FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to___________________
Commission File Number: 0-28838
PEOPLES FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Ohio 34-1822228
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
211 Lincoln Way East, Massillon, Ohio 44646
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (330) 832-7441
Securities registered pursuant to Section 12(b) of
the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, without par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended September 30, 1997, were
$6.3 million.
Based upon the average bid and asked prices quoted by The Nasdaq Stock
Market, the aggregate market value of the voting stock held by non-affiliates of
the issuer on December 5, 1997, was $15.8 million.
1,416,612 of the issuer's common shares were issued and outstanding on
December 5, 1997.
<PAGE>
PART I
Item 1. Description of Business
Peoples Financial Corporation ("PFC"), an Ohio corporation formed in
1995, is a unitary savings and loan holding company which owns all of the issued
and outstanding common stock of Peoples Federal Savings and Loan Association of
Massillon ("Peoples Federal"), a savings and loan association chartered under
the laws of the United States. On September 12, 1996, PFC acquired all of the
common stock issued by Peoples Federal upon its conversion from mutual to stock
form (the "Conversion").
Because PFC's activities have been limited primarily to holding the
common stock of Peoples Federal since acquiring such common stock in connection
with the Conversion, the following discussion focuses primarily on the business
of Peoples Federal.
General
Peoples Federal is principally engaged in the business of making
permanent first and second mortgage loans secured by one- to four-family
residential real estate located in Peoples Federal's primary market area and
investing in U.S. Government and agency obligations, interest-bearing deposits
in other financial institutions, mortgage-backed securities, municipal
securities and automobile loan pass-through certificates. Peoples Federal also
originates loans for the construction of residential real estate and loans
secured by multifamily real estate (over four units) and nonresidential real
estate. The origination of consumer loans, including unsecured loans and loans
secured by deposits, constitutes a small portion of Peoples Federal's lending
activities. Loan funds are obtained primarily from deposits, which are insured
up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC"),
and loan and mortgage-backed and related securities repayments.
Peoples Federal conducts business from its main office and a
full-service branch office, both located in Massillon, Ohio, and a lending
office in the Belden Village area of North Canton, Ohio. Massillon is located
eight miles west of Canton, 32 miles south of Akron and 50 miles south of
Cleveland. Peoples Federal's primary market area consists of Stark County, Ohio,
and adjacent counties.
In addition to the historic financial information included herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances and PFC's operations and actual results
could differ significantly from those discussed in those forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein, but also include changes in the economy and
interest rates in the nation and in PFC's general market area. See Exhibit 99
hereto, "Safe Harbor Under the Private Securities Litigation Reform Act of
1995," which is incorporated herein by reference.
Lending Activities
General. Peoples Federal's primary lending activity is the origination
of conventional mortgage loans secured by one- to four-family homes located in
Peoples Federal's primary market area and home equity loans secured by first or
second mortgages. Loans for the construction of one- to four-family homes and
mortgage loans on multifamily properties containing five units or more and
nonresidential properties are also offered by Peoples Federal. Peoples Federal
does not originate loans insured by the Federal Housing Administration or loans
guaranteed by the Veterans Administration. In addition to mortgage lending,
Peoples Federal makes unsecured loans and consumer loans secured by deposits.
Peoples Federal does not originate its loans in accordance with traditional
secondary market guidelines and has not sold any loans.
2
<PAGE>
Loan Portfolio Composition. The following table presents certain
information with respect to the composition of Peoples Federal's loan portfolio
at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
1996
1997
Percent Percent
of total of total
Amount loans Amount loans
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential real estate loans:
One- to four-family (first and
second mortgage) $48,026 77.32% $34,542 68.18%
Home equity (secured by mortgages) 1,548 2.49 1,316 2.60
Multifamily 345 .55 122 .24
Nonresidential real estate loans 2,653 4.27 3,695 7.29
Construction loans 9,140 14.72 10,579 20.88
---------- ------- -------- -------
Total real estate loans 61,712 99.35 50,254 99.19
Consumer loans:
Loans on deposits 225 .36 185 .36
Other consumer loans 176 .29 227 .45
----------- --------- ---------- ---------
Total consumer loans 401 .65 412 .81
----------- --------- ---------- ---------
Total loans 62,113 100.00% 50,666 100.00%
====== ======
Net items:
Deferred loan origination costs 48 70
Loans in process (5,374) (6,337)
Allowance for loan losses (145) (193)
---------- -----------
Net loans $56,642 $44,206
======= =======
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information as of September 30, 1997, regarding the dollar amount of loans
maturing in Peoples Federal's portfolio based on their contractual terms to
maturity. Demand loans and loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the year ending Due 4-5 Due 6-10 Due 11-20 Due more than
September 30, years after years after years after 20 years after
1998 1999 2000 9/30/97 9/30/97 9/30/97 9/30/97 Total
----- ----- ----- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family
(first mortgage) $11,295 $2,486 $2,541 $4,911 $11,183 $13,433 $11,317 $57,166
Home equity (second
mortgage) 94 104 110 236 639 365 - 1,548
Multifamily 11 13 14 32 108 167 - 345
Nonresidential 329 192 210 474 982 466 - 2,653
Consumer loans 160 122 63 51 5 - - 401
------- ------ ------ ------ ------- ------- ------- -------
Total loans $11,889 $2,917 $2,938 $5,704 $12,917 $14,431 $11,317 $62,113
======= ====== ====== ====== ======= ======= ======= =======
</TABLE>
Of the loans due more than one year after September 30, 1997, loans
with aggregate balances of $41.0 million have fixed rates of interest, and loans
with aggregate balances of $9.2 million have adjustable interest rates.
3
<PAGE>
One- to Four-Family Residential Real Estate Loans. The primary lending
activity of Peoples Federal has been the origination of permanent conventional
loans secured by one- to four-family residences, primarily single-family
residences, located within Peoples Federal's designated lending area. Peoples
Federal also originates loans for the construction of one- to four-family
residences and home equity loans secured by first or second mortgages on
single-family, owner-occupied, residential real estate. Each of such loans is
secured by a mortgage on the underlying real estate and improvements thereon, if
any.
OTS regulations limit the amount that Peoples Federal may lend in
relationship to the appraised value of the real estate and improvements at the
time of loan origination. In accordance with such regulations, Peoples Federal
makes fixed-rate first mortgage loans on single-family or duplex, owner-occupied
residences up to 95% of the value of the real estate and improvements (the
"Loan-to-Value Ratio" or "LTV"). Low- to moderate-income loans are granted up to
95% on single-family or duplex, owner-occupied residences. Home equity loans
secured by first or second mortgages are made with a maximum combined LTV for
the first and second mortgage of 80%. Peoples Federal makes adjustable-rate
first mortgage loans for investment purposes on one- to four-family,
nonowner-occupied residences in amounts up to 75% LTV. Peoples Federal requires
private mortgage insurance ("PMI") for the amount of loans in excess of 80% of
the value of the real estate securing such loans. PMI is required for the amount
of any loan in excess of 85% of the value of the real estate and improvements
for low- to moderate-income loans. Fixed-rate residential real estate loans are
offered by Peoples Federal for terms of up to 30 years.
Adjustable-rate mortgage loans are offered by Peoples Federal for terms
of up to 30 years and with various alternative features. The interest rate
adjustment periods on ARMs are either one year, three years or a fixed rate for
10 years followed by one-year adjustment periods. The interest rate adjustments
on ARMs presently originated by Peoples Federal are tied to changes in the
weekly average yield on the one- and three-year U.S. Treasury constant
maturities index, respectively. Rate adjustments are computed by adding a stated
margin, typically 2.75%, to the index. The maximum allowable adjustment at each
adjustment date is usually 1% with a maximum adjustment of 3% over the term of
the loan, although Peoples Federal will make available an ARM with a 2% maximum
adjustment at each adjustment date and a maximum adjustment of 6% over the term
of the loan. The initial rate is dependent, in part, on how often the rate can
be adjusted. Peoples Federal also offers an ARM on two- to four-family
properties with a margin of 3.5% over the index and 2% and 6% maximum
adjustments at each adjustment date and over the term of the loan, respectively.
Peoples Federal originates ARMs which have initial interest rates lower than the
sum of the index plus the margin. Such loans are subject to increased risk of
delinquency or default due to increasing monthly payments as the interest rates
on such loans increase to the fully-indexed level, although such increase is
considered in Peoples Federal's underwriting of any such loans with a one-year
adjustment period.
The aggregate amount of Peoples Federal's one- to four-family
residential real estate loans, excluding construction loans, equaled
approximately $49.6 million at September 30, 1997, and represented 79.8% of
loans at such date. The largest individual loan balance on a one- to four-family
loan at such date was $506,000. At such date, no loans secured by one- to
four-family residential real estate were more than 90 days delinquent or
nonaccruing.
In April 1997, Peoples Federal began offering loans to borrowers to
build or buy a new residence using the equity in their current residence as the
down payment. Bridge loans are structured as temporary mortgage loans, with
interest payments only required, at a fixed rate with a term of two years. The
maximum loan amount offered is $125,000. In addition, the maximum total amount
of bridge loans Peoples Federal's policy authorizes to have outstanding at any
one time is $1,000,000. If the current residence is not sold within the two-year
period, the bridge loan must be converted to a non-owner-occupied mortgage loan.
Bridge loans are considered to involve a greater degree of risk due to
the fact that the borrower may also have a construction loan from Peoples
Federal at the same time. The risk is reduced by requiring any other liens on
the current residence to be paid off with the proceeds of the loan or before a
loan is granted, requiring a maximum LTV of 80% of the current residence and
evaluating the credit history of the borrower. The risk is also reduced by
Peoples Federal's overall limitation.
At September 30, 1997, one- to four-family mortgage loans included
$621,000, or 1.0% of total loans, invested in bridge loans secured by property
located within the primary lending area. At such date, no bridge loans were
delinquent.
Multifamily Residential Real Estate Loans. In addition to loans on one-
to four-family properties, Peoples Federal makes loans secured by multifamily
properties containing over four units. Such loans are made with adjustable
interest rates, a maximum LTV of 75% and a maximum term of 30 years.
4
<PAGE>
Multifamily 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.
Peoples Federal attempts to reduce the risk associated with multifamily lending
by evaluating the creditworthiness of the borrower and the projected income from
the project and by obtaining personal guarantees on loans made to corporations
and partnerships. Peoples Federal currently requires that borrowers agree to
submit financial statements, rent rolls and tax returns annually to enable
Peoples Federal to monitor the loans.
At September 30, 1997, loans secured by multifamily properties totaled
approximately $345,000, or .6% of total loans, all of which were secured by
property located within Peoples Federal's primary market area and all of which
were performing in accordance with their terms. The largest property securing
such a loan is a twelve-unit apartment building.
Construction Loans. Peoples Federal makes loans for the construction of
residential and nonresidential real estate. Such loans are structured as
permanent loans with fixed rates of interest and for terms of up to 30 years.
Although most of the construction loans originated by Peoples Federal
historically were made to owner-occupants for the construction of single-family
homes by a general contractor, throughout the last two fiscal years, Peoples
Federal has also made loans to developers who did not have a purchaser for the
property at the time the loan was made.
Construction loans 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, such loans 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 LTV
and the total loan funds required to complete a project. In the event a default
on a construction loan occurs and foreclosure follows, Peoples Federal must take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. Additional risk exists with
respect to loans made to developers who do not have a buyer for the property, as
the developer may lack funds to pay the loan if the property is not sold upon
completion. Peoples Federal attempts to reduce such risks on loans to developers
by requiring personal guarantees and reviewing current personal financial
statements and tax returns and other projects undertaken by the developers.
At September 30, 1997, a total of $9.1 million, or approximately 14.7%
of Peoples Federal's total loans, consisted of construction loans. All of
Peoples Federal's construction loans are secured by property located within
Peoples Federal's primary market area, and the economy of such lending area has
been relatively stable. At September 30, 1997, all of such loans were performing
in accordance with their terms.
Nonresidential Real Estate Loans. Peoples Federal also makes loans
secured by nonresidential real estate consisting of retail stores, office
buildings, churches, a theater, manufacturing facilities, an industrial facility
and a warehouse. Such loans generally are originated with terms of up to 20
years and a minimum loan amount of $20,000 and a maximum loan amount of
$500,000. Such loans have a maximum LTV of 75%. Peoples Federal makes loans for
land development in amounts up to 75% LTV and a maximum term of three years.
