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the
F-17
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE J--REGULATORY CAPITAL (CONTINUED)
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
The minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement and
the risk-based capital requirement. The tangible capital requirement provides
for minimum tangible capital (defined as retained earnings less all intangible
assets) equal to 1.5% of adjusted total assets. The core capital requirement
provides for minimum core capital (tangible capital plus certain forms of
supervisory goodwill and other qualifying intangible assets) equal to 3.0% of
adjusted total assets. An OTS proposal, if adopted in present form, would
increase the core capital requirement to a range of 4.0%--5.0% of adjusted total
assets for substantially all savings associations. Management anticipates no
material change to the Company's excess regulatory capital position as a result
of this proposed change in the regulatory capital requirement. The risk-based
capital requirement currently provides for the maintenance of core capital plus
general loss allowances equal to 8.0% of risk-weighted assets. In computing
risk-weighted assets, the Company multiplies the value of each asset on its
statement of financial condition by a defined risk-weighting factor, e.g., one-
to four-family residential loans carry a risk-weighted factor of 50%.
As of September 30, 1999 and 1998, management believes that the Company met
all capital adequacy requirements to which it was subject and would be
considered as well-captalized.
<TABLE>
<CAPTION>
RECONCILIATION OF REGULATORY CAPITAL AT SEPTEMBER 30, 1999
-------------------------------------------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
-------- -------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles............. $11,787 $11,787 $11,787
Unrealized losses on securities
designated as available for
sale.............................. 4 4 4
Additional capital items
General valuation allowances--
limited......................... -- -- 365
------- ------- -------
Regulatory capital computed......... 11,791 13.1 11,791 13.1 12,156 24.4
Minimum capital requirement......... 1,354 1.5 2,709 3.0 3,985 8.0
------- ---- ------- ---- ------- ----
Regulatory capital--excess.......... $10,437 10.6 $ 8,510 10.1 $ 8,171 16.4
======= ==== ======= ==== ======= ====
</TABLE>
F-18
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE J--REGULATORY CAPITAL (CONTINUED)
<TABLE>
<CAPTION>
RECONCILIATION OF REGULATORY CAPITAL AT SEPTEMBER 30, 1998
-------------------------------------------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
-------- -------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles............. $11,025 $11,025 $11,025
Unrealized gains on securities
designated as available for
sale.............................. -- -- --
Additional capital items:
General valuation allowances--
limited......................... -- -- 215
------- ------- -------
Regulatory capital computed......... 11,025 12.3 11,025 12.3 11,240 23.6
Minimum capital requirement......... 1,345 1.5 2,690 3.0 3,985 8.0
------- ---- ------- ---- ------- ----
Regulatory capital--excess.......... $ 9,780 10.8 $ 8,335 9.3 $ 7,255 15.6
======= ==== ======= ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
----------------------------------------------------------------
TO BE "WELL-CAPITALIZED"
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------- ----------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital..... $11,791 13.1% *$1,354 *1.5% *$4,515 * 5.0%
Core capital......... $11,791 13.1% *$2,709 *3.0% *$5,418 * 6.0%
Risk-based capital... $12,156 24.4% *$3,985 *8.0% *$4,982 *10.0%
* greater than or equal to
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
--------------------------------------------------------------------
TO BE "WELL-CAPITALIZED"
UNDER PROMPT
FOR CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
---------------- --------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ---------- --------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital..... $11,025 12.3% *$1,345 *1.5% *$4,482 * 5.0%
Core capital......... $11,025 12.3% *$2,690 *3.0% *$5,378 * 6.0%
Risk-based capital... $11,240 23.6% *$3,806 *8.0% *$4,758 *10.0%
* greater than or equal to
</TABLE>
The Company's management believes that, under the current regulatory capital
regulations, the Company will continue to meet its minimum capital requirements
in the foreseeable future. However, events beyond the control of the Company,
such as increased interest rates or a downturn in the economy in the Company's
market area, could adversely affect future earnings and, consequently, the
ability to meet future minimum regulatory capital requirements.
F-19
<PAGE>
THE PEOPLE'S BUILDING, LOAN AND SAVINGS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE K--BUSINESS COMBINATIONS AND REORGANIZATION OF CORPORATE FORM
On October 1, 1999, the Company and The Oakley Improved Building and Loan
Company ("Oakley"), (collectively "the Companies"), jointly announced the
signing of an Agreement and Plan of Merger (the "Agreement") wherein Oakley
would merged with and into the Company. The merger will be accounted for under
the pooling-of-interests method of accounting. In connection therewith, the
Companies adopted an overall Plan of Conversion (the "conversion") whereby the
Company will form a new holding company and convert from mutual to stock form.
Pursuant to the Plan, the Companies will offer for sale up to 1,610,000
common shares to its depositors and members of the community. The costs of
issuing the common stock will be deferred and deducted from the sale proceeds of
the offering. If the conversion is unsuccessful, all deferred costs will be
charged to operations. At September 30, 1999, the Company had not incurred any
conversion costs.
At the date of the conversion, People's will establish a liquidation account
in an amount equal to retained earnings reflected in the statement of financial
condition used in the conversion offering circular. The liquidation account will
be maintained for the benefit of eligible savings account holders who maintain
deposit accounts in People's after conversion.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held, before any liquidation distribution
may be made with respect to the common shares. Except for the repurchase of
stock and payment of dividends by the Companies, the existence of the
liquidation account will not restrict the use or further application of such
retained earnings.
People's may not declare or pay a cash dividend on, or repurchase any of its
common shares if the effect thereof would cause the Company's shareholders'
equity to be reduced below either the amount required for the liquidation
account or the regulatory capital requirements for insured institutions.
Additionally, the Company will acquire the Harvest Home Financial
Corporation ("Harvest Home") for consideration of approximately $16.5 million in
cash and common stock. Under the terms of the Agreement, each share of Harvest
Home's common stock will be exchanged for a combination of $9.00 per share in
cash plus new common shares of Peoples' holding company with a value of $9.00.
It is currently anticipated that the number of shares of common stock that will
be exchanged for each share of Harvest Home's common stock is 0.9 shares,
assuming the initial offering price of People's common stock is $10 per share.
The acquisition will be accounted for using the purchase method of accounting.
F-20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
The Oakley Improved Building and Loan Company
We have audited the statements of financial condition of The Oakley Improved
Building and Loan Company as of September 30, 1999 and 1998, and the related
statements of operations, comprehensive income, retained earnings and cash flows
for each of the years ended September 30, 1999, 1998 and 1997. These financial
statements are the responsibility of the Company'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 financial statements referred to above present fairly,
in all material respects, the financial position of The Oakley Improved Building
and Loan Company as of September 30, 1999, and 1998, and the results of its
operations and its cash flows for each of the years ended September 30, 1999,
1998 and 1997, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
- ---------------------------------
Cincinnati, Ohio
December 3, 1999
F-21
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 101 $ 97
Federal funds sold.......................................... 700 1,100
Interest-bearing deposits in other financial institutions... 2,362 2,159
--------- -------
Cash and cash equivalents........................... 3,163 3,356
Certificates of deposit in other financial institutions..... 400 500
Investment securities designated as available for sale--at
market.................................................... 2,452 2,442
Mortgage-backed securities designated as available for
sale--at market........................................... 81 110
Loans receivable--net....................................... 10,624 10,701
Office premises and equipment--at depreciated cost.......... 25 28
Federal Home Loan Bank stock--at cost....................... 171 159
Accrued interest receivable on loans........................ 58 65
Accrued interest receivable on investments.................. 1 1
Accrued interest receivable on mortgage-backed securities... 13 9
Prepaid expenses and other assets........................... 32 15
Prepaid federal income taxes................................ 7 --
--------- -------
Total assets........................................ $ 17,027 $17,386
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................................... $ 13,327 $13,633
Other liabilities........................................... 180 160
Accrued federal income taxes................................ -- 51
Deferred federal income taxes............................... 630 627
--------- -------
Total liabilities................................... 14,137 14,471
Commitments and contingencies............................... -- --
Retained earnings--substantially restricted................. 1,635 1,666
Accumulated other comprehensive income, unrealized gains on
securities designated as available for sale, net of
related tax effects....................................... 1,255 1,249
--------- -------
Total retained earnings............................. 2,890 2,915
--------- -------
Total liabilities and retained earnings............. $ 17,027 $17,386
========= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net earnings (loss) for the year............................ $ (31) $ 147 $127
Other comprehensive income, net of tax:
Unrealized holding gains on securities during the period,
net of tax of $3, $211 and $143 in fiscal 1999, 1998 and
1997, respectively...................................... 6 409 277
Reclassification adjustment for realized gains included in
earnings, net of tax of $31 in 1998....................... -- (60) --
------ ------ ----
Comprehensive income (loss)................................. $ (25) $ 496 $404
====== ====== ====
Accumulated comprehensive income............................ $1,255 $1,249 $900
====== ====== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
STATEMENTS OF RETAINED EARNINGS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
UNREALIZED
GAINS ON
SECURITIES
DESIGNATED AS
RETAINED AVAILABLE
EARNINGS FOR SALE TOTAL
-------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at October 1, 1996.................................. $1,392 $ 623 $2,015
Net earnings for the year ended September 30, 1997.......... 127 -- 127
Unrealized gains on securities designated as available for
sale, net of related tax effects.......................... -- 277 277
------ ------ ------
Balance at September 30, 1997............................... 1,519 900 2,419
Net earnings for the year ended September 30, 1998.......... 147 -- 147
Unrealized gains on securities designated as available for
sale, net of related tax effects.......................... -- 349 349
------ ------ ------
Balance at September 30, 1998............................... 1,666 1,249 2,915
Net loss for the year ended September 30, 1999.............. (31) -- (31)
Unrealized gains on securities designated as available for
sale, net of related tax effects.......................... -- 6 6
------ ------ ------
Balance at September 30, 1999............................... $1,635 $1,255 $2,890
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) for the year.......................... $ (31) $ 147 $ 127
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees........ (15) (13) (16)
Depreciation and amortization......................... 5 4 3
Amortization of premiums and (discounts) on investment
securities--net...................................... (4) (2) 2
Federal Home Loan Bank stock dividends................ (12) (11) (9)
Provision for losses on loans......................... 25 -- 1
Gain on sale of investments designated as available
for sale............................................. -- (91) --
Increase (decrease) in cash due to changes in:
Accrued interest receivable......................... 9 1 4
Prepaid expenses and other assets................... (23) (6) 7
Other liabilities................................... 20 (8) (91)
Federal income taxes Current........................ (58) 30 29
Deferred............................................ (1) 11 (26)
------- ------- -------
Net cash provided by (used in) operating
activities.................................... (85) 62 31
Cash flows provided by (used in) investing activities:
(Increase) decrease in certificates of deposit in other
financial institutions.................................. 100 (200) --
Purchase of investment securities......................... (496) (502) (747)
Proceeds from maturities of investment securities......... 500 750 500
Proceeds from repayments on mortgage-backed securities.... 29 20 22
Proceeds from sale of investments designated as available
for sale................................................ -- 93 --
Loan principal repayments................................. 3,556 2,132 1,761
Loan disbursements........................................ (3,489) (1,707) (1,914)
Purchase of office premises and equipment................. (2) (17) (2)
------- ------- -------
Net cash provided by (used in) investing
activities.................................... 198 569 (380)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts............... (306) 488 258
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (193) 1,119 (91)
Cash and cash equivalents at beginning of year.............. 3,356 2,237 2,328
------- ------- -------
Cash and cash equivalents at end of year.................... $ 3,163 $ 3,356 $ 2,237
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes.................................... $ 35 $ 30 $ 18
======= ======= =======
Interest on deposits.................................... $ 668 $ 726 $ 685
======= ======= =======
Supplemental disclosure of noncash investing activities:
Unrealized gains on investment securities designated as
available for sale,
net of related tax effects.............................. $ 6 $ 349 $ 277
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES
The Oakley Improved Building and Loan Company (the "Company") conducts a
general banking business in southwestern Ohio which primarily consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer, and nonresidential purposes. The
Company's profitability is significantly dependent on its net interest income,
which is the difference between interest income generated from interest-earning
assets (i.e. loans and investments) and the interest expense paid on
interest-bearing liabilities (i.e. deposits and borrowed funds). Net interest
income is affected by the relative amount of interest-earning assets and
interest-bearing liabilities and the interest received or paid on these
balances. The level of interest rates paid or received by the Company can be
significantly influenced by a number of environmental factors, such as
governmental monetary policy, that are outside of management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general accounting
practices within the financial services industry. In preparing financial
statements in accordance with GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from such estimates.