Peoples Federal also makes loans on undeveloped land in amounts up to 65% LTV
and a maximum term of five years.
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. Peoples Federal 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. Peoples Federal also requires personal guarantees on such
loans.
At September 30, 1997, Peoples Federal had a total of $2.7 million
invested in nonresidential real estate loans, all of which were secured by
property located within Peoples Federal's primary market area. Such loans
comprised approximately 4.3% of Peoples Federal's total loans at such date. At
such date, Peoples Federal had no delinquent nonresidential real estate loans.
5
<PAGE>
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its tangible capital. At September 30,
1997, Peoples Federal's nonresidential mortgage loans totaled 16.5% of Peoples
Federal's tangible capital.
Consumer Loans. Peoples Federal makes various types of consumer loans,
including unsecured loans and loans secured by deposits. Such loans are made
only at fixed rates of interest for terms of up to five years. Peoples Federal
has been attempting to increase its consumer loan portfolio as part of its
interest rate risk management efforts and because a higher rate of interest is
received on consumer loans.
Consumer loans may entail greater credit risk than do residential
mortgage loans. The risk of default on consumer loans increases during periods
of recession, high unemployment and other adverse economic conditions. Although
Peoples Federal has not had significant delinquencies on consumer loans, no
assurance can be provided that delinquencies will not increase.
At September 30, 1997, Peoples Federal had approximately $401,000, or
..7% of its total loans, invested in consumer loans. Of such amount, loans with
outstanding balances totaling approximately $2,000, or .5% of its consumer loan
balance, were more than 90 days delinquent and nonaccruing.
Loan Solicitation and Processing. Loan originations are developed from
a number of sources, including continuing business with depositors, borrowers
and real estate developers, periodic newspaper and radio advertisements,
solicitations by Peoples Federal's lending staff and walk-in customers.
Loan applications for permanent mortgage loans are taken by loan
personnel. Peoples Federal obtains a credit report, verification of employment
and other documentation concerning the credit-worthiness of the borrower.
Peoples Federal limits the ratio of mortgage loan payments to the borrower's
income to 28% and the ratio of the borrower's total debt payments to income to
38%. An appraisal of the fair market value of the real estate on which Peoples
Federal will be granted a mortgage to secure the loan is prepared by an
independent fee appraiser approved by the Board of Directors. Since 1993,
Peoples Federal has required a survey of the property securing every real estate
loan. In 1994, Peoples Federal adopted an environmental policy. Pursuant to such
policy, Peoples Federal requires a Phase I Environmental Site Assessment by an
approved environmental consultant during processing of an application for any
commercial real estate loan in the amount of $250,000 or greater and before
foreclosing on any real estate. For nonresidential real estate loans of less
than $250,000, single-family homes, duplexes and multi-family homes, the
borrower is required to complete an Environmental Inspection Questionnaire. For
larger multi-tenant properties, including apartment buildings, nursing homes and
day care centers, tests for lead paint, lead in the drinking water and radon are
performed. Significant negative information from any such questionnaire or tests
may result in further investigation.
For multifamily and nonresidential mortgage loans, a personal guarantee
of the borrower's obligation to repay the loan is required. Peoples Federal also
obtains information with respect to prior projects completed by the borrower.
Upon the completion of the appraisal and the receipt of information on the
borrower, the application for a loan is submitted to the Loan Committee,
comprised of certain management officials, for approval or rejection if the loan
amount does not exceed $300,000. If the loan amount exceeds $300,000, or if the
application does not conform in all respects with Peoples Federal's underwriting
guidelines, the application is accepted or rejected by the Board of Directors.
If a mortgage loan application is approved, title insurance is now
obtained on the title to the real estate which will secure the mortgage loan.
Prior to April 1, 1994, Peoples Federal did not require title insurance but did
obtain an attorney's opinion of title. Borrowers are required to carry
satisfactory fire and casualty insurance and flood insurance, if applicable, and
to name Peoples Federal 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. Peoples Federal
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Peoples Federal's loans carry no pre-payment penalties but do provide
that the entire balance of the loan is due upon sale of the property securing
the loan. Peoples Federal generally enforces such due-on-sale provisions.
6
<PAGE>
Loan Originations, Purchases and Sales. Peoples Federal originated only
fixed-rate loans until July 1995. Peoples Federal has never sold loans and does
not originate its loans in accordance with secondary market guidelines.
The following table presents Peoples Federal's mortgage loan
origination and participation activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
1997 1996
(In thousands)
<S> <C> <C>
Loans originated:
One- to four-family residential (1) $26,839 $18,742
Multifamily residential - 350
Nonresidential 599 927
Consumer 332 354
---------- ----------
Total loans originated 27,770 20,373
-------- --------
Reductions:
Principal repayments (16,323) (8,805)
Increase (decrease) in other items, net (2) 989 (5,383)
---------- ---------
Net increase $12,436 $ 6,185
======= ========
- -----------------------------
<FN>
(1) Includes construction loans.
(2) Consists of unearned and deferred fees, costs and undisbursed loans in
process and the allowance for loan losses.
</FN>
</TABLE>
Office of Thrift Supervision ("OTS") regulations generally limit the
aggregate amount that a savings association may lend to any one borrower to an
amount equal to 15% of the association's total capital under the regulatory
capital requirements plus any additional loan reserve not included in total
capital. A savings association may lend to one borrower an additional amount not
to exceed 10% of total capital plus additional reserves if the additional amount
is fully secured by certain forms of "readily marketable collateral." Real
estate is not considered "readily marketable collateral." In addition, the
regulations require that loans to certain related or affiliated borrowers be
aggregated for purposes of such limits. An exception to these limits permits
loans to one borrower of up to $500,000 "for any purpose."
Based on such limits, Peoples Federal was able to lend approximately
$2.4 million to one borrower at September 30, 1997. The largest amount Peoples
Federal had outstanding to one borrower at September 30, 1997, was $1.0 million,
consisting of four loans. Such loans were secured by a single-family residence,
nonresidential real estate and two residences under construction for which the
contractor had no purchaser when construction started. All of such loans were
current at September 30, 1997.
Delinquent Loans, Nonperforming Assets and Classified Assets. When a
borrower fails to make a required payment on a loan, Peoples Federal attempts to
cause the delinquency to be cured by contacting the borrower. In most cases,
delinquencies are cured promptly.
When a loan is fifteen days or more delinquent, the borrower is sent a
delinquency notice. When a loan is thirty days delinquent, Peoples Federal
generally telephones the borrower. Depending upon the circumstances, Peoples
Federal may also inspect the property and inform the borrower of the
availability of credit counseling from Peoples Federal and counseling agencies.
Before a loan becomes 90 days delinquent, Peoples Federal will make further
contact with the borrower and, depending upon the circumstances, may arrange
appropriate alternative payment arrangements. After a loan becomes 90 days
delinquent, Peoples Federal may refer the matter to an attorney for foreclosure.
A decision as to whether and when to initiate foreclosure proceedings is based
on such factors as the amount of the outstanding loan in relation to the
original indebtedness, the extent of the delinquency and the borrower's ability
and willingness to cooperate in curing delinquencies. If a foreclosure occurs,
the real estate is sold at public sale and may be purchased by Peoples Federal.
Real estate acquired by Peoples Federal as a result of foreclosure
proceedings is classified as real estate owned ("REO") until it is sold. When
property is so acquired it is initially recorded by Peoples Federal at the lower
of cost or fair value of the real estate, less estimated costs to sell. Any
reduction in fair value is reflected in a valuation allowance account
established by a charge to income. Costs incurred to carry other real estate are
charged to expense.
Peoples Federal had no REO property at September 30, 1997.
7
<PAGE>
Peoples Federal evaluates a loan for nonaccrual status when the
payments are 90 days or more past due.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
September 30,
1997 1996
------ ----
Percent Percent
of total of total
Number Amount loans Number Amount loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for (1):
30 - 59 days 6 $150 .24% 12 $ 342 .68%
60 - 89 days 5 51 .08 4 99 .20
90 days and over 1 2 .01 6 597 1.18
--- ------- --- --- ------- ----
Total delinquent loans 12 $203 .33% 22 $1,038 2.06%
== ==== === == ====== ====
- -------------------------------------
<FN>
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
</FN>
</TABLE>
The following table sets forth information with respect to the accrual
and nonaccrual status of Peoples Federal's loans which are 90 days or more past
due and other nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $ - $ 25
Nonresidential - -
Consumer 2 -
------ -------
Total nonaccruing loans 2 25
Accruing loans contractually past due 90
days or more:
Real estate:
Residential - -
Nonresidential - 572(1)
Consumer - -
------- ------
Total accruing loans contractually past
due 90 days or more - 572
Automobile loan pass-through certificates 33 -
------ ------
Total nonperforming assets $ 35 $597
===== ====
Total loan loss allowance $145 $193
==== ====
Total nonperforming assets as
a percentage of total assets .04% .67%
=== ===
Loan loss allowance as a percent
of nonperforming loans 7,250% 32.33%
===== =====
- -----------------------------------
<FN>
(1) The properties securing these loans were sold in October 1996, and the
loans were paid in full.
</FN>
</TABLE>
8
<PAGE>
For the year ended September 30, 1997, gross interest income which
would have been recorded had non-accruing loans been current in accordance with
their original terms was less than $1,000. During the year ended September 30,
1997, less than $1,000 was recorded as interest income as former nonaccruing
loans were returned to accrual status. During the periods shown, Peoples Federal
had no restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15. There are no loans which are not currently
classified as nonaccrual, more than 90 days past due or restructured but which
may be so classified in the near future because management has concerns as to
the ability of the borrowers to comply with repayment terms.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "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 same weaknesses as "substandard" assets, with the additional
characteristics that (i) the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions and values questionable and
(ii) there is a high possibility of loss. An asset classified "loss" is
considered uncollectible and of such little value that its continuance as an
asset of the institution is not warranted. The regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving management's
close attention.
Generally, Peoples Federal classifies as "substandard" all loans that
are delinquent more than 90 days, unless management believes the delinquency
status is short-term due to unusual circumstances. Loans delinquent fewer than
90 days may also be classified if the loans have the characteristics described
above rendering classification appropriate.
At September 30, 1997, Peoples Federal had $33,000 of automobile loan
pass-through certificates classified as substandard. During September 1997, a
permanent writedown of $60,000 to the estimated recoverable value was recorded
in conjunction with these certificates.
No loans in Peoples Federal's portfolio were classified as problem
assets at September 30, 1997.
Federal examiners are authorized to classify an association's assets.
If an association does not agree with an examiner's classification of an asset,
it may appeal this determination to the Regional Director of the OTS. Peoples
Federal had no disagreements with the examiners regarding the classification of
assets at the time of the last examination.
OTS regulations require that Peoples Federal establish prudent general
allowances for loan losses for any loan classified as substandard or doubtful.
If an asset, or portion thereof, is classified as loss, the association must
either establish specific allowances for losses in the amount of 100% of the
portion of the asset classified loss, or charge off such amount.
Allowance for Loan Losses. Peoples Federal maintains an allowance for
loan losses based upon a number of relevant factors, including, but not limited
to, trends in the level of nonperforming assets and classified loans, current
and anticipated economic conditions in the primary lending area, past loss
experience, possible losses arising from specific problem assets and changes in
the composition of the loan portfolio.
The single largest component of Peoples Federal's loan portfolio
consists of one- to four-family residential real estate loans. Substantially all
of these loans are secured by residential real estate and require a down payment
of 20% of the lower of the sales price or appraised value of the real estate. In
addition, all of these loans are secured by property in Peoples Federal's
primary lending area. Peoples Federal's practice of making loans only in its
local market area and requiring a 20% down payment have contributed to a low
charge-off history.
In addition to one- to four-family residential real estate loans,
Peoples Federal makes additional real estate loans including home equity,
multifamily residential real estate, nonresidential real estate and construction
loans. These real estate loans are secured by property in Peoples Federal's
lending area and also require the borrower to provide a down payment. Peoples
Federal has not experienced any charge-offs from these other real estate loan
categories.
Management believes that maintenance of the allowance at current levels
is prudent. The allowance for loan losses is reviewed quarterly by the Board of
Directors. While the Board of Directors believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in material adjustments, and net earnings could
be significantly adversely affected, if circumstances differ substantially from
the assumptions used in making the final determination.
9
<PAGE>
The following table sets forth an analysis of Peoples Federal's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
For the year ended September 30,
1997 1996
----- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $193 $ 80
Charge-offs 60 -
Recoveries - 8
Provision for loan losses (charged to
operations) 12 105
------ -----
Balance at end of period $145 $193
==== ====
Ratio of net charge-offs (recoveries) to
average net loans outstanding during
the period .12% (.02%)
Ratio of allowance for loan losses to
total loans .23% .38%
</TABLE>
At September 30, 1997, $20,000 of the allowance for loan losses was
allocated to nonresidential loans and $125,000 was allocated to residential
loans. At September 30, 1996, $40,000 of the allowance for loan losses was
allocated to nonresidential loans and $153,000 was allocated to residential
loans.
Mortgage-Backed and Related Securities
Peoples Federal maintains a significant portfolio of mortgage-backed
securities in the form of Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA") participation certificates, as well as two mortgage-backed
securities not issued by government agencies. Mortgage-backed securities
generally entitle Peoples Federal to receive a portion of the cash flows from an
identified pool of mortgages. FHLMC, FNMA and GNMA securities are each
guaranteed by their respective agencies as to principal and interest.
The FHLMC is a corporation chartered by the U.S. Government and
guarantees the timely payment of interest and the ultimate return of principal
on participation certificates. The FNMA is a corporation chartered by the U.S.
Congress and guarantees the timely payment of principal and interest on FNMA
securities. Although FHLMC and FNMA securities are not backed by the full faith
and credit of the U.S. Government, these securities are generally considered
among the highest quality investments with minimal credit risk. The GNMA is a
government agency. GNMA securities are backed by Federal Housing
Authority-insured and Veterans Administration-guaranteed loans. The timely
payment of principal and interest on GNMA securities is guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government.
Peoples Federal has also invested in mortgage-backed securities issued
by two other issuers. The first security represents a $897,000 interest in a
trust fund consisting primarily of a pool of conventional adjustable-rate
mortgage loans secured by first liens on multifamily residential real estate
originated by Guardian Savings and Loan Association located in California
("Guardian Savings"). Peoples Federal receives a portion of the principal and
interest payments made on the underlying loans. The risks of such securities
include the possibility that borrowers will default on the loans or that
borrowers will pay the loans before maturity, reducing the yield on Peoples
Federal's investment.
The second such security represents the right to receive principal and
interest payments from mortgage loans obtained by persons purchasing timeshare
units in Discovery Beach Resort and Tennis Club in Cocoa Beach, Florida. The
loans are secured by mortgages on the underlying timeshare units. As with the
Guardian Savings securities, this security's risks include default on or early
repayment of the loans. As the collateral for the loans is vacation property, it
can reasonably be anticipated that a borrower might default on such a loan
rather than default on a loan secured by a primary residence. The market value
of such security at September 30, 1997, was $179,000.
10
<PAGE>
Neither of the privately issued mortgage-backed securities is
guaranteed. Peoples Federal is receiving timely payments on both securities.
Peoples Federal has also invested in collateralized mortgage
obligations ("CMOs"). CMOs are securities issued by special purpose entities and
secured by mortgage-backed securities. The cash flow from the mortgages
underlying a CMO is segmented and paid in accordance with a predetermined
priority to investors holding various CMO classes. Each class has its own stated
maturity, estimated average life, coupon rate and prepayment characteristics.
All of Peoples Federal's CMOs are performing in accordance with their terms. All
of People's Federal's CMOs are issued by and guaranteed by FNMA and FHLMC. None
of Peoples Federal's CMOs are considered "high risk" under OTS pronouncements.
Mortgage-backed and related securities generally yield less than
individual loans originated by Peoples Federal. In addition, a high rate of
prepayment of the underlying loans could have a material negative effect on the
yield on the securities, which are purchased at a premium over their original
principal amounts. Mortgage-backed and related securities present less credit
risk than loans originated by Peoples Federal and held in its portfolio, and
Peoples Federal has purchased adjustable-rate mortgage-backed and related
securities as part of its effort to reduce its interest rate risk. If interest
rates rise in general, including the interest paid by Peoples Federal on its
liabilities, the interest rates on the loans backing the mortgage-backed and
related securities will also adjust upward. At September 30, 1997, $8.8 million
of Peoples Federal's mortgage-backed and related securities had adjustable
rates.
The following table sets forth the carrying value of Peoples Federal's
mortgage-backed and related securities at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1997 1996
(In thousands)
<S> <C> <C>
FNMA certificates $ 1,379 $2,637
GNMA certificates 6,470 8,823
FHLMC certificates 4,260 7,926
Guardian Savings and Loan certificate 897 972
Discovery Resort Limited Partnership Notes 179 289
FNMA and FHLMC real estate mortgage
investment conduits ("REMICs") 2,313 2,341
--------- ------
Total mortgage-backed and related
securities $15,498 $22,988
======= =======
</TABLE>
11
<PAGE>
The following table sets forth information regarding scheduled
maturities, amortized costs, market value and weighted average yields of Peoples
Federal's mortgage-backed and related securities at September 30, 1997. Expected
maturities will differ from contractual maturities due to scheduled repayments
and because borrowers may have the right to call or prepay obligations with or
without prepayment penalties. The following table does not take into
consideration the effects of scheduled repayments or the effects of possible
prepayments.
<TABLE>
<CAPTION>
At September 30, 1997
One year or less After one to five years After five to ten years After ten years
--------------------- ---------------------- ----------------------- ----------------------
Carrying Average Carrying Average Carrying Average Carrying Average
value yield value yield value yield value yield
--------- -------- --------- -------- -------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA certificates $ - -% $ - -% $ - -% $ 1,379 8.27%
GNMA certificates - - - - - - 6,470 6.91
FHLMC certificates 733 7.18 - - 451 8.07 3,076 7.20
Guardian Savings and
Loan certificate - - - - - - 897 6.73
Discovery Resort
Limited Partnership - - - - 179 7.83 - -
Notes
FNMA and FHLMC
REMICs - - - - - - 2,313 6.22
---- ---- ---- --- ---- ---- ------- ----
Total $733 7.18% $ - -% $630 8.00% $14,135 7.07%
==== ==== ==== === ==== ==== ======= ====
<CAPTION>
Total mortgage-backed and related
securities portfolio
--------------------------------------
Carrying Market Average
value value yield
-------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C>
FNMA certificates $ 1,379 $ 1,446 8.27%
GNMA certificates 6,470 6,559 6.91
FHLMC certificates 4,260 4,307 7.29
Guardian Savings and
Loan certificate 897 897 6.73
Discovery Resort Limited
Partnership Notes 179 179 7.83
FNMA and FHLMC
REMICs 2,313 2,313 6.22
------- ------- ----
Total $15,498 $15,701 7.03%
======= ======= ====
</TABLE>
For additional information, see Note B of the Notes to Consolidated
Financial Statements.
12
<PAGE>
Investment Activities
OTS regulations require that Peoples Federal maintain a minimum amount
of liquid assets, which may be invested in U. S. Treasury obligations,
securities of various federal agencies, certificates of deposit at insured
banks, bankers' acceptances and federal funds. Peoples Federal is also permitted
to make investments in certain commercial paper, corporate debt securities rated
in one of the four highest rating categories by one or more nationally
recognized statistical rating organizations, and mutual funds, as well as other
investments permitted by federal regulations.
Peoples Federal's investments include four automobile loan pass-through
certificates. Such certificates represent interests in pools of automobile
loans. Most of such loans have higher-than-normal interest rates and have been
made to high-risk borrowers. The cash flows from the loans are segmented and
paid to certificate holders in accordance with a predetermined priority to
investors holding various classes. Peoples Federal's certificates all represent
the highest priority class in each pool. Peoples Federal receives portions of
the loan payments made by the borrowers.
The automobile loan pass-through certificates have two principal risks.
First, there is a risk that if interest rates decrease, borrowers will repay
their loans early, refinancing their loans at a lower rate. Peoples Federal
might experience a lower yield on the certificates due to such prepayments.
Second, because the borrowers are typically low-income individuals with either
no credit history or adverse credit ratings, a higher-than-average default rate
can be expected. Moreover, upon repossession, the full amount owed on the loan
may not be recovered, the security interest in the vehicle may not be perfected,
and in some states, other persons or governmental entities might have a prior
security interest in the vehicles. Although some of such certificates have
insurance against such risks of loss, the amount of such insurance might not
cover all loss. The Trustee holding the loans and security interests and
distributing payments is required to maintain a certain amount of cash in a
reserve fund for the benefit of the certificate holders in the event of a
shortfall in a scheduled distribution. In February 1996, however, Duff & Phelps,
a security rating service, lowered its ratings on three of the certificates from
A+ to BBB- due to failure of the Trustee to maintain the required reserve
amount. In addition, in November 1996, Duff & Philips withdrew its ratings on
the same certificates, without stating a reason. Of the four certificates, three
are performing in accordance with their terms at September 30, 1997. One
certificate is carried as available for sale, at market value, which
approximates unrecovered cost. A permanent writedown to estimated recoverable
value was recorded for two certificates, adjusting the September 30, 1997,
carrying value to 50% of unrecovered cost, $33,000. The final certificate is in
default at September 30, 1997, and the carrying value has been written down
entirely.
The following table sets forth the composition of Peoples Federal's
certificates of deposit in the Federal Home Loan Bank (the "FHLB") of Cincinnati
and investment securities at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
1997 1996
Carrying % of Market % of Carrying % of Market % of
value Total value Total value Total value Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit in the
FHLB $1,000 16.48% $1,000 16.35% $ 500 6.65% $ 500 6.63%
Investment securities:
U.S. government and federal
agency securities 1,496 24.66 1,496 24.45 3,702 49.21 3,703 49.06
FHLB and FHLMC stock 2,451 40.41 2,451 40.06 1,890 25.12 1,890 25.04
Automobile loan pass-through
certificates 146 2.41 146 2.39 443 5.89 443 5.87
Municipal securities 973 16.04 1,025 16.75 988 13.13 1,011 13.40
-------- ------- ------- ------- -------- ------- -------- -------
Total interest-bearing deposits
and investment securities $6,066 100.00% $6,118 100.00% $7,523 100.00% $ 7,547 100.00%
====== ====== ====== ====== ====== ====== ======= ======
</TABLE>
13
<PAGE>
The following tables set forth the contractual maturities, carrying
values, market values and average yields for Peoples Federal's certificates of
deposit in the FHLB of Cincinnati and investment securities at September 30,
1997.
<TABLE>
<CAPTION>
At September 30, 1997
One year or less After one to five years After five years
Carrying Average Carrying Average Carrying Average
value yield value yield value yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit in the
FHLB $1,000 5.5% $ - -% $ - -%
Investment securities:
U.S. government and federal
agency securities - - 1,496 6.16 - -
FHLB and FHLMC stock 2,451 3.18 - - - -
Automobile loan
pass-through certificates 16 - 130 6.40 - -
Municipal securities 12 6.50 123 6.31 838 6.09
--------- ---- -------- ---- ----- ----
Total $3,479 3.85% $1,749 6.19% $838 6.09%
====== ==== ====== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1997
Average Weighted
life Carrying Market average
in years value value yield
(Dollars in thousands)
<S> <C> <C> <C> <C>
Certificates of deposit
in the FHLB .28 $1,000 $1,000 5.50%
Investment securities:
U.S.government and
federal agency
securities 2.17 1,496 1,496 6.16
FHLB and FHLMC stock
Automobile loan - 2,451 2,451 3.18
pass-through
certificates 3.10 146 146 5.68
Municipalsecurities 10.93 973 1,025 6.12
----- -------- -------- ----
Total 4.04 $6,066 $6,118 4.83%
====== ====== ====== ====
</TABLE>
Deposits and Borrowings
General. Deposits have traditionally been the primary source of Peoples
Federal's funds for use in lending and other investment activities. In addition
to deposits, Peoples Federal derives funds from interest payments and principal
repayments on loans and mortgage-backed and related securities, income on
earning assets, service charges and gains on the sale of assets. 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. Peoples Federal has never borrowed funds.
Deposits. Deposits are attracted principally from within Peoples
Federal's primary market area through the offering of a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") accounts,
money market accounts, passbook savings accounts and term certificate accounts.