The following is a summary of significant accounting policies which have
been consistently applied in the preparation of the accompanying financial
statements.
1. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Company accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires that investments be categorized as held-to-maturity, trading,
or available for sale. Securities classified as held-to-maturity are carried at
cost only if the Company has the positive intent and ability to hold these
securities to maturity. Trading securities and securities designated as
available for sale are carried at fair value with resulting unrealized gains or
losses recorded to operations or retained earnings, respectively. At
September 30, 1999 and 1998, the Company's retained earnings reflected
unrealized gains on investment and mortgage-backed securities designated as
available for sale totaling $1.3 million and $1.2 million, respectively.
2. LOANS RECEIVABLE
Loans receivable are stated at the principal amount outstanding, adjusted
for deferred loan origination fees and the allowance for loan losses. Interest
is accrued as earned unless the collectibility of the loan is in doubt. Interest
on loans that are contractually past due is charged off, or an allowance is
established based on management's periodic evaluation. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments has returned to normal, in which
case the loan is returned to accrual status. If the ultimate collectibility of
the loan is in doubt, in whole or in part, all payments received on nonaccrual
loans are applied to reduce principal until such doubt is eliminated.
F-26
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
3. LOAN ORIGINATION FEES
The Company accounts for loan origination fees in accordance with SFAS
No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the
provisions of SFAS No. 91, origination fees received from loans, net of certain
direct origination costs, are deferred and amortized to interest income using
the level-yield method, giving effect to actual loan prepayments. Additionally,
SFAS No. 91 generally limits the definition of loan origination costs to the
direct costs attributable to originating a loan, i.e., principally actual
personnel costs.
4. ALLOWANCE FOR LOSSES ON LOANS
It is the Company's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, trends in the level of delinquent
and problem loans, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current and
anticipated economic conditions in the Company's primary lending area. When the
collection of a loan becomes doubtful, or otherwise troubled, the Company
records a loan charge-off equal to the difference between the fair value of the
property securing the loan and the loan's carrying value. Major loans and major
lending areas are reviewed periodically to determine potential problems at an
early date. The allowance for loan losses is increased by charges to earnings
and decreased by charge-offs (net of recoveries).
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which requires that impaired
loans be measured based upon the present value of expected future cash flows
discounted at the loan's effective interest rate or, as an alternative, at the
loan's observable market price or fair value of the collateral. The Company's
current procedures for evaluating impaired loans result in carrying such loans
at the lower of cost or fair value.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Company considers its investment in
one- to four-family residential loans and consumer loans to be homogeneous and
therefore excluded from separate identification for evaluation of impairment.
With respect to the Company's investment in multi-family and nonresidential
loans, and its evaluation of impairment thereof, such loans are collateral
dependent, and as a result, are carried as a practical expedient at the lower of
cost or fair value.
It is the Company's policy to charge off unsecured credits that are more
than ninety days delinquent. Similarly, collateral dependent loans which are
more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No. 114
at that time.
At September 30, 1999 and 1998, the Company had no loans that would be
defined as impaired under SFAS No. 114.
F-27
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
5. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost), or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are recorded if
the properties' fair value subsequently declines below the value determined at
the recording date. In determining the lower of cost or fair value at
acquisition, costs relating to development and improvement of property are
capitalized. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
6. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation and
amortization are provided primarily on the straight-line and accelerated methods
over the useful lives of the assets, estimated to be forty years for the
building, ten to forty years for building improvements and five to ten years for
furniture and equipment. An accelerated method is used for tax reporting
purposes.
7. FEDERAL INCOME TAXES
The Company accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is
computed by applying the current statutory tax rates to net taxable or
deductible differences between the tax basis of an asset or liability and its
reported amount in the financial statements that will result in taxable or
deductible amounts in future periods. Deferred tax assets are recorded only to
the extent that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current period earnings, carried
back against prior years earnings, offset against taxable temporary differences
reversing in future periods, or utilized to the extent of management's estimate
of future taxable income. A valuation allowance is provided for deferred tax
assets to the extent that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes payable on
future taxable income. Deferred tax liabilities are provided on the total amount
of net temporary differences taxable in the future.
The Company's principal temporary differences between pretax financial
income and taxable income result from different methods of accounting for
deferred loan origination fees and costs, general loan loss allowances, certain
components of retirement expense, and Federal Home Loan Bank stock dividends.
Additionally, a temporary difference is recognized for depreciation utilizing
accelerated methods for federal income tax purposes.
8. BENEFIT PLANS
The Company has a deferred unfunded compensation plan that provides
retirement benefits for officers and directors. Expense under the plan totaled
$44,000, $15,000 and $16,000 for the fiscal years ended September 30, 1999, 1998
and 1997, respectively.
F-28
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
The Company also has a Simplified Employee Pension Plan that provides
retirement benefits to all employees. Contributions to the plan are subject to
the discretion of the Board of Directors. Expense recognized for the plan
totaled $21,000, $19,000 and $20,000 for the fiscal years ended September 30,
1999, 1998 and 1997, respectively.
9. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of
October 1, 1998. The Statement established standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. SFAS No. 130 requires that
companies (i) classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings. Financial statements for
earlier fiscal years were restated for comparative purposes. The Company's
accumulated comprehensive income consists solely of the change in unrealized
gains and losses on securities designated as available for sale in accordance
with SFAS No. 115.
10. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-bearing deposits in other financial institutions
with original terms to maturity of less than ninety days.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets and
liabilities whether or not recognized in the statement of financial condition,
for which it is practicable to estimate that value. For financial instruments
where quoted market prices are not available, fair values are based on estimates
using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair values
presented may not represent amounts that could be realized in an exchange for
certain financial instruments.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments at September 30, 1999 and
1998:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
statements of financial condition for cash and cash equivalents are
deemed to approximate fair value.
CERTIFICATES OF DEPOSIT IN OTHER FINANCIAL INSTITUTION: The carrying
amounts presented in the statements of financial condition for
certificates of deposit are deemed to approximate fair value.
F-29
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into categories
with similar characteristics, such as one- to four-family residential,
multi-family residential and nonresidential real estate. These loan
categories were further delineated into fixed-rate and adjustable-rate
loans. The fair values for the resultant loan categories were computed
via discounted cash flow analysis, using current interest rates offered
for loans with similar terms to borrowers of similar credit quality. For
consumer and other loans, fair values were deemed to equal the historic
carrying values. The historical carrying amount of accrued interest on
loans is deemed to approximate fair value.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the
statements of financial condition is deemed to approximate fair value.
DEPOSITS: The fair value of passbook and money market deposit accounts
is deemed to approximate the amount payable on demand. Fair values for
fixed-rate certificates of deposit have been estimated using a discounted
cash flow calculation using the interest rates currently offered for
deposits of similar remaining maturities.
ADVANCES FROM THE FEDERAL HOME LOAN BANK: The fair value of these
advances is estimated using the rates currently offered for similar
advances of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. At September 30,
1999 and 1998, the difference between the fair value and notional amount
of loan commitments was not material.
F-30
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Company's financial instruments at September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents............................. $ 2,020 $ 2,020 $ 4,392 $ 4,392
Certificates of deposit............................... -- -- 400 400
Investment securities................................. 798 798 1,303 1,303
Mortgage-backed securities............................ 1,110 1,110 1,419 1,419
Loans receivable...................................... 83,927 85,096 79,747 83,890
Federal Home Loan Bank stock.......................... 850 850 792 792
------- ------- ------- -------
$88,705 $89,874 $88,053 $92,196
======= ======= ======= =======
Financial liabilities
Deposits.............................................. $77,691 $78,201 $73,691 $92,196
Advances from Federal Home Loan Bank.................. -- -- 4,000 4,000
Escrow deposits....................................... 6 6 10 10
------- ------- ------- -------
$77,697 $78,207 $77,701 $78,380
======= ======= ======= =======
</TABLE>
12. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1999
financial statement presentation.
F-31
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE B--INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investment securities designated as available for sale
at September 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLMC stock.......................................... $ 48 $1,902 $ -- $1,950
U.S. Government and agency obligations--due within
one year........................................... 502 -- -- 502
---- ------ ---- ------
$550 $1,902 $ -- $2,452
==== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLMC stock.......................................... $ 48 $1,892 $ -- $1,940
U.S. Government and agency obligations--due within
two years.......................................... 502 -- -- 502
---- ------ ----- ------
$550 $1,892 $ -- $2,442
==== ====== ===== ======
</TABLE>
Mortgage-backed securities consist of Government National Mortgage
Association ("GNMA") certificates which are scheduled to mature ratably over the
next ten years. The fair value of mortgage-backed securities approximated
amortized cost at both September 30, 1999 and 1998.
F-32
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE C--LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Residential real estate
One-to-four family...................................... $ 9,680 $ 9,844
Multi-family............................................ 606 575
Construction............................................ 677 --
Nonresidential real estate and land....................... 288 342
Consumer and other........................................ 9 12
------- -------
11,260 10,773
Less:
Undisbursed portion of loans in process................. 540 --
Deferred loan origination fees.......................... 46 47
Allowance for loan losses............................... 50 25
------- -------
$10,624 $10,701
======= =======
</TABLE>
The Company's lending efforts have historically focused on one-to-four
family and multi-family residential real estate loans, which comprise
approximately $10.4 million, or 98%, of the total loan portfolio as of
September 30, 1999 and $10.4 million, or 97%, of the total loan portfolio as of
September 30, 1998. Generally, such loans have been underwritten on the basis of
no more than an 80% loan-to-value ratio, which has historically provided the
Company with adequate collateral coverage in the event of default. Nevertheless,
the Company, as with any lending institution, is subject to the risk that real
estate values could deteriorate in its primary lending area of southwestern
Ohio, thereby impairing collateral values. However, management is of the belief
that real estate values in the Company's primary lending area are presently
stable.
There were no loans outstanding to the Company's officers, directors or
employees at September 30, 1999, 1998 and 1997.
NOTE D--ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................ $ 25 $ 25 $ 24
Provision for loan losses............................... 25 -- 1
---- ---- ----
Balance at end of year.................................. $ 50 $ 25 $ 25
==== ==== ====
</TABLE>
As of September 30, 1999, the Company's allowance for loan losses was solely
general in nature, and is includible as a component of regulatory risk-based
capital.
F-33
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE D--ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The Company had nonperforming and nonaccrual loans totaling $38,000 and
$15,000 at September 30, 1999 and 1997, respectively. Interest income that would
have been recognized had such loans been performing in accordance with their
contractual terms totaled approximately $1,100 and $700 for the years ended
September 30, 1999 and 1997, respectively. The Company had no nonperforming and
nonaccrual loans at September 30, 1998.
NOTE E--OFFICE PREMISES AND EQUIPMENT
At September 30, office premises and equipment were comprised of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 9 $ 9
Building and improvements................................... 28 28
Furniture and equipment..................................... 72 70
---- ----
109 107
Less accumulated depreciation and amortization.............. 84 79
---- ----
$ 25 $ 28
==== ====
</TABLE>
F-34
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE F--DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1999 1998
- -------------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Passbook
1999--3.00%............................................. $ 1,400
1998--3.00%............................................. $ 1,607
Money market deposit accounts
1999--3.25%............................................. 2,101
1998--3.50%............................................. 1,801
------- -------
Total demand, transaction and passbook deposits........... 3,501 3,408
Certificates of deposit
Original maturities of:
Less than 12 months
1999--4.80%......................................... 4,094
1998--5.45%......................................... 3,098
12 months to 36 months
1999--5.60%......................................... 2,325
1998--5.92%......................................... 3,288
More than 36 months
1999--6.36%......................................... 2,374
1998--6.32%......................................... 2,833
Individual retirement accounts
1999--5.74%........................................... 1,033
1998--5.99%........................................... 1,006
------- -------
Total certificates of deposit............................. 9,826 10,225
------- -------
Total deposit accounts.................................... $13,327 $13,633
======= =======
</TABLE>
At September 30, 1999 and 1998, the Company had deposit accounts with
balances in excess of $100,000 totaling approximately $1.2 million and $960,000,
respectively. Deposit balances in excess of $100,000 are not insured by the
FDIC.
Interest expense on deposits for the year ended September 30 is summarized
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook................................................ $ 46 $ 52 $ 51
Money market deposit accounts........................... 62 54 54
Certificates of deposit................................. 560 620 580
---- ---- ----
$668 $726 $685
==== ==== ====
</TABLE>
F-35
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE F--DEPOSITS (CONTINUED)
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Less than one year......................................... $7,225 $ 5,887
One year to three years.................................... 1,602 3,467
More than three years...................................... 999 871
------ -------
$9,826 $10,225
====== =======
</TABLE>
NOTE G--FEDERAL INCOME TAXES (CREDITS)
Federal income taxes (credits) differ from the amounts computed at the
statutory corporate tax rate of 34%. for the fiscal years ended September 30 as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes (credits) at statutory
rate............................................ $ (19) $ 73 $ 51
Changes in taxes or credits resulting from:
Tax exempt dividends............................ (5) (4) (4)
Other (primarily surtax exemptions in 1997)..... -- -- (25)
------ ----- -----
Federal income taxes (credits) per consolidated
financial statements............................ $ (24) $ 69 $ 22
====== ===== =====
Effective rate of tax (credits)................... (34.5)% 31.9% 14.8%
====== ===== =====
</TABLE>
The composition of the Company's net deferred tax liability at September 30
is as follows:
<TABLE>
<CAPTION>
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY
DIFFERENCES AT STATUTORY RATE: 1999 1998
- --------------------------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
General loan loss allowance............................... $ 17 $ 9
Deferred loan origination fees............................ 16 16
Benefit plans............................................. 46 40
----- -----
Deferred tax assets..................................... 79 65
Deferred tax liabilities:
Federal Home Loan Bank stock dividends.................... (35) (31)
Book/tax depreciation differences......................... (6) (1)
Cash versus accrual basis of accounting................... (21) (17)
Unrealized gains on securities designated as available for
sale.................................................... (647) (643)
----- -----
Deferred tax liabilities................................ (709) (692)
----- -----
Net deferred tax liability.............................. $(630) $(627)
===== =====
</TABLE>
F-36
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE G--FEDERAL INCOME TAXES (CREDITS) (CONTINUED)
The Company has historically been allowed a special bad debt deduction,
generally limited to 8% of otherwise taxable income, and subject to certain
limitations based on aggregate loans and deposit account balances at the end of
the year. If the amounts that qualify as deductions for federal income taxes are
later used for purposes other than bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at the
then current corporate income tax rate. Retained earnings at September 30, 1999,
includes approximately $290,000 for which federal income taxes have not been
provided. The amount of unrecognized deferred tax liability relating to the
cumulative bad debt deduction was approximately $99,000 at September 30, 1999.
Pursuant to legislation enacted in 1996, the Company was required to
recapture as taxable income approximately $80,000 of its tax bad debt reserve,
which represented the post-1987 additions to the reserve, and will be unable to
utilize the percentage of earnings method to compute its bad debt deduction in
the future. The Company effected the recapture of the bad debt reserve into
taxable income during fiscal 1997.
NOTE H--LOAN COMMITMENTS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
including commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the statement of financial condition. The contract or notional
amounts of the commitments reflect the extent of the Company's involvement in
such financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
At September 30, 1999, the Company had outstanding commitments of
approximately $41,000 to originate fixed rate loans. In the opinion of
management, all loan commitments equaled or exceeded prevalent market interest
rates as of September 30, 1999, and will be funded from normal cash flow from
operations and existing excess liquidity.
NOTE I--REGULATORY CAPITAL
The Company is subject to minimum regulatory capital standards promulgated
by the Office of Thrift Supervision (the "OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
The minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the
F-37
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE I--REGULATORY CAPITAL (CONTINUED)
core capital requirement and the risk-based capital requirement. The tangible
capital requirement provides for minimum tangible capital (defined as retained
earnings less all intangible assets) equal to 1.5% of adjusted total assets. The
core capital requirement provides for minimum core capital (tangible capital
plus certain forms of supervisory goodwill and other qualifying intangible
assets) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted in
present form, would increase the core capital requirement to a range of
4.0%--5.0% of adjusted total assets for substantially all savings associations.
Management anticipates no material change to the Company's excess regulatory
capital position as a result of this proposed change in the regulatory capital
requirement. The risk-based capital requirement currently provides for the
maintenance of core capital plus general loss allowances equal to 8.0% of
risk-weighted assets. In computing risk-weighted assets, the Company multiplies
the value of each asset on its statement of financial condition by a defined
risk-weighting factor, e.g., one- to four-family residential loans carry a
risk-weighted factor of 50%.