Although Peoples Federal has some individual retirement accounts ("IRAs"),
Peoples Federal has not offered new IRAs for several years. Interest rates paid,
maturity terms, service fees and withdrawal penalties for the various types of
accounts are established periodically by the management of Peoples Federal based
on Peoples Federal's liquidity requirements, growth goals and interest rates
paid by competitors. Peoples Federal does not use brokers to attract deposits.
14
<PAGE>
At September 30, 1997, Peoples Federal's certificates of deposit
totaled $49.2 million, or 74.9% of total deposits. Of such amount, approximately
$27.3 million in certificates of deposit mature within one year. Based on past
experience and Peoples Federal's prevailing pricing strategies, management
believes that a substantial percentage of such certificates will renew with
Peoples Federal at maturity. If there is a significant deviation from historical
experience, Peoples Federal can utilize borrowings from the FHLB as an
alternative to this source of funds.
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Peoples Federal at the dates
indicated:
<TABLE>
<CAPTION>
At September 30,
1997 1996
------ ----
Percent Percent
of total of total
Amount deposits Amount deposits
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
NOW accounts (1) $ 2,497 3.80% $ 1,293 2.01%
Money market accounts (2) 2,588 3.94 3,067 4.77
Passbook savings accounts (3) 11,395 17.36 12,120 18.83
-------- ------- -------- -------
Total transaction accounts 16,480 25.10 16,480 25.61
Certificates of deposit:
2.01 - 4.00% 160 .24 192 .30
4.01 - 6.00% 29,971 45.65 33,243 51.65
6.01 - 8.00% 19,049 29.01 14,391 22.36
8.01 - 10.00% - - 49 .08
------------- ----------- ----------- ---------
Total certificates of deposit 49,180 74.90 47,875 74.39
-------- ------- -------- -------
Total deposits (4) $65,660 100.00% $64,355 100.00%
======= ====== ======= ======
- -----------------------------
<FN>
(1) Peoples Federal's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. The weighted
average rate on NOW accounts was 1.50% and 1.50% at September 30, 1997 and
1996, respectively.
(2) Peoples Federal's weighted average interest rate paid on money market
accounts fluctuates with the general movement of interest rates. The
weighted average rate on money market accounts was 2.10% and 2.35% at
September 30, 1997 and 1996, respectively.
(3) Peoples Federal's weighted average rate on passbook savings accounts
fluctuates with the general movement of interest rates. The weighted
average rate on passbook accounts was 2.00% and 2.25% at September 30, 1997
and 1996, respectively.
(4) IRAs are included in the various certificates of deposit balances. IRAs
totaled $160,000 and $192,000 as of September 30, 1997 and 1996,
respectively.
</FN>
</TABLE>
15
<PAGE>
The following table shows rate and maturity information for Peoples
Federal's certificates of deposit as of September 30, 1997:
<TABLE>
<CAPTION>
Amount Due
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
---- -------- - -------- -- -------- - -------- -- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
2.01 - 4.00% $ 87 $ 73 $ - $ - $ 160
4.01 - 6.00 21,980 5,420 1,229 1,342 29,971
Over 6.01 5,267 10,681 1,987 1,114 19,049
--------- -------- ------- ------- --------
Total certificates
of deposit $27,334 $16,174 $3,216 $2,456 $49,180
======= ======= ====== ====== =======
</TABLE>
The following table presents the amount of Peoples Federal's certificates
of deposit of $100,000 or more by the time remaining until maturity as of
September 30, 1997:
<TABLE>
<CAPTION>
Maturity Amount
(In thousands)
<S> <C>
Three months or less $ 320
Over 3 months to 6 months 306
Over 6 months to 12 months 600
Over 12 months 3,056
-------
Total $4,282
======
</TABLE>
The following table sets forth Peoples Federal's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Beginning balance $64,355 $66,564
Deposits 46,296 52,260
Withdrawals (47,260) (57,229)
-------- --------
Net decreases before interest credited (964) (4,969)
Interest credited 2,269 2,760
--------- ---------
Ending balance $65,660 $64,355
======= =======
Net increase (decrease) $ 1,305 $(2,209)
Percent increase (decrease) 2.03% (3.32)%
</TABLE>
Borrowings. The FHLB 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 FHLB of Cincinnati, Peoples
Federal is authorized to apply for advances from the FHLB of Cincinnati,
provided certain standards of creditworthiness have been met. Under current
regulations, an association must meet certain qualifications to be eligible for
FHLB advances. The extent to which an association is eligible for such advances
will depend upon whether it meets the Qualified Thrift Lender Test (the "QTL
Test"). If an association meets the QTL Test, it will be eligible for 100% of
the advances it would otherwise be eligible to receive. If an association does
not meet the QTL Test, it will be eligible for such advances only to the extent
it holds specified QTL Test assets.
16
<PAGE>
At September 30, 1997, Peoples Federal was in compliance with the QTL Test.
Peoples Federal has not utilized FHLB advances during the three fiscal years
ended September 30, 1997.
PFC obtained an unsecured 90-day loan from a bank in the amount of $3.0
million, with an interest rate of 8.5%, in September 1997 in conjunction with
its special distribution to shareholders.
Yields Earned and Rates Paid
The spread between the average interest rate on interest-earning assets and
the average interest rate on interest-bearing liabilities increased to 2.52% for
the year ended September 30, 1997, from 2.25% for the year ended September 30,
1996. The spread for the year ended September 30, 1996, decreased from 2.46% for
the year ended September 30, 1995.
The yield on interest-earning assets increased to 7.32% for the year ended
September 30, 1997, from 7.23% for the year ended September 30, 1996, as a
result of an increase in loans receivable, partly offset by a decrease in
investments and mortgage-backed securities. The cost of funds to Peoples Federal
decreased to 4.80% for the year ended September 30, 1997, from 4.98% for the
year ended September 30, 1996, due to maturity of longer-term, high-rate
certificates of deposit.
The yield on interest-earning assets decreased to 7.23% for the year ended
September 30, 1996, from 7.27% for the year ended September 30, 1995. Decreased
average interest rates on loans, interest-bearing deposits and investment
securities, partly offset by an increase in the average interest rate on
mortgage-backed and related securities, made up the net decrease for the year
ended September 30, 1996. The cost of funds to Peoples Federal increased to
4.98% for the year ended September 30, 1996, from 4.81% for the year ended
September 30, 1995, due to the increased rates of interest on certificates of
deposit.
17
<PAGE>
The following table presents certain information relating to PFC and
Peoples Federal's average balance sheet information and reflects the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities for the periods indicated. Such yields and costs are derived by
dividing annual income or expense by the average monthly balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
years presented. Average balances are derived from daily balances, which include
nonaccruing loans in the loan portfolio, net of the allowance for loan losses.
<TABLE>
<CAPTION>
Year ended September 30,
1997 1996
------ ----
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 5,806 $ 322 5.55% $ 7,130 $ 319 4.47%
Investment securities 8,255 448 5.42 7,292 435 5.96
Mortgage-backed and related securities
21,674 1,483 6.84 23,671 1,569 6.63
Loans receivable (1) 49,717 4,000 8.05 39,844 3,309 8.31
-------- ------- -------- -------
Total interest-earning assets 85,452 6,253 7.32 77,937 5,632 7.23
Non-interest-earning assets:
Cash and amounts due from depository
institutions 269 250
Premises and equipment, net 1,463 1,517
Other nonearning assets 640 565
---------- ----------
Total assets $87,824 $80,269
======= =======
Interest-bearing liabilities:
NOW accounts $ 1,536 18 1.17 $ 1,431 18 1.26
Money market accounts 2,708 57 2.10 3,402 87 2.56
Passbook savings accounts 12,026 241 2.00 13,958 326 2.34
Certificates of deposit 46,941 2,727 5.81 49,249 2,960 6.01
-------- -------- -------- -------
Total deposits 63,211 3,043 4.81 68,040 3,391 4.98
Borrowings 250 4 1.60 - - -
--------- ---------- -------- ------------ ---------- --------
Total interest-bearing liabilities 63,461 3,047 4.80 68,040 3,391 4.98
-------- ------- -------- -------- ------ -----
Non-interest-bearing liabilities 1,435 1,032
--------- ---------
Total liabilities 64,896 69,072
Shareholder's equity 22,928 11,197
-------- --------
Total liabilities and shareholders' equity $87,824 $80,269
======= =======
Net interest income; interest rate spread $3,206 2.52% $2,241 2.25%
====== ======== ====== ========
Net interest margin (net interest income
as a percent of average
interest-earning assets) 3.75% 2.88%
======== ========
Average interest-earning assets to
interest-bearing liabilities 134.65% 114.55%
====== ======
- ---------------------------
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
</FN>
</TABLE>
18
<PAGE>
The following table sets forth, at the dates indicated, the weighted
average yields earned on Peoples Federal's interest-earning assets, the weighted
average interest yield paid on interest-bearing liabilities and the interest
rate spread.
<TABLE>
<CAPTION>
At September 30,
1997 1996
<S> <C> <C>
Weighted average yield on loan portfolio 8.19% 8.50%
Weighted average yield on mortgage-backed and related securities 6.99 6.75
Weighted average yield on investment securities 4.77 5.52
Weighted average yield on interest-bearing deposits 5.07 4.81
Weighted average yield on all interest-earning assets 7.55 7.26
Weighted average yield on deposits 4.97 4.99
Weighted average yield on borrowings 8.50 -
Weighted average yield paid on all interest-bearing liabilities 5.13 4.99
---- ----
Interest rate spread (spread between weighted average interest
rate on all interest-bearing assets and all interest-bearing 2.42% 2.27%
==== ====
liabilities)
</TABLE>
19
<PAGE>
The table below describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected Peoples Federal's interest income and expense during
the years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(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,
1997 vs. 1996 1996 vs. 1995
------------------------ -------------------------
Increase (decrease) Increase (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $(73) $ 76 $ 3 $ 230 $ (29) $201
Investment securities 52 (39) 13 (224) (13) (237)
Mortgage-backed and related (136) 50 (86) (1) 104 103
securities
Loans receivable 794 (103) 691 236 (30) 206
----- ---- ---- ----- ----- -----
Total interest income 637 (16) 621 241 32 273
----- ---- ---- ----- ---- -----
Interest expense attributable to:
NOW accounts 1 (2) (1) 5 (2) 3
Money market accounts (14) (15) (29) (17) (5) (22)
Passbook savings accounts (39) (46) (85) 25 (22) 3
Certificates of deposit (134) (99) (233) 109 156 265
Borrowings 4 - 4 - - -
------- -------- ------ -------- -------- --------
Total interest expense (182) (162) (344) 122 127 249
---- ---- ---- ----- ----- -----
Increase (decrease) in net interest
income $819 $146 $965 $119 $ (95) $ 24
==== ==== ==== ==== ===== =====
</TABLE>
Asset and Liability Management
Peoples Federal, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. As part of its effort to
monitor and manage interest rate risk, Peoples Federal uses the Net Portfolio
Value ("NPV") methodology recently adopted by the OTS as part of its capital
regulations. Although Peoples Federal is not currently subject to the NPV
regulation because such regulation does not apply to institutions with less than
$300 million in assets and risk-based capital in excess of 12%, the application
of the NPV methodology may illustrate Peoples Federal's interest rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and outgoing
cash flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
which would result from a theoretical 200 basis point (1 basis point equals
..01%) change in market interest rates. Both a 200 basis point increase in market
interest rates and a 200 basis point decrease in market interest rates are
considered. If the NPV would decrease more than 2% of the present value of the
institution's assets with either an increase or a decrease in market rates, the
institution must deduct 50% of the amount of the decrease in excess of such 2%
in the calculation of the institution's risk-based capital.
At September 30, 1997, 2% of the present value of Peoples Federal's
assets was approximately $1.8 million. Because the interest rate risk of a 200
basis point increase in market interest rates (which was greater than the
interest rate risk of a 200 basis point decrease) was $3.4 million at September
30, 1997, Peoples Federal would have been required to deduct
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approximately $824,000 (50% of the approximate $1.6 million difference) from its
capital in determining whether Peoples Federal met its risk-based capital
requirement. Regardless of such reduction, however, Peoples Federal's risk-based
capital at September 30, 1997, would still have exceeded the regulatory
requirement by $12.5 million.