As of September 30, 1999 and 1998, management believes that the Company met
all capital adequacy requirements to which it was subject and would be
considered well-capitalized.
<TABLE>
<CAPTION>
RECONCILIATION OF REGULATORY CAPITAL AT SEPTEMBER 30, 1999
-------------------------------------------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
-------- -------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles............. $ 2,890 $ 2,890 $ 2,890
Unrealized gains on securities
designated as available for
sale.............................. (1,255) (1,255) (1,255)
Additional capital items
General valuation allowances--
limited......................... -- -- 50
------- ---- ------- ---- ------- ----
Regulatory capital computed......... 1,635 10.8 1,635 10.8 1,685 26.3
Minimum capital requirement......... 227 1.5 454 3.0 513 8.0
------- ---- ------- ---- ------- ----
Regulatory capital--excess.......... $ 1,408 9.3 $ 1,181 7.8 $ 1,172 18.3
======= ==== ======= ==== ======= ====
</TABLE>
F-38
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE I--REGULATORY CAPITAL (CONTINUED)
<TABLE>
<CAPTION>
RECONCILIATION OF REGULATORY CAPITAL AT SEPTEMBER 30, 1998
-------------------------------------------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
-------- -------- -------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles............. $ 2,915 $ 2,915 $ 2,915
Unrealized gains on securities
designated as available for
sale.............................. (1,249) (1,249) (1,249)
Additional capital items
General valuation allowances--
limited......................... -- -- 25
------- ---- ------- ---- ------- ----
Regulatory capital computed......... 1,666 10.7 1,666 10.7 1,691 26.1
Minimum capital requirement......... 233 1.5 465 3.0 517 8.0
------- ---- ------- ---- ------- ----
Regulatory capital--excess.......... $ 1,433 9.2 $ 1,201 7.7 $ 1,174 18.1
======= ==== ======= ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------------------------------------------
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital.............. $1,635 10.8% *$227 *1.5% *$756 * 5.0%
Core capital.................. $1,635 10.8% *$454 *3.0% *$908 * 6.0%
Risk-based capital............ $1,685 26.3% *$513 *8.0% *$642 *10.0%
* greater than or equal to
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-------------------------------------------------------------------
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital.............. $1,666 10.7% *$233 *1.5% *$775 * 5.0%
Core capital.................. $1,666 10.7% *$465 *3.0% *$930 * 6.0%
Risk-based capital............ $1,691 26.1% *$517 *8.0% *$647 *10.0%
* greater than or equal to
</TABLE>
The Company's management believes that, under the current regulatory capital
regulations, the Company will continue to meet its minimum capital requirements
in the foreseeable future. However, events beyond the control of the Company,
such as increased interest rates or a downturn in the economy in the Company's
market area, could adversely affect future earnings and, consequently, the
ability to meet future minimum regulatory capital requirements.
F-39
<PAGE>
THE OAKLEY IMPROVED BUILDING AND LOAN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE J--BUSINESS COMBINATIONS AND REORGANIZATION OF CORPORATE FORM
On October 1, 1999, the Company and the People's Building Loan and Savings
Company ("People's"), an institution chartered under the laws of the State of
Ohio (collectively "the Companies"), jointly announced the signing of an
Agreement and Plan of Merger (the "Agreement") in which the Company will be
merged with and into People's. In connection therewith, the Companies adopted an
overall Plan of Conversion (the "conversion") whereby People's will form a new
holding company and convert from mutual to stock form.
Pursuant to the Plan, the Companies will offer for sale up to 1,610,000
common shares to their depositors and members of the community. The costs of
issuing the common stock will be deferred and deducted from the sale proceeds of
the offering. If the conversion is unsuccessful, all deferred costs will be
charged to operations. At September 30, 1999, the Company had not incurred any
conversion costs.
At the date of the conversion, People's will establish a liquidation account
in an amount equal to retained earnings reflected in the statement of financial
condition used in the conversion offering circular. The liquidation account will
be maintained for the benefit of eligible savings account holders who maintained
deposit accounts in People's after conversion.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held, before any liquidation distribution
may be made with respect to the common shares. Except for the repurchase of
stock and payment of dividends by the Companies, the existence of the
liquidation account will not restrict the use or further application of such
retained earnings.
People's may not declare or pay a cash dividend on, or repurchase any of its
common shares if the effect thereof would cause the Company's shareholders'
equity to be reduced below either the amount required for the liquidation
account or the regulatory capital requirements for insured institutions.
People's has agreed to acquire the Harvest Home Financial Corporation
("Harvest Home") for consideration of approximately $16.5 million in cash and
common stock. Under the terms of the Agreement, each share of Harvest Home's
common stock will be exchanged for a combination of $9.00 per share in cash plus
new common shares of Peoples' holding company with a value of $9.00. It is
currently anticipated that the number of shares of common stock that will be
exchanged for each share of Harvest Home's common stock is 0.9 shares, assuming
the initial offering price of People's common stock is $10 per share.
F-40
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Harvest Home Financial Corporation
We have audited the accompanying consolidated statements of financial
condition of Harvest Home Financial Corporation as of September 30, 1999 and
1998, and the related consolidated statements of earnings, comprehensive income,
stockholders' equity, and cash flows for each of the three years ended
September 30, 1999, 1998 and 1997. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Harvest Home
Financial Corporation as of September 30, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the years ended
September 30, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
- ---------------------------------
Cincinnati, Ohio
November 19, 1999
F-41
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 1,347 $ 1,505
Federal funds sold.......................................... 100 200
Interest-bearing deposits in other financial institutions... 1,402 1,182
------- -------
Cash and cash equivalents........................... 2,849 2,887
Investment securities designated as available for sale--at
market.................................................... 5,951 4,032
Mortgage-backed securities designated as available for
sale--at market........................................... 33,711 37,864
Loans receivable--net....................................... 52,790 48,797
Office premises and equipment--at depreciated cost.......... 1,236 1,117
Federal Home Loan Bank stock--at cost....................... 1,723 1,606
Accrued interest receivable on loans........................ 287 257
Accrued interest receivable on mortgage-backed securities... 160 173
Accrued interest receivable on investments and
interest-bearing deposits................................. 55 47
Prepaid expenses and other assets........................... 117 114
Deferred federal income tax asset........................... 56 --
------- -------
Total assets........................................ $98,935 $96,894
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................................... $66,220 $60,225
Advances from the Federal Home Loan Bank.................... 22,600 25,850
Advances by borrowers for taxes and insurance............... 105 119
Accrued interest payable.................................... 115 126
Other liabilities........................................... 232 230
Accrued federal income taxes................................ 10 65
Deferred federal income taxes............................... -- 302
------- -------
Total liabilities................................... 89,282 86,917
Commitments and contingencies............................... -- --
Stockholders' equity
Common stock--2,000,000 shares of no par value authorized;
991,875 shares issued................................... -- --
Additional paid-in capital................................ 6,887 6,903
Retained earnings--restricted............................. 5,329 5,191
Shares acquired by Employee Stock Ownership Plan.......... (224) (301)
Shares acquired by Recognition and Retention Plan......... (194) (291)
Accumulated other comprehensive income, unrealized gains
(losses) on securities designated as available for sale,
net of related tax effects.............................. (694) 87
Less 116,586 and 129,518 shares of treasury stock--at
cost.................................................... (1,451) (1,612)
------- -------
Total stockholders' equity.......................... 9,653 9,977
------- -------
Total liabilities and stockholders' equity.......... $98,935 $96,894
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net earnings for the year................................... $ 514 $541 $627
Other comprehensive income (loss), net of tax effects:
Unrealized holding gains (losses) on securities during the
period, net of tax effects of $(403), $39 and $28 in
1999, 1998 and 1997, respectively....................... (781) 75 54
Reclassification adjustment for unrealized gains included
in earnings, net of tax effects of $15 and $2 in 1998
and 1997, respectively.................................. -- (28) (5)
----- ---- ----
Comprehensive income (loss)................................. $(267) $588 $676
===== ==== ====
Accumulated comprehensive income (loss)..................... $(694) $ 87 $ 40
===== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
SHARES ON SECURITIES
ACQUIRED DESIGNATED
ADDITIONAL BY STOCK AS
COMMON PAID-IN RETAINED BENEFIT AVAILABLE TREASURY
STOCK CAPITAL EARNINGS PLANS FOR SALE STOCK TOTAL
--------- ---------- -------- -------- ------------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996........... $ -- $6,740 $4,787 $(1,160) $ (9) $ (633) $9,725
Net earnings for the year ended
September 30, 1997................. -- -- 627 -- -- -- 627
Cash dividends of $.40 per share..... -- -- (371) -- -- -- (371)
Purchase of treasury shares--at
cost............................... -- -- -- -- -- (223) (223)
Amortization of expense related to
stock benefit plans................ -- 144 -- 393 -- -- 537
Unrealized gains on securities
designated as available for sale,
net of related tax effects......... -- -- -- -- 49 -- 49
--------- ------ ------ ------- ----- ------- ------
Balance at September 30, 1997........ -- 6,884 5,043 (767) 40 (856) 10,344
Net earnings for the year ended
September 30, 1998................. -- -- 541 -- -- -- 541
Cash dividends of $.44 per share..... -- -- (393) -- -- -- (393)
Purchase of treasury shares--at
cost............................... -- -- -- -- -- (756) (756)
Amortization of expense related to
stock benefit plans................ -- 19 -- 175 -- -- 194
Unrealized gains on securities
designated as available for sale,
net of related tax effects......... -- -- -- -- 47 -- 47
--------- ------ ------ ------- ----- ------- ------
Balance at September 30, 1998........ -- 6,903 5,191 (592) 87 (1,612) 9,977
Net earnings for the year ended
September 30, 1999................. -- -- 514 -- -- -- 514
Cash dividends of $.44 per share..... -- -- (376) -- -- -- (376)
Exercise of stock options............ -- (39) -- -- -- 161 122
Amortization of expense related to
stock benefit plans................ -- 23 -- 174 -- -- 197
Unrealized losses on securities
designated as available for sale,
net of related tax effects......... -- -- -- -- (781) -- (781)
--------- ------ ------ ------- ----- ------- ------
Balance at September 30, 1999........ $ -- $6,887 $5,329 $ (418) $(694) $(1,451) $9,653
========= ====== ====== ======= ===== ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year................................. $ 514 $ 541 $ 627
Adjustments to reconcile net earnings to net cash provided
by
(used in) operating activities:
Amortization of deferred loan origination fees........ (44) (34) (34)
Depreciation and amortization......................... 77 57 51
Amortization of premiums on mortgage-backed
securities........................................... 15 5 6
Amortization of premiums (discounts) on investment
securities--net...................................... 5 (33) 17
Gain on sale of investment and mortgage-backed
securities........................................... -- (43) (7)
Amortization expense of stock benefit plans........... 197 194 537
Provision for losses on loans......................... 12 12 9
Federal Home Loan Bank stock dividends................ (117) (102) (59)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans................ (30) (12) (36)
Accrued interest receivable on mortgage-backed
securities.......................................... 13 (34) (37)
Accrued interest receivable on investments and
interest-bearing deposits........................... (8) 79 85
Prepaid expenses and other assets................... (3) (41) 1
Accrued interest payable............................ (11) 37 12
Other liabilities................................... 2 (23) (563)
Federal income taxes
Current........................................... (55) 116 22
Deferred.......................................... 46 23 183
-------- -------- --------
Net cash provided by operating activities....... 613 742 814
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities........ 14,992 19,867 2,644
Purchase of mortgage-backed securities.................... (11,963) (26,992) (18,205)
Proceeds from sale of mortgage-backed securities available
for sale................................................ -- 1,878 141
Proceeds from maturity of mortgage-backed securities...... -- -- 3,500
Purchase of investment securities......................... (6,000) -- --
Proceeds from maturity of investment securities........... 4,000 4,000 2,003
Proceeds from sale of investment securities available for
sale.................................................... -- -- 2,003
Principal repayments on loans............................. 11,883 10,376 5,976
Loan disbursements........................................ (15,844) (13,922) (8,913)
Purchase of Federal Home Loan Bank stock.................. -- (285) (572)
Purchase of office equipment.............................. (196) (193) (80)
-------- -------- --------
Net cash used in investing activities........... (3,128) (5,271) (11,503)
-------- -------- --------
Net cash used in operating and investing
activities
(balance carried forward)..................... (2,515) (4,529) (10,689)
-------- -------- --------
Net cash used in operating and investing
activities
(balance brought forward)..................... $ (2,515) $ (4,529) $(10,689)
Cash flows provided by (used in) financing activities:
Net increase in deposits.................................. 5,995 1,439 828
Proceeds from Federal Home Loan Bank advances............. 10,000 38,200 18,200
Repayment of Federal Home Loan Bank advances.............. (13,250) (36,350) (4,200)
Advances by borrowers for taxes and insurance............. (14) 12 11
Dividends on common stock................................. (376) (393) (371)
Proceeds from exercise of stock options................... 122 -- --
Purchase of treasury stock................................ -- (756) (223)
-------- -------- --------
Net cash provided by financing activities....... 2,477 2,152 14,245
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (38) (2,377) 3,556
Cash and cash equivalents at beginning of year.............. 2,887 5,264 1,708
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 2,849 $ 2,887 $ 5,264
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes.................................... $ 180 $ 121 $ 96
======== ======== ========
Interest paid on deposits and borrowings................ $ 4,222 $ 4,106 $ 3,677
======== ======== ========
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale,
net of related tax effects.............................. $ (781) $ 47 $ 49
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Harvest Home Financial Corporation (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock of
Harvest Home Savings Bank, (the "Savings Bank"). The Savings Bank conducts a
general banking business in southwestern Ohio which consists of attracting
deposits from the general public and primarily applying those funds to the
origination of loans for residential, consumer and nonresidential purposes. The
Savings Bank's profitability is significantly dependent on net interest income,
which is the difference between interest income generated from interest-earning
assets (i.e. loans and investments) and the interest expense paid on
interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net
interest income is affected by the relative amount of interest-earning assets
and interest-bearing liabilities and the interest received or paid on these
balances. The level of interest rates paid or received by the Savings Bank can
be significantly influenced by a number of environmental factors, such as
governmental monetary policy, that are outside of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and general
accounting practices within the financial services industry. In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and the Savings Bank. All significant intercompany balances and
transactions have been eliminated.
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS
No. 115 requires that investments in debt and equity securities be categorized
as held-to-maturity, trading, or available for sale. Securities classified as
held-to-maturity are carried at cost only if the Corporation has the positive
intent and ability to hold these securities to maturity. Trading securities and
securities designated as available for sale are carried at fair value with
resulting unrealized gains or losses recorded to operations or stockholders'
equity, respectively.
At September 30, 1999, the Corporation's stockholders' equity reflected net
unrealized losses on securities designated as available for sale totaling
$694,000. At September 30, 1998, the Corporation's stockholders' equity
reflected net unrealized gains on securities designated as available for sale
totaling $87,000.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
F-46
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
3. LOANS RECEIVABLE
Loans receivable are stated at the principal amount outstanding, adjusted
for deferred loan origination fees and the allowance for loan losses. Interest
is accrued as earned unless the collectibility of the loan is in doubt. Interest
on loans that are contractually past due is charged off, or an allowance is
established based on management's periodic evaluation. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments has returned to normal, in which
case the loan is returned to accrual status. If the ultimate collectibility of
the loan is in doubt, in whole or in part, all payments received on nonaccrual
loans are applied to reduce principal until such doubt is eliminated.
4. LOAN ORIGINATION FEES
The Savings Bank accounts for loan origination fees in accordance with SFAS
No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Cost of Leases". Pursuant to the
provisions of SFAS No. 91, origination fees received from loans, net of direct
origination costs, are deferred and amortized to interest income using the
level-yield method, giving effect to actual loan prepayments. Additionally, SFAS
No. 91 generally limits the definition of loan origination costs to the direct
costs of originating a loan, i.e., principally actual personnel costs. Fees
received for loan commitments that are expected to be drawn upon, based on the
Savings Bank's experience with similar commitments, are deferred and amortized
over the life of the loan using the level-yield method. Fees for other loan
commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
5. ALLOWANCE FOR LOSSES ON LOANS
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in the level of
delinquent and problem loans, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and current
and anticipated economic conditions in the primary lending area. When the
collection of a loan becomes doubtful, or otherwise troubled, the Savings Bank
records a loan charge-off equal to the difference between the fair value of the
property securing the loan and the loan's carrying value. Major loans (including
development projects) and major lending areas are reviewed periodically to
determine potential problems at an early date. The allowance for loan losses is
increased by charges to earnings and decreased by charge-offs (net of
recoveries).
The Savings Bank accounts for impaired loans in accordance with SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan," which requires that
impaired loans be measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or, as an alternative, at
the loan's observable market price or fair value of the collateral. The Savings
Bank's current procedures for evaluating impaired loans result in carrying such
loans at the lower of cost or fair value.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual
F-47
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
terms of the loan agreement. In applying the provisions of SFAS No. 114, the
Savings Bank considers its investment in one- to four-family residential loans
and consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Savings Bank's investment in multi-family and nonresidential loans, and its
evaluation of impairment thereof, such loans are collateral dependent, and as a
result, are carried as a practical expedient at the lower of cost or fair value.
It is the Savings Bank's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans which
are more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No. 114
at that time.
At September 30, 1999, the Savings Bank had one loan account totaling
$195,000 that is defined as impaired under SFAS No. 114. The Savings Bank had no
such loans at September 30, 1998. No portion of the allowance for credit losses
was allocated to such impaired loans at September 30, 1999 or 1998.
6. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation and
amortization are provided on the straight-line and accelerated methods over the
useful lives of the assets, estimated to be forty years for buildings, ten to
forty years for building improvements, and five to ten years for furniture and
equipment. An accelerated method is used for tax reporting purposes.
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are recorded if
the properties' fair value subsequently declines below the amount determined at
the recording date. In determining the lower of cost or fair value at
acquisition, costs relating to development and improvement of property are
capitalized. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
8. FEDERAL INCOME TAXES
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is
computed by applying the current statutory tax rates to net taxable or
deductible differences between the tax basis of an asset or liability and its
reported amount in the consolidated financial statements that will result in
taxable or deductible amounts in future periods. Deferred tax assets are
recorded only to the extent that the amount of net deductible temporary
differences or carryforward attributes may be utilized against current period
earnings, carried back against prior years' earnings, offset against taxable
temporary differences reversing in future periods, or utilized to the extent of
management's estimate of future taxable income. A valuation allowance is
provided for deferred tax assets to the extent that the value of net deductible
temporary differences
F-48
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and carryforward attributes exceeds management's estimates of taxes payable on
future taxable income. Deferred tax liabilities are provided on the total amount
of net temporary differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result from different methods of accounting for
deferred loan origination fees and costs, Federal Home Loan Bank stock
dividends, retirement expense, the general loan loss allowance and percentage of
earnings bad debt deductions. Additional temporary differences result from
depreciation computed using accelerated methods for tax purposes.