Presented below, as of September 30, 1997, is an analysis of Peoples
Federal's interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts of 100 basis points in market interest rates. The
table also contains the policy limits set by the Board of Directors of Peoples
Federal as the maximum change in NPV that the Board of Directors deems advisable
in the event of various changes in interest rates. Such limits have been
established with consideration of the dollar impact of various rate changes and
Peoples Federal's strong capital position.
As illustrated in the table, Peoples Federal's NPV is more sensitive to
rising rates than declining rates. Such difference in sensitivity occurs
principally because, as rates rise, borrowers do not prepay fixed-rate loans as
quickly as they do when interest rates are declining. The loan portfolio of
Peoples Federal consists almost entirely of fixed-rate loans. In addition,
because Peoples Federal has not originated loans in accordance with traditional
secondary market guidelines, the sale of fixed-rate loans may be difficult. As a
result, in a rising interest rate environment, the amount of interest Peoples
Federal would receive on its loans would increase relatively slowly as loans are
slowly prepaid and new loans at higher rates are made. Moreover, the interest
Peoples Federal would pay on its deposits would increase rapidly because Peoples
Federal's deposits generally have shorter periods to repricing. Assumptions used
in calculating the amounts in this table are OTS assumptions.
<TABLE>
<CAPTION>
September 30, 1997
Change in Interest Rate Board Limit $ Change % Change
(Basis Points) % Change in NPV in NPV
<S> <C> <C> <C>
+300 (70)% $(5,419) (27)%
+200 (45) (3,391) (17)
+100 (25) (1,526) (8)
- - - -
-100 (25) 918 5
-200 (45) 1,457 7
-300 (70) 2,070 10
</TABLE>
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Further, in the event of a change in
interest rates, expected rates of prepayment on loans and mortgage-backed
securities and early withdrawal levels from certificates of deposit would likely
deviate significantly from those assumed in making the risk calculations.
If interest rates continue to rise from the recent historically low
levels, Peoples Federal's net interest income will be negatively affected.
Moreover, rising interest rates may negatively affect Peoples Federal's earnings
due to diminished loan demand.
As part of management's overall strategy to manage interest rate risk,
Peoples Federal commenced the origination of adjustable-rate mortgage loans in
June 1995. At September 30, 1997, the portfolio included $1.6 million of
three-year ARMs, $837,000 of one-year ARMs and $9.1 million of loans that adjust
for the first time after 10 years and then each year thereafter. In addition, at
September 30, 1997, $8.8 million of Peoples Federal's mortgage-backed and
related securities were backed by mortgages with adjustable rates. Management
has also increased consumer lending and expects such lending to become a larger
part of overall lending activities. Consumer loans typically have a
significantly shorter weighted average maturity and offer less exposure to
interest rate risk. In the event interest rates decline, however, the
origination of adjustable-rate loans could be expected to decline as consumers
demand more fixed-rate loans. On the deposit side, management has attempted to
reduce the impact of interest rate changes by emphasizing low interest rate
deposit products and by maintaining competitive pricing on longer term
certificates of deposit.
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Competition
Peoples Federal competes for deposits with other savings 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, Peoples Federal competes with other savings
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, mortgage companies and other lenders. Peoples Federal
competes for loan originations primarily through the interest rates and loan
fees offered and through the efficiency and quality of services provided.
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.
The size of financial institutions competing with Peoples Federal 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 Peoples
Federal.
Subsidiaries
Peoples Federal owns all of the outstanding shares of Massillon
Community Service Corporation, the only asset of which was stock of Intrieve,
Incorporated, a data processing company. Such shares were redeemed on October
20, 1995.
Personnel
As of September 30, 1997, Peoples Federal had 19 full-time employees
and 2 part-time employees.
REGULATION
General
PFC is a savings and loan holding company within the meaning of the
Home Owners Loan Act, as amended (the "HOLA"). Consequently, PFC is subject to
regulation, examination and oversight by the OTS and must submit periodic
reports to the OTS concerning its activities and financial condition. In
addition, as a corporation organized under Ohio law, PFC is subject to
provisions of the Ohio Revised Code applicable to corporations generally.
As a savings association organized under the laws of the United States,
Peoples Federal is subject to regulatory oversight by the OTS. Because Peoples
Federal's deposits are insured by the FDIC, Peoples Federal is also subject to
examination and regulation by the FDIC. Peoples Federal must file periodic
reports with the OTS concerning its activities and financial condition.
Examinations are conducted periodically by the OTS to determine whether Peoples
Federal is in compliance with various regulatory requirements and is operating
in a safe and sound manner. Peoples Federal is a member of the FHLB of
Cincinnati.
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS and
Peoples Federal may be regulated under federal law as a bank or be required to
change its charter. Such change in regulation or charter would likely change the
range of activities in which Peoples Federal may engage and would probably
subject Peoples Federal to more regulation by the FDIC. In addition, PFC might
become subject to a different set of holding company regulations limiting the
activities in which PFC may engage and subjecting PFC to additional regulatory
requirements, including separate capital requirements. At this time, PFC cannot
predict when or whether Congress may actually pass legislation regarding PFC's
and Peoples Federal's regulatory requirements or charter. Although such
legislation, if enacted, may change the activities in which PFC or Peoples
Federal are authorized to engage, it is not anticipated that the current
activities of either PFC or Peoples Federal will be materially affected by those
activity limits.
Ohio Corporation Law
Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or
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transfers between an Ohio corporation and any person who has the right to
exercise, alone or with others, 10% or more of the voting power of such
corporation (an "Interested Shareholder"), for three years following the date on
which such person first becomes an Interested Shareholder. Such a business
combination is permitted only if, prior to the time such person first becomes an
Interested Shareholder, the Board of Directors of the issuing corporation has
approved the purchase of shares which resulted in such person first becoming an
Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the specified exceptions applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (3)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. PFC has
not opted out of the protection afforded by Chapter 1704.
Control Share Acquisition. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that, with certain
exceptions, acquisitions of voting securities which would result in the
acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting
securities of an Ohio corporation (a "Control Share Acquisition") must be
approved in advance by the holders of at least a majority of the outstanding
voting shares of such corporation represented at a meeting at which a quorum is
present and a majority of the portion of the outstanding voting shares
represented at such a meeting excluding the voting shares owned by the acquiring
shareholder, by certain other persons who acquire or transfer voting shares
after public announcement of the acquisition or by certain officers of the
corporation or directors of the corporation who are employees of the
corporation. The Control Share Acquisition Statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.
Takeover Bid Statute. Ohio law provides that an offeror may not make a
tender offer or request or invitation for tenders that would result in the
offeror beneficially owning more than ten percent of any class of the target
company's equity securities unless such offeror files certain information with
the Ohio Division of Securities (the "Securities Division") and provides such
information to the target company and the offerees within Ohio. The Securities
Division may suspend the continuation of the control bid if the Securities
Division determines that the offeror's filed information does not provide full
disclosure to the offerees of all material information concerning the control
bid. The statute also provides that an offeror may not acquire any equity
security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
Office of Thrift Supervision
General. The OTS is an office of the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings associations and all other savings associations the deposits of which
are insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The
OTS issues regulations governing the operation of savings associations,
regularly examines such associations and imposes assessments on savings
associations based on their asset size to cover the costs of general supervision
and examination. The OTS also may initiate enforcement actions against savings
associations and certain persons affiliated with them for violations of laws or
regulations or for engaging in unsafe or unsound practices. If the grounds
provided by law exist, the OTS may appoint a conservator or receiver for a
savings association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how
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well and to what extent an institution lends and invests in its designated
service area, with particular emphasis on low- to moderate-income communities
and borrowers in that area.
Regulatory Capital Requirements. Peoples Federal is required by OTS
regulations to meet certain minimum capital requirements. The tangible capital
requirement requires savings associations to maintain "tangible capital" of not
less than 1.5% of their adjusted total assets. Tangible capital is defined in
OTS regulations as core capital minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of their total assets. The
OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. Peoples
Federal does not anticipate that it will be adversely affected if the core
capital requirement regulation is amended as proposed.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of their risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Peoples Federal includes a general loan loss allowance of
$145,000 at September 30, 1997.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to the interest rate risk component, a savings association
will have to measure the effect of an immediate 200 basis point change in
interest rates on the value of its portfolio as determined under the methodology
of the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
such excess exposure from its total capital when determining its risk-based
capital. In general, an association with less than $300 million in assets and a
risk-based capital ratio in excess of 12% will not be subject to the interest
rate risk component. Pending implementation of the interest rate risk component,
the OTS has the authority to impose a higher individualized capital requirement
on any savings association it deems to have excess interest rate risk. The OTS
also may adjust the risk-based capital requirement on an individualized basis to
take into account risks due to concentrations of credit and non-traditional
activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and more numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. In addition, the OTS
generally can downgrade an association's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. All undercapitalized associations must submit a
capital restoration plan to the OTS within 45 days after becoming
undercapitalized. Such associations will be subject to increased monitoring and
asset growth restrictions and will be required to obtain prior approval for
acquisitions, branching and engaging in new lines of business. Furthermore,
critically undercapitalized institutions must be placed in conservatorship or
receivership within 90 days of reaching that capitalization level, except under
limited circumstances. Peoples Federal's capital at September 30, 1997, met the
standards for the highest category, a "well-capitalized" institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized and (b) the amount that is
necessary to bring the association into compliance with all capital standards
applicable to such association at the time the association fails to comply with
its capital restoration plan.
Liquidity. OTS regulations require that a savings association maintain
a minimum daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations). At September 30, 1997, such minimum requirement was an amount
equal to a monthly average of not less than
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5% of its net withdrawable savings deposits plus borrowings payable in one year
or less. The requirement has since been lowered to 4%. Monetary penalties may be
imposed upon associations failing to meet the liquidity requirement. The
eligible liquidity of Peoples Federal at September 30, 1997, was approximately
$8.5 million, or 13.77%, and exceeded the then applicable 5% liquidity
requirement by approximately $5.4 million.
Qualified Thrift Lender Test. Savings associations are required to
maintain a specified level of investments in assets that are designated as
qualifying thrift investments ("QTIs"), which are generally related to domestic
residential real estate and manufactured housing and include credit card,
student and small business loans and stock issued by any FHLB, the FHLMC or the
FNMA. Under such test, 65% of an institution's "portfolio assets" (total assets
less goodwill and other intangibles, property used to conduct business and 20%
of liquid assets) must consist of QTI on a monthly average basis in nine out of
every 12 months. Effective September 30, 1996, a savings association may also
qualify as a QTL by meeting the definition of "domestic building and loan
association" under the Internal Revenue Code of 1986, as amended (the "Code").
In order for an institution to meet the definition of a "domestic building and
loan association" under the Code, at least 60% of such institution's assets must
consist of specified types of property, including cash loans secured by
residential real estate or deposits, educational loans and certain governmental
obligations. The OTS may grant exceptions to the QTL test under certain
circumstances. If a savings association fails to meet the QTL test, the
association and its holding company become subject to certain operating and
regulatory restrictions. A savings association that fails to meet the QTL test
will not be eligible for new FHLB advances. At September 30, 1997, Peoples
Federal met the QTL test.
Lending Limit. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's Lending Limit Capital. A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to the lending
limit. A general exception to the 15% limit provides that an association may
lend to one borrower up to $500,000, for any purpose. In applying the limit on
loans to one borrower, the regulations require that loans to certain related
borrowers be aggregated. At September 30, 1997, Peoples Federal was in
compliance with this lending limit.
Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
deposits). Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of the board of directors of the association, with any "interested"
director not participating. All loans to directors, executive officers and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions with the general public or as offered to all
employees in a company-wide benefit program, and loans to executive officers are
subject to additional limitations. Peoples Federal was in compliance with such
restrictions at September 30, 1997.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. PFC is an
affiliate of Peoples Federal. Generally, Sections 23A and 23B of the FRA (i)
limit the extent to which a savings association or its subsidiaries may engage
in "covered transactions" with any one affiliate to an amount equal to 10% of
such institution's capital stock and surplus, (ii) limit the aggregate of all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchasing of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. Peoples Federal was
in compliance with these requirements and restrictions at September 30, 1997.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association which has converted
from mutual to stock form is prohibited from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the net worth of the
association would be reduced below the amount required to be maintained for the
liquidation account established in connection with its mutual to stock
conversion. OTS regulations also establish a three-tier system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
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Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year up to the
greater of (i) 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, and (ii) the amount authorized
for a Tier 2 association. A Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association. Peoples Federal meets the requirements for a Tier 1 association and
has not been notified of any need for more than normal supervision.
Tier 2 consists of associations that, before and after the proposed
distribution, meet their current minimum, but not fully phased-in, capital
requirements. Associations in this category may make capital distributions of up
to 75% of net income over the most recent four quarters. Tier 3 associations do
not meet current minimum capital requirements and must obtain OTS approval of
any capital distribution. Tier 2 associations that propose to make a capital
distribution in excess of the noted safe harbor level must also obtain OTS
approval. Tier 2 associations proposing to make a capital distribution within
the safe harbor provisions and Tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior to such
distribution.
As a subsidiary of PFC, Peoples Federal is required to give the OTS 30
days' notice prior to declaring any dividend on its stock. The OTS may object to
the distribution during such 30-day period based on safety and soundness
concerns. Peoples Federal paid no dividends to PFC during fiscal 1997.
Holding Company Regulation. PFC is a savings and loan holding company
within the meaning of the HOLA. As such, PFC has registered with the OTS and is
subject to OTS regulations, examination, supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by PFC.
Except with the prior approval of the OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such holding company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other savings
and loan holding company.
As a unitary savings and loan holding company, PFC generally has no
restrictions on its activities. Such companies are the only financial
institution holding companies which may engage in any commercial, securities and
insurance activities without restriction. Congress is considering legislation
which may limit PFC's ability to engage in these activities. It cannot be
predicted whether and in what form these proposals might become law. However,
such limits would not impact PFC's current activities, which consist solely of
holding stock of Peoples Federal. The broad latitude to engage in activities
under current law can be restricted. If the OTS 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 association, the OTS may impose
such restrictions as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings association, (ii) transactions between
the savings association and its affiliates, and (iii) any activities of the
savings association that might create a serious risk that the liabilities of PFC
and its affiliates may be imposed on the savings association. Notwithstanding
the foregoing rules as to permissible business activities of a unitary savings
and loan holding company, if the savings association subsidiary of a holding
company fails to meet the QTL test, then such unitary holding company would
become subject to the activities restrictions applicable to multiple holding
companies. At September 30, 1997, Peoples Federal met both those tests.
If PFC acquired control of another savings institution, other than
through a merger or other business combination with Peoples Federal, PFC would
become a multiple savings and loan holding company. Unless the acquisition was
an emergency thrift acquisition and each subsidiary savings association met the
QTL test, the activities of PFC and any of its subsidiaries (other than Peoples
Federal or other subsidiary savings associations) would thereafter be subject to
activity restrictions. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof that is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings institution, (ii) conducting an insurance agency or
escrow business, (iii)
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holding, managing or liquidating assets owned by or acquired from a subsidiary
savings institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by federal regulation as of
March 5, 1987, to be engaged in by multiple holding companies, or (vii) those
activities authorized by the FRB as permissible for bank holding companies,
unless the OTS by regulation prohibits or limits such activities for savings and
loan holding companies. Those activities described in (vii) above must also be
approved by the OTS prior to being engaged in by a multiple holding company.
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state only if the multiple savings and loan holding company
involved controls a savings association that operated a home or branch office in
the state of the association to be acquired as of March 5, 1987, or if the laws
of the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions). As under prior law, the OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings associations
in more than one state in the case of certain emergency thrift acquisitions.
Bank holding companies have had more expansive authority to make interstate
acquisitions than savings and loan holding companies since August 1995.
Federal Regulation of Acquisitions of Control of PFC and Peoples
Federal. In addition to the Ohio law limitations on the merger with, and
acquisition of, PFC, federal limitations generally require regulatory approval
of acquisitions at specified levels. Under pertinent federal law and
regulations, no person, directly or indirectly, or acting in concert with
others, may acquire control of Peoples Federal or PFC without 60 days' prior
notice to the OTS. "Control" is generally defined as having more than 25%
ownership or voting power; however, ownership or voting power of more than 10%
may be deemed "control" if certain factors are in place. If the acquisition of
control is by a company, the acquiror must obtain approval, rather than give
notice, of the acquisition as a savings and loan holding company.
In addition, any merger of Peoples Federal must be approved by the OTS
as well as the Superintendent. Further, any merger of PFC in which PFC is not
the resulting company must also be approved by both the OTS and the
Superintendent.
Federal Deposit Insurance Corporation
Deposit Insurance and Assessments. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and savings and loan associations and safeguards the
safety and soundness of the banking and savings and loan industries. The FDIC
administers two separate insurance funds, the Bank Insurance Fund ("BIF") for
commercial banks and state savings banks and the SAIF for savings associations.
Peoples Federal is a member of the SAIF and its deposit accounts are insured by
the FDIC up to the prescribed limits. The FDIC has examination authority over
all insured depository institutions, including Peoples Federal, and has
authority to initiate enforcement actions against federally-insured savings
associations if the FDIC does not believe the OTS has taken appropriate action
to safeguard safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in the
SAIF and in the BIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such rates if such target
level has been met. The FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments vary based on the risk
the institution poses to its deposit insurance fund. The risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Prior to September 1996, the SAIF's ratio of reserves to insured
deposits was significantly below the level required by law, while the BIF's
ratio was above the required level. As a result, institutions with SAIF-insured
deposits were paying higher deposit insurance assessments than institutions with
BIF-insured deposits. Federal legislation providing for the recapitalization of
the SAIF became effective in September 1996 and included a special assessment of
$.657 per $100 of SAIF-insured deposits held at March 31, 1995. Peoples Federal
had approximately $65.5 million in deposits at March 31, 1995, and paid a
special assessment of $427,000.
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Federal Reserve Requirements
Effective December 16, 1997, FRB regulations require savings
associations to maintain reserves of 3% of net transaction accounts (primarily
NOW accounts) up to $47.8 million (subject to an exemption of up to $4.7
million), and of 10% of net transaction accounts in excess of $47.8 million. At
September 30, 1997, Peoples Federal was in compliance with the reserve
requirements then in effect and also with the new requirements.
Federal Home Loan Banks
The Federal Home Loan Banks provide credit to their members in the form
of advances. Peoples Federal is a member of the FHLB of Cincinnati and must
maintain an investment in the capital stock of the FHLB of Cincinnati in an
amount equal to the greater of 1.0% of the aggregate outstanding principal
amount of Peoples Federal's residential mortgage loans, home purchase contracts
and similar obligations at the beginning of each year, or 5% of its advances
from the FHLB of Cincinnati. Peoples Federal was in compliance with this
requirement with an investment in stock of the FHLB of Cincinnati of $802,000 at
September 30, 1997.
FHLB advances to member institutions who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets or (ii) 20
times the member's investment in FHLB stock. At September 30, 1997, Peoples
Federal's maximum limit on advances was approximately $16.0 million. The
granting of advances is also subject to the FHLB's collateral and credit
underwriting guidelines.
Upon the origination or renewal of a loan or advance, the FHLB is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully-disbursed, whole first mortgage loans
on improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the United States
Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable to
the FHLB, if such collateral has a readily ascertainable value and the FHLB can
perfect its security interest in the collateral.
The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by the FHLB must be made only to provide funds for
residential housing finance.
TAXATION
Federal Taxation
PFC and Peoples Federal are both subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, PFC and Peoples Federal may be subject to the alternative minimum
tax which is imposed at a minimum tax rate of 20% on "alternative minimum
taxable income" (which is the sum of a corporation's regular taxable income,
with certain adjustments, and tax preference items), less any available
exemption. Such tax preference items include interest on certain tax-exempt
bonds issued after August 7, 1986. In addition, 75% of the amount by which a
corporation's "adjusted current earnings" exceeds its alternative minimum
taxable income computed without regard to this preference item and prior to
reduction by net operating losses, is included in alternative minimum taxable
income. Net operating losses can offset no more than 90% of alternative minimum
taxable income. The alternative minimum tax is imposed to the extent it exceeds
the corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. However, the
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5,000,000 or less for the three tax years ending with its first tax
year beginning after December 31, 1996. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period
does not exceed $7,500,000. In determining if a corporation meets this
requirement, the first year that it achieved small corporation status is not
taken into consideration.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as Peoples Federal, were allowed deductions for bad debts
under methods more
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favorable than those granted to other taxpayers. Qualified thrift institutions
could compute deductions for bad debts using either the specific charge-off
method of Section 166 of the Code or one of two reserve methods of Section 593
of the Code. The reserve methods under Section 593 of the Code permitted a
thrift institution annually to elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions, or
(ii) the "experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the "experience" method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans either under the experience method or the
percentage of taxable income method. For tax years 1995, 1994, and 1993, Peoples
Federal used the percentage of taxable income method.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Peoples Federal, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
and its reserve for losses on nonqualifying loans as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the greater of the
balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would
have been at the close of its last year beginning before January 1, 1996, had
the thrift always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by Peoples Federal to PFC is deemed paid out of its
pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and
the gross income of Peoples Federal for tax purposes would be increased by the
amount which, when reduced by the income tax, if any, attributable to the
inclusion of such amount in its gross income, equals the amount deemed paid out
of the pre-1988 reserves. As of September 30, 1997, the pre-1988 reserves of
Peoples Federal for tax purposes totaled approximately $1.8 million. Peoples
Federal believes it had approximately $5.6 million of accumulated earnings and
profits for tax purposes as of September 30, 1997, which would be available for
dividend distributions, provided regulatory restrictions applicable to the
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payment of dividends are met. No representation can be made as to whether
Peoples Federal will have current or accumulated earnings and profits in
subsequent years.
The tax returns of Peoples Federal have been audited or closed without
audit through fiscal year 1993. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Peoples Federal.
Ohio Taxation
PFC is subject to the Ohio corporation franchise tax, which, as applied
to PFC, 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. For tax years beginning after December 31, 1998, the rate of
tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable
income and 8.5% of computed Ohio taxable income in excess of $50,000 or (ii)
..400% times taxable net worth.
A special litter tax is also applicable to all corporations, including
PFC, 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 .11% of the first $50,000 of computed Ohio taxable income and
..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 .014% times taxable
net worth.
Peoples Federal 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 the
book net worth of Peoples Federal determined in accordance with generally
accepted accounting principles. For tax year 1999, however, the franchise tax on
financial institutions will be 1.4% of the book net worth and for tax year 2000
and years thereafter the tax will be 1.3% of the book net worth. As a "financial
institution," Peoples Federal is not subject to any tax based upon net income or
net profits imposed by the State of Ohio.
Item 2. Description of Property
The following table sets forth certain information at September 30,
1997, regarding the properties on which the main office, the branch office and
the lending office of Peoples Federal are located:
<TABLE>
<CAPTION>
Owned Date Square Net
Location or leased acquired footage book value(1) Deposits
<S> <C> <C> <C> <C> <C>
Main Office:
211 Lincoln Way East
Massillon, Ohio 44646 Owned 1958 7,200 $673,000 $52.7 million
Branch Office:
2312 Lincoln Way N.W.
Massillon, Ohio 44647 Owned 1978 1,400 $438,000 $13.0 million
Lending Office:
4344 Metro Circle, N.W.
North Canton, Ohio 44720 Leased(2) N/A - $19,000 (3) N/A
- -----------------------------
<FN>
(1) At September 30, 1997, Peoples Federal's office premises and equipment had
a total net book value of $1.4 million. For additional information
regarding Peoples Federal's office premises and equipment, see Notes A and
E of Notes to Consolidated Financial Statements.
(2) The lease is for a term of three years, expiring in 1999, with a three-year
renewal option.
(3) Consists of leasehold improvements.
</FN>
</TABLE>
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<PAGE>
Item 3. Legal Proceedings
Neither PFC nor Peoples Federal is presently involved in any legal
proceedings of a material nature. From time to time, Peoples Federal is a party
to legal proceedings incidental to its business to enforce its security interest
in collateral pledged to secure loans made by Peoples Federal.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
There were 1,416,612 common shares of PFC outstanding on December 5,
1997, held of record by approximately 316 shareholders. Price information with
respect to PFC's common shares is quoted on The Nasdaq SmallCap Market
("Nasdaq") under the symbol "PFFC." The high and low bids for the common shares
of PFC, as quoted by Nasdaq, and dividends declared per common share between
September 12, 1996, the date of completion of the Conversion, and September 30,
1997, are set forth below.