9. BENEFIT PLANS
The Savings Bank provides a supplemental retirement plan to certain key
officers. The Savings Bank's obligations under the supplemental plan have been
funded via the purchase of key man life insurance policies for which the Savings
Bank is the beneficiary. Expense under the supplemental plan totaled
approximately $1,000 during each of the fiscal years ended September 30, 1999,
1998 and 1997.
The Corporation has an Employee Stock Ownership Plan ("ESOP") which provides
retirement benefits for substantially all full-time employees who have completed
one year of service. The Corporation accounts for the ESOP in accordance with
Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock
Ownership Plans". SOP 93-6 requires that compensation expense recorded by
employers equal the fair value of ESOP shares allocated to participants during a
given fiscal year. Expense recognized related to the ESOP totaled approximately
$114,000, $111,000 and $48,000 for the fiscal years ended September 30, 1999,
1998 and 1997, respectively.
The Corporation also has a Recognition and Retention Plan ("RRP"). During
fiscal 1996, the RRP purchased 39,675 shares of the Corporation's common stock
in the open market. At September 30, 1999, 37,211 shares had been awarded to
executive officers and members of the Board of Directors of the Corporation.
Common stock awarded under the RRP vests ratably over a five year period,
commencing with the date of the award. A provision of $97,000 related to the RRP
was charged to expense for each of the fiscal years ended September 30, 1999,
1998 and 1997.
10. EARNINGS PER SHARE AND DIVIDENDS PER SHARE
Basic earnings per share for the years ended September 30, 1999, 1998 and
1997 is computed based upon the weighted-average shares outstanding during the
period, less 20,337, 28,252 and 36,774 shares, respectively, in the ESOP that
are unallocated and not committed to be released. Weighted-average common shares
deemed outstanding totaled 851,799, 859,891 and 881,720 for the years ended
September 30, 1999, 1998 and 1997, respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under the
Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
878,289, 894,437 and 893,942 for the fiscal years ended September 30, 1999, 1998
and 1997, respectively. Incremental shares related to the assumed exercise of
stock options included in the computation of diluted earnings per share totaled
26,490, 34,546 and 12,222 for the fiscal years ended September 30, 1999, 1998
and 1997, respectively. Options to purchase 1,000 shares of common stock
F-49
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
with an exercise price of $14.00 per share were outstanding at September 30,
1999, but were excluded from the computation of diluted earnings per share
because the exercise price was greater than the average market price of the
common shares.
Capital distributions paid in excess of the Corporation's earnings and
profits (computed on a stand-alone basis for federal income tax purposes) are
deemed by management to constitute a return of excess capital. Management has
determined that $.21, $.33 and $.37 of fiscal 1999, 1998 and 1997 dividends
constitute tax-free distributions.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets and
liabilities whether or not recognized in the consolidated statement of financial
condition, for which it is practicable to estimate that value. For financial
instruments where quoted market prices are not available, fair values are based
on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair values
presented may not represent amounts that could be realized in an exchange for
certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at
September 30, 1999 and 1998:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash equivalents are
deemed to approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted market
price.
LOANS RECEIVABLE: The loan portfolio has been segregated into categories
with similar characteristics, such as one- to four-family residential,
multi-family residential and nonresidential real estate. These loan categories
were further delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant loan categories were computed via discounted cash flow
analysis, using current interest rates offered for loans with similar terms to
borrowers of similar credit quality. For loans on deposit accounts and consumer
and other loans, fair values were deemed to equal the historic carrying values.
The historical carrying amount of accrued interest on loans is deemed to
approximate fair value.
DEPOSITS: The fair value of NOW accounts, passbook accounts, money market
demand and escrow deposits is deemed to approximate the amount payable on
demand. Fair values for fixed-rate certificates of deposit have been estimated
using a discounted cash flow calculation using the interest rates currently
offered for deposits of similar remaining maturities.
ADVANCES FROM THE FEDERAL HOME LOAN BANK: The fair value of these advances
is estimated using the rates currently offered for similar advances of similar
remaining maturities.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between current
levels of interest rates and committed rates. At
F-50
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
September 30, 1999 and 1998, the difference between the fair value and notional
amount of loan commitments was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents............................... $ 2,849 $ 2,849 $ 2,887 $ 2,887
Investment securities................................. 5,951 5,951 4,032 4,032
Mortgage-backed securities............................ 33,711 33,711 37,864 37,864
Loans receivable...................................... 52,790 52,512 48,797 50,590
------- ------- ------- -------
$95,301 $95,023 $93,580 $95,373
======= ======= ======= =======
Financial liabilities
Deposits.............................................. $66,220 $66,439 $60,225 $61,304
Advances from Federal Home Loan Bank.................. 22,600 22,598 25,850 25,775
Escrow deposits....................................... 105 105 119 119
------- ------- ------- -------
$88,925 $89,142 $86,194 $87,198
======= ======= ======= =======
</TABLE>
12. COMPREHENSIVE INCOME
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as
of October 1, 1998. The Statement established standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. SFAS No. 130 requires that
companies (i) classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital. Financial statements for earlier periods were restated for comparative
purposes. The Corporation's accumulated comprehensive income consists solely of
the change in unrealized gains and losses on securities designated as available
for sale in accordance with SFAS No. 115.
13. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, federal funds sold and interest-bearing deposits in other
financial institutions with original maturities of less than ninety days.
F-51
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
14. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1999
consolidated financial statement presentation.
NOTE B--INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investment securities at September 30, 1999 and 1998
are summarized as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government agency obligations................. $6,000 $ -- $49 $5,951
====== ========= === ======
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government agency obligations................. $4,005 $27 $ -- $4,032
====== === ========= ======
</TABLE>
The amortized cost and estimated fair values of U.S. Government agency
obligations by contractual term to maturity at September 30 are shown below:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due within one year................................... $ -- $ -- $4,005 $4,032
Due after one year through five years................. 6,000 5,951 -- --
------ ------ ------ ------
$6,000 $5,951 $4,005 $4,032
====== ====== ====== ======
</TABLE>
F-52
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE B--INVESTMENTS AND MORTGAGE-BACKED SECURITIES (CONTINUED)
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at September 30, 1999 and
1998 are summarized as follows:
<TABLE>
<CAPTION>
1999
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Mortgage Corporation:
Participation certificates....................... $ 4,901 $ -- $ 128 $ 4,773
Collateralized mortgage obligations.............. 22,236 -- 858 21,378
Federal National Mortgage Association:
Participation certificates....................... 2,158 2 52 2,108
Collateralized mortgage obligations.............. 5,420 33 1 5,452
------- ---- ------ -------
Total mortgage-backed securities............... $34,715 $ 35 $1,039 $33,711
======= ==== ====== =======
</TABLE>
<TABLE>
<CAPTION>
1999
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Mortgage Corporation:
Participation certificates....................... $ 6,140 $ 3 $ 26 $ 6,117
Collateralized mortgage obligations.............. 15,358 8 29 15,337
Federal National Mortgage Association:
Participation certificates....................... 3,068 29 37 3,060
Collateralized mortgage obligations.............. 13,193 172 15 13,350
------- ---- ---- -------
Total mortgage-backed securities............... $37,759 $212 $107 $37,864
======= ==== ==== =======
</TABLE>
The amortized cost of mortgage-backed securities, by contractual terms to
maturity at September 30, are shown below. Expected maturities will differ from
contractual maturities because borrowers may generally prepay obligations
without prepayment penalties.
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Due within three years.................................... $ 1,044 $ 1,010
Due in three to five years................................ 4,016 5,713
Due in five to ten years.................................. 8,055 8,761
Due in ten to twenty years................................ 1,261 2,857
Due after twenty years.................................... 20,339 19,418
------- -------
$34,715 $37,759
======= =======
</TABLE>
F-53
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE C--LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Residential real estate
One-to-four family...................................... $43,083 $41,214
Home equity lines of credit............................. 1,480 1,275
Multifamily............................................. 2,178 1,367
Construction............................................ 5,964 4,663
Nonresidential real estate and land....................... 3,085 3,024
Deposit account........................................... 20 25
------- -------
55,810 51,568
Less:
Undisbursed portion of loans in process................. 2,823 2,556
Deferred loan origination fees.......................... 58 88
Allowance for loan losses............................... 139 127
------- -------
$52,790 $48,797
======= =======
</TABLE>
As depicted above, the Savings Bank's lending efforts have historically
focused on one-to-four family residential and multifamily residential real
estate loans, which comprise approximately $49.9 million, or 94%, of the total
loan portfolio at September 30, 1999, and $46.0 million, or 94%, of the total
loan portfolio at September 30, 1998. Generally, such loans have been
underwritten on the basis of no more than an 80% loan-to-value ratio, which has
historically provided the Savings Bank with adequate collateral coverage in the
event of default. Nevertheless, the Savings Bank, as with any lending
institution, is subject to the risk that residential real estate values could
deteriorate in its primary lending area of southwestern Ohio, thereby impairing
collateral values. However, management is of the belief that residential real
estate values in the Savings Bank's primary lending area are presently stable.
The Savings Bank had sold participating interests in loans in the secondary
market, retaining servicing on the loans sold. Loans sold and serviced for
others totaled approximately $196,000 and $250,000 at September 30, 1998 and
1997, respectively. There were no loans serviced for others at September 30,
1999.
In the ordinary course of business, the Savings Bank has granted loans to
some of its directors, officers and their related business interests. All loans
to related parties have been made on substantially the same terms as those
prevailing at the time for unrelated third parties. The aggregate dollar amount
of loans to officers and directors was approximately $132,000 and $157,000 at
September 30, 1999 and 1998, respectively. During the fiscal year ended
September 30, 1999, $75,000 in new loans were disbursed to officers and
directors, while principal repayments of $100,000 were received from officers
and directors.
F-54
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE D--ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................ $127 $115 $111
Provision for losses on loans........................... 12 12 9
Charge-off of loans..................................... -- -- (5)
---- ---- ----
Balance at end of year.................................. $139 $127 $115
==== ==== ====
</TABLE>
At September 30, 1999, the Savings Bank's allowance for loan losses was
comprised solely of a general loan loss allowance, which is includible as a
component of regulatory risk-based capital.
At September 30, 1999, 1998 and 1997, the Savings Bank's nonaccrual and
nonperforming loans totaled $25,000, $49,000 and $95,000, respectively. Interest
income which would have been recognized if such loans had performed pursuant to
contractual terms totaled approximately $1,000, $2,000 and $6,000 for the years
ended September 30, 1999, 1998 and 1997, respectively. A total of approximately
$1,000 of interest income was actually recorded on such loans in the fiscal year
ended September 30, 1999.
NOTE E--OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are comprised of the following at
September 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements....................................... $ 119 $ 119
Office buildings and improvements........................... 1,425 1,397
Furniture, fixtures and equipment........................... 642 474
Automobile.................................................. 14 14
------ ------
2,200 2,004
Less accumulated depreciation............................... 964 887
------ ------
$1,236 $1,117
====== ======
</TABLE>
F-55
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE F--DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
1999 1998
DEPOSIT TYPE AND WEIGHTED-AVERAGE ------------------- -------------------
INTEREST RATE AMOUNT % AMOUNT %
- --------------------------------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NOW accounts--1.84% in 1999 and 1998..................... $ 3,806 5.7 $ 3,208 5.3
Super NOW accounts--2.75% in 1999 and 1998............... 405 .6 253 .4
Passbook accounts--2.53% in 1999 and 1998................ 10,437 15.8 9,494 15.8
Money market demand deposit--3.00% in 1999 and 1998...... 4,534 6.9 4,107 6.8
------- ----- ------- -----
Total demand, transaction and passbook deposits........ 19,182 29.0 17,062 28.3
Certificates of deposit:
Original maturities of:
Less than 12 months
4.57% in 1999 and 5.13% in 1998.................... 4,012 6.1 3,163 5.3
12 months
4.90% in 1999 and 5.15% in 1998.................... 21,751 32.8 21,945 36.4
18 months
5.45% in 1999 and 5.86% in 1998.................... 5,231 7.9 4,760 7.9
30 months
5.60% in 1999 and 5.80% in 1998.................... 6,844 10.3 5,254 8.7
48 months and greater
6.02% in 1999 and 6.12% in 1998.................... 9,200 13.9 8,041 13.4
------- ----- ------- -----
Total certificates of deposit.................... 47,038 71.0 43,163 71.7
------- ----- ------- -----
Total deposits................................... $66,220 100.0% $60,225 100.0%
======= ===== ======= =====
</TABLE>
At September 30, 1999 and 1998, the Savings Bank had certificate of deposit
accounts with balances greater than $100,000 totaling $4.1 million and
$2.9 million, respectively. Deposit balances in excess of $100,000 are not
insured by the FDIC.
Interest expense on deposit accounts is summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Money market demand deposit accounts................ $ 132 $ 130 $ 144
Passbook and escrow accounts........................ 253 254 256
NOW and Super NOW accounts.......................... 72 73 107
Certificates of deposit............................. 2,544 2,465 2,279
------ ------ ------
$3,001 $2,922 $2,786
====== ====== ======
</TABLE>
F-56
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE F--DEPOSITS (CONTINUED)
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Less than six months...................................... $18,130 $13,202
Six months to one year.................................... 16,242 16,864
One to two years.......................................... 7,906 6,976
Two to three years........................................ 1,191 4,358
Three to four years....................................... 1,347 341
Over four years........................................... 2,222 1,422
------- -------
$47,038 $43,163
======= =======
</TABLE>
NOTE G--ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1999 by pledges of certain residential mortgage loans totaling $33.9 million and
the Savings Bank's investment in Federal Home Loan Bank stock, are summarized as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
MATURING FISCAL -------------------
INTEREST RATE YEAR ENDING IN 1999 1998
- ------------- --------------- -------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
5.58%........................................ 2000 $ -- $ 3,000
5.38%........................................ 2001 5,600 --
5.43%--5.71%................................. 2007 -- 950
4.66%--5.64%................................. 2008 17,000 21,900
------- -------
$22,600 $25,850
======= =======
Weighted-average interest rate............... 5.23% 5.26%
======= =======
</TABLE>
F-57
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE H--COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the consolidated statement of financial condition. The
contract or notional amounts of the commitments reflect the extent of the
Savings Bank's involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Savings
Bank uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At September 30, 1999, the Savings Bank had commitments for unused lines of
credit under home equity loans of $3.0 million. Management believes that such
loan commitments are able to be funded through cash flow from operations and
existing excess liquidity. Fees received in connection with these commitments
have not been recognized in earnings.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Savings Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Savings Bank upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral on loans may vary but the
preponderance of loans granted generally include a mortgage interest in real
estate as security.
NOTE I--FEDERAL INCOME TAXES
The Corporation's provision for federal income taxes does not differ
materially from the amounts computed at the statutory corporate tax rate for the
years ended September 30, 1999, 1998 and 1997.
F-58
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE I--FEDERAL INCOME TAXES (CONTINUED)
The composition of the Corporation's net deferred tax asset (liability) at
September 30 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Taxes (payable) refundable on temporary differences at
estimated corporate tax rate:
Deferred tax assets:
General loan loss allowance............................. $ 47 $ 43
Stock benefit plans..................................... 25 25
Unrealized losses on securities designated as available
for sale.............................................. 359 --
----- -----
Total deferred tax assets............................. 431 68
Deferred tax liabilities:
Percentage of earnings bad debt deduction................. (104) (125)
Deferred loan origination costs........................... (39) (24)
Federal Home Loan Bank stock dividends.................... (230) (176)
Unrealized gains on securities designated as available for
sale.................................................... -- (45)
Other..................................................... (2) --
----- -----
Total deferred tax liabilities........................ (375) (370)
----- -----
Net deferred tax asset (liability).................... $ 56 $(302)
===== =====
</TABLE>
The Savings Bank was allowed a special bad debt deduction based on a
percentage of earnings, generally limited to 8% of otherwise taxable income and
subject to certain limitations based on aggregate loans and savings account
balances at the end of the year. This deduction totaled approximately
$1.7 million as of September 30, 1999. If the amounts that qualify as deductions
for federal income tax purposes are later used for purposes other than for bad
debt losses, including distributions in liquidation, such distributions will be
subject to federal income taxes at the then current corporate income tax rate.
The approximate amount of the unrecognized deferred tax liability relating to
the cumulative bad debt deduction is $450,000.
Due to recent legislation, the Savings Bank is required to recapture as
taxable income approximately $370,000 of its tax bad debt reserve, which
represents the post-1987 additions to the reserve, and will be unable to utilize
the percentage of earnings method to compute its bad debt deduction in the
future. The Savings Bank has provided deferred taxes for this amount and will
amortize the recapture of the bad debt reserve in taxable income over a six year
period, which commenced in fiscal 1999.
NOTE J--REGULATORY CAPITAL
The Savings Bank is subject to the regulatory capital requirements of the
Federal Deposit Insurance Corporation (the "FDIC"). Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet
F-59
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE J--REGULATORY CAPITAL (CONTINUED)
specific capital guidelines that involve quantitative measures of the Savings
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Savings Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
During the calendar year, the Savings Bank was notified by its primary
regulator that it was categorized as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well-capitalized"
the Savings Bank must maintain minimum capital ratios as set forth in the table
that follows.
The FDIC has adopted risk-based capital ratio guidelines to which the
Savings Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk-weighting categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
1") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier 2") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan losses, subject to certain
limitations, less required deductions. Savings banks are required to maintain a
total risk-based capital (the sum of Tier 1 and Tier 2 capital) ratio of 8%, of
which 4% must be Tier 1 capital. The FDIC may, however, set higher capital
requirements when particular circumstances warrant. Savings banks experiencing
or anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier 1
leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3%
for savings banks that meet certain specified criteria, including that they have
the highest regulatory rating and are not experiencing or anticipating
significant growth. All other savings banks are required to maintain a Tier 1
leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
points.
F-60
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE J--REGULATORY CAPITAL (CONTINUED)
As of September 30, 1999 and 1998, management believes that the Savings Bank
met all capital adequacy requirements to which it was subject and would be
considered well-capialized.