Such amounts do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
09/97 06/97 03/97 12/96 09/96
<S> <C> <C> <C> <C> <C>
Dividends Declared $5.125(1) $0.125 $0.075 $ - $ -
High Bid During Quarter 18.500 15.250 15.500 13.00 12.750
Low Bid During Quarter 15.250 14.625 13.000 11.50 10.875(2)
- ----------------------
<FN>
(1) Management expects that approximately $4.70 of such distribution will
constitute a return of capital.
(2) Common Shares of PFC were sold in connection with the Conversion for $10.00
per share.
</FN>
</TABLE>
The income of PFC consists of dividends which may periodically be
declared and paid by the Board of Directors of Peoples Federal on the common
shares of Peoples Federal held by PFC and earnings on the $7.1 million in net
proceeds retained by PFC from the sale of PFC's common shares in connection with
the Conversion. In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings associations.
Under OTS regulations applicable to converted savings associations,
Peoples Federal is not permitted to pay a cash dividend on its common shares if
the regulatory capital of Peoples Federal would, as a result of the payment of
such dividend, be reduced below the amount required for the liquidation account
(which was established for the purpose of granting a limited priority claim on
the assets of Peoples Federal, in the event of a complete liquidation, to those
members of Peoples Federal before the Conversion who maintain a savings account
at Peoples Federal after the Conversion) or applicable regulatory capital
requirements prescribed by the OTS.
OTS regulations applicable to all savings associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital to
assets ratio exceeded its required capital to assets ratio at the beginning of
the calendar year, or (2) 75% of its net earnings for the most recent
four-quarter period. Savings associations with total capital in excess of the
capital requirements that have been notified by the OTS that they are in need of
more than normal supervision will be subject to restrictions on dividends. A
savings association that fails
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<PAGE>
to meet current minimum capital requirements is prohibited from making any
capital distributions without prior approval of the OTS. Peoples Federal
currently meets all of its regulatory capital requirements and, unless the OTS
determines that Peoples Federal is an institution requiring more than normal
supervision, Peoples Federal may pay dividends in accordance with the foregoing
provisions of the OTS regulations.
Item 6. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
PFC was incorporated for the purpose of owning all of the outstanding shares of
Peoples Federal after the Conversion. As a result, the discussion that follows
focuses on Peoples Federal's financial condition and results of operations. The
following discussion and analysis of the financial condition and results of
operations of PFC and Peoples Federal should be read in conjunction with and
with reference to the consolidated financial statements and the notes thereto,
included in the Annual Report.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of Peoples Federal, and
PFC'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 changes in interest rates in the nation and PFC's primary market
area.
Without limiting the generality of the foregoing, some of the statements in the
referenced sections of this discussion and analysis are forward looking and are,
therefore, subject to such risks and uncertainties:
1. Management's determination of the amount of the allowance for loan
losses set forth under "Financial Condition," "Comparison of Results
of Operations for the Years Ended September 30, 1997 and 1996" and
"Comparison of Results of Operations for the Years Ended September 30,
1996 and 1995;"
2. Management's analysis of interest rate risk set forth under "Asset and
Liability Management;"
3. Management's discussion of the liquidity of Peoples Federal's assets
and the regulatory capital of Peoples Federal set forth under
"Liquidity and Capital Resources;" and
4. The discussion of the anticipated effect of legislation which may be
enacted set forth under "Charter Unification Legislation."
Discussion of Changes in Financial Condition from September 30, 1996 to
September 30, 1997
PFC's consolidated assets totaled $85.2 million at September 30, 1997, a
decrease of $4.1 million, or 4.5%, from the $89.3 million total at September 30,
1996. The principal changes in the composition of assets during the year ended
September 30, 1997, consisted of an increase in loans receivable, offset by
decreases in interest-bearing deposits in other financial institutions and
investment and mortgage-backed securities. This decline in assets resulted
primarily from decreases in shareholders' equity due to a $7.1 million special
distribution paid to shareholders, a $1.3 million purchase of PFC shares, a
$919,000 purchase of PFC shares for stock benefit plans, payment of cash
dividends of $482,000, partially offset by net earnings of $806,000, by
increases of $3.0 million in notes payable and by $1.3 million in deposits.
32
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussions of Changes in Financial Condition from September 30, 1996 to
September 30, 1997 (continued)
Interest-bearing deposits in other financial institutions totaled $4.4 million
at September 30, 1997, a decrease of $7.8 million. Investment securities and
mortgage-backed securities totaled $20.8 million at September 30, 1997, as
compared to $29.8 million at September 30, 1996, a decrease of $9.0 million, or
30.2%. The decrease in interest-bearing deposits in other financial
institutions, investment securities and mortgage-backed securities was
principally used to fund the growth in the loan portfolio and the aforementioned
shareholders' equity transactions. Investment securities decreased due to sale
of U.S. Government agency obligations, maturities, principally of FHLB
certificates of deposit, and principal repayments totaling $5.5 million, which
were partially offset by purchases of $3.5 million. Mortgage-backed securities
decreased due to sales and principal repayments totaling $11.1 million,
partially offset by purchases of $3.5 million.
Loans receivable totaled $56.6 million at September 30, 1997, an increase of
$12.4 million, or 28.1% over the $44.2 million total at September 30, 1996. The
increase was comprised of a $12.3 million increase in one- to four-family, home
equity and construction loans, including a net decrease in undisbursed loans in
process of $963,000. Multi-family and nonresidential real estate loans decreased
by $819,000 while consumer and other loans decreased by $11,000. Loan
disbursements of $28.7 million were partially offset by principal repayments of
$16.3 million during the year ended September 30, 1997. Fiscal 1996 loan
disbursements totaled $15.1 million and principal repayments amounted to $8.8
million.
Peoples Federal's allowance for loan losses totaled $145,000 at September 30,
1997, compared to the fiscal 1996 allowance of $193,000. The allowance for loan
losses was increased in fiscal 1996 due primarily to three nonperforming loans
with total unpaid balances of $572,000. The properties securing these loans were
placed in foreclosure in fiscal 1996, and sold in October 1996, with Peoples
Federal receiving full repayment in December 1996. At September 30, 1997, the
level of nonperforming loans had declined to $2,000. At that date, the allowance
for loan losses represented .2% of total loans and 7,250% of nonperforming
loans.
Management believes that the allowance for loan loss level at September 30, 1997
is appropriate based on the available facts and circumstances. There can be no
assurance, however, that the allowance will be adequate to absorb actual loan
losses during future periods. The amount of loan loss experienced may increase
due to growth in the loan portfolio generally; increases in the amount of the
portfolio consisting of higher risk loan types, such as nonresidential real
estate loans, construction loans and consumer and other loans; economic changes
locally or nationally, including changes in interest rates, employment rates and
property values; and unexpected problems with specific loans. If additions to
the allowance are necessary in future periods, such additions would reduce PFC's
net earnings.
Deposits totaled $65.7 million at September 30, 1997, as compared to $64.4
million at September 30, 1996, an increase of $1.3 million, or 2.0%. During the
first three fiscal quarters, deposit levels declined as a result of management's
continuing efforts to maintain cost of funds at acceptable levels. These
declines were offset during the fourth quarter by significant deposits received
from credit unions.
33
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussions of Changes in Financial Condition from September 30, 1996 to
September 30, 1997 (continued)
Notes payable at September 30, 1997, totaled $3.0 million. The funds obtained
from the borrowing were used to partially fund the return of capital
distribution and were repaid to the lender in October 1997. PFC had no
borrowings at September 30, 1996.
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996
General
The operating results of PFC are affected by general economic conditions, the
monetary and fiscal policies of U. S. Government agencies and the regulatory
policies of agencies which regulate financial institutions. The net earnings of
PFC and Peoples Federal are primarily dependent on net interest income, which is
the difference between interest earned on loans and other interest-earning
assets and interest expense incurred on deposits and borrowed funds.
Net earnings totaled $806,000 for the year ended September 30, 1997, an increase
of $729,000, from net earnings of $77,000 recorded for fiscal 1996. The increase
resulted primarily from an increase in net interest income of $965,000, a
decrease of $93,000 in the provision for losses on loans, an increase in other
income of $28,000 and a decrease in general, administrative and other expense of
$58,000, including the effects of the $428,000 charge recorded in fiscal 1996
related to the Savings Association Insurance Fund ("SAIF") recapitalization
assessment, which were partially offset by an increase of $415,000 in the
provision for federal income taxes.
Net Interest Income
Total interest income for the year ended September 30, 1997, totaled $6.3
million, an increase of $621,000, or 11.0%, over the $5.6 million recorded in
fiscal 1996. Interest income from loans increased $691,000, or 20.9%. The
increase resulted primarily from a $9.9 million increase in the weighted-average
outstanding balance of loans receivable, partially offset by a 26 basis point
(100 basis points equals one percent) decrease in weighted-average yield to
8.05% in 1997, from 8.31% in 1996. Interest income on mortgage-backed
securities, investment securities and interest-bearing deposits decreased by
$70,000, or 3.0%. The decrease resulted primarily from a $2.4 million decrease
in the average balance of such assets and a 54 basis point decrease in
weighted-average yield on investment securities, partially offset by a 108 basis
point increase in weighted-average yield on interest earning deposits and a 21
basis point increase in weighted average yield on mortgage-backed securities.
Interest expense on deposits for the year ended September 30, 1997, totaled $3.0
million, a decrease of $348,000 from the $3.4 million recorded in fiscal 1996.
This decrease was due primarily to a decrease in the weighted-average
outstanding balance of deposits totaling $4.8 million, and a decrease in the
weighted-average interest rate paid of 17 basis points, to 4.81% in 1997, from
4.98% in 1996.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $965,000, or 43.1%, to $3.2 million for the
year ended September 30, 1997. The interest rate spread increased to 2.52% in
fiscal 1997, from 2.25% in fiscal 1996, while the net interest margin increased
to 3.75% in fiscal 1997, from 2.88% in fiscal 1996.
34
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996 (continued)
Provision for Losses on Loans
The provision for losses on loans totaled $12,000 for the year ended September
30, 1997, a decrease of $93,000, or 88.6%, from the $105,000 provision recorded
in fiscal 1996. The decrease was primarily due to an additional provision of
$100,000 recorded in the year ended September 30, 1996, because of an increase
in delinquent loans during that year. These loans were partially repaid in
fiscal 1996 and paid in full in December 1996. Management believes that the
continuation of periodic increases in the allowance for loan losses based upon
the inherent risk of loss related to loans, the increase in the outstanding
portfolio balance, current and anticipated economic conditions as measured by
leading economic indicators and local employment data, the level of
nonperforming loans and past loss experience is prudent. There can be no
assurance that the loan loss allowance will be adequate to cover losses on
nonperforming assets in the future.
Other Income
Other income totaled $52,000 for the year ended September 30, 1997, compared to
$24,000 for fiscal 1996. The increase resulted primarily from a net gain on sale
of securities during 1997. Mortgage-backed and investment securities with a book
value of $10.0 million were sold during fiscal 1997. Gains of $41,000 and losses
of $26,000 were realized. No securities were sold in fiscal 1996. Other
operating income increased by $13,000, consisting primarily of increases in
service fees, safe deposit box rentals, service charges on negotiable order of
withdrawal ("NOW") accounts and mortgage loan late charges.
General, Administrative and Other Expense
General, administrative and other expense totaled $2.0 million for the year
ended September 30, 1997, compared to $2.1 million for fiscal 1996, a decrease
of $58,000, or 2.8%. Federal deposit insurance premiums decreased by $520,000. A
one-time assessment to recapitalize the SAIF totaling $428,000 was recorded in
September 1996, while the $92,000 remainder of the decrease was due to lower
quarterly premium rates in fiscal 1997.
Employee compensation and benefits increased by $267,000, or 33.8% in fiscal
1997, compared to fiscal 1996. Recording the first full year's cost of stock
benefit plans increased expense by $248,000. Salaries and wages increased by
$48,000 due to normal merit increases and additional hours worked. Cost of the
401(k) benefit plan decreased by $37,000 as the Corporation's contributions were
frozen during the first half of fiscal 1997.
Other expense increases during fiscal 1997 were $105,000 in franchise taxes,
based on increased capital from the Conversion and $84,000 in other operating
expenses, primarily from costs of compliance reporting requirements of a
publicly traded corporation, modification of an employee benefit plan and
operation of PFC.