<TABLE>
<CAPTION>
RECONCILIATION OF REGULATORY CAPITAL AT SEPTEMBER 30, 1999
--------------------------------------------------------------------------
TIER I LEVERAGE TIER I TOTAL
CAPITAL PERCENT CAPITAL(1) PERCENT CAPITAL(1) PERCENT
--------------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles............... $9,040 $9,040 $9,040
Unrealized losses on securities
designated as available for sale.... 694 694 694
Additional capital items
General valuation
allowances--limited............... -- -- 139
------ ------ ------
Regulatory capital computed........... 9,734 9.8 9,734 23.2 9,873 23.5
Minimum capital requirement........... 3,985 4.0 1,682 4.0 3,365 8.0
------ ---- ------ ---- ------ ----
Regulatory capital--excess............ $5,749 5.8 $8,052 19.2 $6,508 15.5
====== ==== ====== ==== ====== ====
</TABLE>
- ------------------------
(1) to risk-weighted assets
<TABLE>
<CAPTION>
RECONCILIATION OF REGULATORY CAPITAL AT SEPTEMBER 30, 1998
--------------------------------------------------------------------------
TIER I LEVERAGE TIER I TOTAL
CAPITAL PERCENT CAPITAL(1) PERCENT CAPITAL(1) PERCENT
--------------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles............... $9,370 $9,370 $9,370
Unrealized gains on securities
designated as available for sale.... (87) (87) (87)
Additional capital items
General valuation
allowances--limited............... -- -- 127
------ ------ ------
Regulatory capital computed........... 9,283 9.6 9,283 23.4 9,410 23.7
Minimum capital requirement........... 3,860 4.0 1,587 4.0 3,174 8.0
------ ---- ------ ---- ------ ----
Regulatory capital--excess............ $5,423 5.6 $7,696 19.4 $6,236 15.7
====== ==== ====== ==== ====== ====
</TABLE>
- ------------------------
(1) to risk-weighted assets
F-61
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE J--REGULATORY CAPITAL (CONTINUED)
<TABLE>
<CAPTION>
1999
------------------------------------------------------------
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ----------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets)........ $9,876 23.5% *$3,365 *8.0% *$4,206 *10.0%
Tier I capital
(to risk-weighed assets)......... $9,737 23.2% *$1,682 *4.0% *$2,523 *6.0%
Tier I leverage.................... $9,737 9.8% *$3,985 *4.0% *$4,981 *5.0%
* greater than or equal to
</TABLE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------------
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ----------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets)............ $9,419 23.7% *$3,174 *8.0% *$3,967 *10.0%
Tier I capital
(to risk-weighed assets)............. $9,292 23.4% *$1,587 *4.0% *$2,380 *6.0%
Tier I leverage........................ $9,292 9.6% *$3,860 *4.0% *$4,825 *5.0%
* greater than or equal to
</TABLE>
The Savings Bank's management believes that, under the current regulatory
capital regulations, the Savings Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control of
the Savings Bank, such as increased interest rates or a downturn in the economy
in the primary market area, could adversely affect future earnings and,
consequently, the ability to meet future minimum regulatory capital
requirements.
F-62
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE K--STOCK OPTION PLAN
The Board of Directors adopted a Stock Option Plan that provided for the
issuance of 129,333 shares (adjusted) of authorized, but unissued shares of
common stock at fair value at the date of grant. During fiscal 1996, the
Corporation granted options to purchase 74,297 shares to members of the Board of
Directors and executive officers at an initial fair value of $12.25 per share.
In order to give effect to a return of capital distribution paid in fiscal 1996,
the number of shares granted under option and the exercise price were adjusted
in fiscal 1997 to 96,879 and $9.42 per share, respectively.
The Corporation accounts for its stock option plan in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that entities may use,
which measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, SFAS No. 123 permits entities to
continue to account for stock options and similar equity instruments under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost for the Corporation's stock
option plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the accounting method utilized in SFAS
No. 123, the Corporation's net earnings and earnings per share would have
resulted in the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported................................. $514 $541 $627
==== ==== ====
Pro-forma................................... $514 $541 $627
==== ==== ====
Earnings per share
Basic As reported................................. $.60 $.63 $.71
==== ==== ====
Pro-forma................................... $.60 $.63 $.71
==== ==== ====
Diluted As reported................................. $.59 $.60 $.70
==== ==== ====
Pro-forma................................... $.59 $.60 $.70
==== ==== ====
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1999: dividend yield of
5.5%, expected volatility of 20.0%, a risk-free interest rate of 6.5% and
expected lives of ten years.
F-63
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE K--STOCK OPTION PLAN (CONTINUED)
A summary of the status of the Corporation's stock option plan as of
September 30, 1999, 1998 and 1997, and changes during the periods ending on
those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year......... 96,879 $9.42 96,879 $9.42 74,297 $12.25
Adjustment for return of capital
distribution............................. -- -- -- -- 22,582 (2.83)
Granted.................................. 1,000 14.00 -- -- -- --
Exercised................................ (12,932) 9.42 -- -- -- --
Forfeited................................ -- -- -- -- -- --
------- ----- ------ ----- ------ ------
Outstanding at end of year............... 84,947 $9.47 96,879 $9.42 96,879 $ 9.42
------- ----- ------ ----- ------ ------
Options exercisable at year-end.......... 84,947 $9.47 96,879 $9.42 96,879 $ 9.42
------- ----- ------ ----- ------ ------
Weighted-average fair value of options
granted during the year................ $2.98 N/A N/A
----- ----- ------
</TABLE>
The following information applies to options outstanding at September 30,
1999:
<TABLE>
<S> <C>
Number outstanding.......................................... 84,947
Range of exercise prices.................................... $ 9.42--$14.00
Weighted-average exercise price............................. $9.47
Weighted-average remaining contractual life................. 6.25 years
</TABLE>
F-64
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE L--CONDENSED FINANCIAL STATEMENTS OF HARVEST HOME FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of Harvest Home Financial Corporation as of September 30, 1999 and
1998, and the results of its operations and its cash flows for the three years
ended September 30, 1999, 1998 and 1997.
HARVEST HOME FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 174 $ 130
Mortgage-backed securities designated as available for
sale--at market........................................... 191 397
Loan receivable from ESOP................................... 224 301
Investment in Harvest Home Savings Bank..................... 9,041 9,370
Prepaid expenses and other.................................. 48 69
------- -------
Total assets.......................................... $ 9,678 $10,267
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities........................................... $ 25 $ 290
Stockholders' equity
Common stock and additional paid-in capital............... 6,887 6,903
Retained earnings......................................... 5,329 5,191
Shares acquired by stock benefit plans.................... (418) (592)
Unrealized gains (losses) on securities designated as
available for sale, net of tax effects.................. (694) 87
Less treasury stock--at cost.............................. (1,451) (1,612)
------- -------
Total stockholders' equity............................ 9,653 9,977
------- -------
Total liabilities and stockholders' equity............ $ 9,678 $10,267
======= =======
</TABLE>
F-65
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE L--CONDENSED FINANCIAL STATEMENTS OF HARVEST HOME FINANCIAL CORPORATION
(CONTINUED)
HARVEST HOME FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
FOR THE YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue
Interest income........................................... $ 29 $ 57 $108
Other income.............................................. 7 26 27
Equity in earnings of Harvest Home Savings Bank........... 548 542 602
---- ---- ----
Total revenue......................................... 584 625 737
General and administrative expenses......................... 87 98 100
---- ---- ----
Earnings before income taxes (credits)................ 497 527 637
Federal income taxes (credits).............................. (17) (14) 10
---- ---- ----
NET EARNINGS.......................................... $514 $541 $627
==== ==== ====
</TABLE>
F-66
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE L--CONDENSED FINANCIAL STATEMENTS OF HARVEST HOME FINANCIAL CORPORATION
(CONTINUED)
HARVEST HOME FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year................................. $ 514 $ 541 $ 627
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities
Accretion of discounts on mortgage-backed securities.... (1) (4) (4)
Undistributed earnings of consolidated subsidiary....... (248) (542) (602)
Amortization expense of stock benefit plans............. -- 8 144
Gain on sale of mortgage-backed securities.............. -- (6) --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets..................... 21 (25) 66
Other liabilities..................................... (261) 257 (199)
----- ------- -----
Net cash provided by operating activities........... 25 229 32
Cash flows provided by investing activities:
Proceeds from repayment of loan to ESOP................... 77 77 296
Proceeds from sale of mortgage-backed securities.......... -- 337 --
Principal repayments on mortgage-backed securities........ 196 281 228
----- ------- -----
Net cash provided by investing activities........... 273 695 524
Cash flows provided by (used in) financing activities:
Payment of dividends on common stock...................... (376) (393) (371)
Purchase of treasury stock................................ -- (756) (223)
Proceeds from exercise of stock options................... 122 -- --
----- ------- -----
Net cash used in financing activities............... (254) (1,149) (594)
----- ------- -----
Net increase (decrease) in cash and cash equivalents........ 44 (225) (38)
Cash and cash equivalents at beginning of year.............. 130 355 393
----- ------- -----
Cash and cash equivalents at end of year.................... $ 174 $ 130 $ 355
===== ======= =====
</TABLE>
F-67
<PAGE>
HARVEST HOME FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
NOTE M--PENDING MERGER
On October 1, 1999, the Corporation entered into an Agreement and Plan of
Merger (the "Agreement") whereby the Corporation would be acquired by a newly
formed holding company of The People's Building, Loan and Savings Company
("People's") for total consideration of approximately $16.5 million in cash and
common stock. In connection with the acquisition, People's (following a merger
with The Oakley Improved Building and Loan Company) will convert from a mutual
to a stock institution and form the holding company. Under the terms of the
Agreement, each share of the Corporation's common stock will be exchanged for a
combination of $9.00 per share in cash plus new common shares of Peoples'
holding company with a value of $9.00. It is currently anticipated that the
number of shares of common stock that will be exchanged for each share of the
Corporation's common stock is 0.9 shares, assuming the initial offering price of
People's common stock is $10 per share.
F-68
<PAGE>
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You should rely only on the information contained in this prospectus-proxy
statement. We have not authorized anyone to provide you with information that is
different. If the laws of your state or other jurisdiction prohibit us from
offering our common stock to you, then this prospectus-proxy statement does not
constitute an offer to sell or a solicitation of an offer to buy any of our
common stock. Neither the delivery of this prospectus-proxy statement nor any
sale hereunder shall imply that there has been no change in our affairs since
any of the dates as of which information is furnished herein or since the date
hereof.
------------------------
The Table of Contents is located on the inside of the front cover page of this
document.
------------------------
UNTIL MARCH 14, 2000 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN OUR COMMON STOCK MAY BE REQUIRED TO DELIVER A PROSPECTUS-PROXY
STATEMENT. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS-PROXY STATEMENT WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO ANY
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PROSPECTUS
OF
PEOPLES COMMUNITY
BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR
PEOPLES COMMUNITY BANK)
COMMON STOCK
PROXY STATEMENT
OF
HARVEST HOME FINANCIAL CORPORATION
KEEFE, BRUYETTE & WOODS, INC.
February 11, 2000
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