35
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996 (continued)
Federal Income Taxes
The provision for federal income taxes totaled $436,000 for the year ended
September 30, 1997, an increase of $415,000 over the $21,000 provision recorded
in fiscal 1996. The increase was primarily due to the increase in net earnings
before taxes of $1.1 million. PFC's effective tax rates were 35.1% for fiscal
1997 and 21.4% for fiscal 1996.
Comparison of Results of Operations for the Years Ended September 30, 1996 and
1995
General
Net earnings totaled $77,000 for the year ended September 30, 1996, a decrease
of $317,000, or 80.5%, from net earnings of $394,000 recorded for fiscal 1995.
The decrease resulted primarily from an increase of $405,000 in general,
administrative and other expense and an increase of $93,000 in the provision for
loan losses, which were partially offset by an increase of $24,000 in net
interest income and a decrease of $156,000 in the provision for federal income
taxes. The increase in general, administrative and other expense was due
primarily to a one-time deposit insurance assessment.
Net Interest Income
Total interest income for the year ended September 30, 1996, totaled $5.6
million, an increase of $273,000, or 5.1%, over the $5.4 million recorded in
fiscal 1995. Interest income from loans increased $206,000, or 6.6%. The
increase resulted primarily from a $2.8 million increase in the weighted-average
outstanding balance of loans receivable, partially offset by an 8 basis point
decrease in weighted-average yield to 8.31% in 1996, from 8.39% in 1995.
Interest income on mortgage-backed securities, investment securities and
interest-bearing deposits increased by $67,000, or 3.0%. The increase resulted
primarily from a $1.4 million increase in the average outstanding balance of
such assets and a 44 basis point increase in average yield on mortgage-backed
securities, partially offset by a 146 basis point decrease in the
weighted-average yield on interest-bearing deposits and a 12 basis point
decrease in weighted-average yield on investment securities. The increase in
interest-earning assets reflects use of the Conversion proceeds to purchase U.
S. Government agency securities and mortgage-backed securities and to increase
the loan portfolio and interest-earning deposits.
Interest expense on deposits for the year ended September 30, 1996, totaled $3.4
million, an increase of $249,000 over the $3.1 million recorded in fiscal 1995.
This increase was due to an increase in the weighted-average outstanding balance
of deposits totaling $2.7 million, and a increase in the weighted-average
interest rate paid to 4.98% in 1996, from 4.81% in 1995.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by approximately $24,000, or 1.1%, to $2.2 million
for the year ended September 30, 1996. The interest rate spread decreased to
2.25% in 1996, from 2.46% in 1995, while the net interest margin decreased to
2.88% in 1996, from 3.01% in 1995.
36
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended September 30, 1996 and
1995 (continued)
Provision for Losses on Loans
The provision for losses on loans totaled $105,000 for the year ended September
30, 1996. As stated previously, the increase was primarily due to the fact that
90 day delinquent loans had increased by $681,000 at December 31, 1995. One
delinquent loan in the amount of $62,000 was repaid in May 1996, and properties
securing $572,000 of delinquent loans were subsequently placed in foreclosure in
April 1996 and sold at a sheriff's sale in October 1996. Management believes
that the continuation of periodic increases in the allowance for loan losses
based upon the inherent risk of loss related to loans, the increase in the
outstanding portfolio balance, current and anticipated economic conditions as
measured by leading economic indicators and local employment data, the level of
nonperforming loans and past loss experience is prudent. There can be no
assurance that the loan loss allowance will be adequate to cover losses on
nonperforming assets in the future.
Other Income
Other operating income totaled $24,000 for the year ended September 30, 1996,
compared to $23,000 for fiscal 1995. Such income consisted primarily of service
fees, safe deposit box rentals, service charges on negotiable order of
withdrawal ("NOW") accounts and mortgage loan late charges.
General, Administrative and Other Expense
General, administrative and other expense totaled $2.1 million for the year
ended September 30, 1996, compared to $1.7 million for fiscal 1995, an increase
of $405,000, or 24.4%. The rise in administrative costs primarily related to
increases of $431,000 in federal deposit insurance premiums, a $108,000, or
15.8%, increase in employee compensation and benefits and a $35,000, or 18.1%,
increase in occupancy and equipment. The increase in deposit insurance premiums
was due primarily to a special assessment by the FDIC pursuant to legislation
enacted to recapitalize the SAIF of the FDIC. The SAIF's capital was below the
level required by law because a significant portion of the assessments paid into
the SAIF by thrifts, like Peoples Federal, were used to pay the cost of prior
thrift failures. The legislation called for a one-time assessment of $.657 per
$100 of SAIF insured deposits held as of March 31, 1995, resulting in a $428,000
charge recorded by PFC at September 30, 1996.
37
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Years Ended September 30, 1996 and
1995 (continued)
General, Administrative and Other Expense (continued)
The increase in employee compensation and benefits resulted primarily from the
hiring of new employees, as well as normal merit increases, a change in the
formula used to compute Peoples Federal's contribution to its 401(k) retirement
plan and expense related to the PFC Employee Stock Ownership Plan. Occupancy and
equipment increased due to costs related to Peoples Federal's new branch office.
Offsetting reductions in general, administrative and other expenses were
evidenced by declines of $39,000, or 55.7%, in advertising, $28,000, or 27.2%,
in data processing, $18,000, or 12.9% in franchise taxes and $84,000, or 26.3%,
in other operating. Advertising decreased as outdoor and certain media and
printing costs incurred in fiscal 1995 were not repeated in fiscal 1996, while
data processing costs were higher in fiscal 1995 due to contract cancellation
fees. The decline in other operating expenses generally reflects management's
continuing efforts to control operating costs.
Federal Income Taxes
The provision for federal income taxes totaled $21,000 for the year ended
September 30, 1996, a decline of $156,000, or 88.1%, from the $177,000 provision
recorded in fiscal 1995. The decrease was primarily due to the decrease in net
earnings before taxes of $473,000, or 82.8%. PFC's effective tax rates were
21.4% for fiscal 1996 and 31.0% for fiscal 1995.
38
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the financial statement date. Companies are, however, allowed to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting, which generally does not result in compensation
expense recognition for most plans. Companies that elect to remain with the
existing accounting are required to disclose in a footnote to the financial
statements pro forma net earnings and, if presented, earnings per share, as if
SFAS No. 123 had been adopted. The accounting requirements of SFAS No. 123 are
effective for transactions entered into during fiscal years that begin after
December 15, 1995, although companies are required to disclose information for
awards granted in their first fiscal year beginning after December 15, 1994.
Management has determined that PFC will continue to account for stock-based
compensation pursuant to Accounting Principles Board Opinion No. 25, and
therefore the disclosure provisions of SFAS No. 123 will have no effect on its
consolidated financial position or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities", that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing assets
and liabilities are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are subject to subsequent
assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet only if
the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
39
<PAGE>
Peoples Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements (continued)
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1997, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on PFC's consolidated financial position or results of
operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share is computed without including
potential common shares, i.e., no dilutive effect. Diluted earnings per share is
computed taking into consideration common shares outstanding and potentially
dilutive common shares, including options, warrants, convertible securities and
contingent stock agreements. SFAS No. 128 is effective for periods ending after
December 15, 1997. Early application is not permitted. Based upon the provisions
of SFAS No. 128, PFC's basic and diluted earnings per share for the fiscal year
ended September 30, 1997 would have been $.57.
In February 1997, the FASB issued SFAS No. 129, "Disclosures of Information
about Capital Structure." SFAS No. 129 consolidated existing accounting guidance
relating to disclosure about a company's capital structure. SFAS No. 129 is
effective for financial statements for periods ending after December 15, 1997.
SFAS No. 129 is not expected to have a material impact on the Corporation's
financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires entities presenting a complete set of financial statements to
include details of comprehensive income that arise in the reporting period.
Comprehensive income consists of net earnings or loss for the current period and
other comprehensive income, expense, gains and losses that bypass the income
statement and are reported in a separate component of equity, i.e., unrealized
gains and losses on certain investment securities. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Management does not believe that
adoption of SFAS No. 130 will have a material effect on PFC's consolidated
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 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 establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS 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. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on the
Corporation's financial statements.
40
<PAGE>
Item 7. Financial Statements
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Peoples Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Peoples Financial Corporation as of September 30, 1997 and 1996, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for the years then ended. 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. The
consolidated financial statements as of and for the year ended September 30,
1995, were audited by other auditors, whose report thereon dated October 30,
1995, expressed an unqualified opinion on those statements and included an
explanatory paragraph relative to a change in the method of accounting for
certain debt and equity securities.
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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Peoples
Financial Corporation as of September 30, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the years then ended,
in conformity with generally accepted accounting principles.
Cincinnati, Ohio
November 4, 1997
41
<PAGE>
Peoples Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 343 $ 276
Interest-bearing deposits in other financial institutions 4,440 12,257
------- ------
Cash and cash equivalents 4,783 12,533
Investment securities designated as available
for sale - at market 3,291 5,087
Investment securities - at cost, approximate market value
of $2,025 and $1,712 as of September 30, 1997 and 1996 1,973 1,688
Mortgage-backed securities designated as available for
sale - at market 8,657 14,113
Mortgage-backed securities - at amortized cost,
approximate market value of $7,044 and $9,011
as of September 30, 1997 and 1996 6,841 8,875
Loans receivable - net 56,642 44,206
Office premises and equipment - at depreciated cost 1,422 1,515
Stock in Federal Home Loan Bank - at cost 802 748
Accrued interest receivable 316 397
Prepaid expenses and other assets 479 95
-------- ---------
Total assets $85,206 $89,257
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $65,660 $64,355
Note payable 3,000 -
Other liabilities 326 667
Accrued federal income taxes 10 32
Deferred federal income taxes 884 497
-------- --------
Total liabilities 69,880 65,551
Commitments - -
Shareholders' equity
Preferred stock - authorized 1,000,000 shares without par
value; no shares issued - -
Common stock - authorized 6,000,000 shares without par or
stated value; 1,491,012 shares issued - -
Additional paid-in capital 7,165 14,203
Retained earnings - restricted 9,779 9,455
Unrealized gains on securities designated as available
for sale, net of related tax effects 1,083 645
Shares acquired by stock benefit plans (1,416) (597)
Less: 74,400 treasury shares, at cost (1,285) -
------- ------
Total shareholders' equity 15,326 23,706
------ ------
Total liabilities and shareholders' equity $85,206 $89,257
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
42
<PAGE>
Peoples Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest income
Loans $4,000 $3,309 $3,103
Mortgage-backed securities 1,483 1,569 1,466
Investment securities 448 435 672
Interest-bearing deposits and other 322 319 118
------ ------ ------
Total interest income 6,253 5,632 5,359
Interest expense
Deposits 3,043 3,391 3,142
Borrowings 4 - -
-------- ----- ----
Total interest expense 3,047 3,391 3,142
----- ----- -----
Net interest income 3,206 2,241 2,217
Provision for losses on loans 12 105 12
------- ------ -------
Net interest income after
provision for losses on loans 3,194 2,136 2,205
Other income
Gain on sale of investment and mortgage-backed
securities designated as available for sale 15 - -
Other operating 37 24 23
------- ------- -------
Total other income 52 24 23
General, administrative and other expense
Employee compensation and benefits 1,057 790 682
Occupancy and equipment 228 228 193
Franchise taxes 227 122 140
Federal deposit insurance premiums 61 581 150
Data processing 75 75 103
Advertising 37 31 70
Other operating 319 235 319
------ ------ ------
Total general, administrative
and other expense 2,004 2,062 1,657
----- ----- -----
Earnings before income taxes 1,242 98 571
Federal income taxes
Current 275 108 150
Deferred 161 (87) 27
------ ------- -------
Total federal income taxes 436 21 177
------ ------- ------
NET EARNINGS $ 806 $ 77 $ 394
====== ======= ======
EARNINGS PER SHARE $.57 N/A N/A
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
43
<PAGE>
Peoples Financial Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1997, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Shares gains on
acquired securities
Additional by stock Treasury designated
Common paid-in benefit shares, as available Retained
stock capital plans at cost for sale earnings Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1994 $- $ - $ - $ - $ - $8,984 $ 8,984
Designation of securities as available for sale upon
adoption of SFAS No. 115, net of related tax effects - - - - 382 - 382
Net earnings for the year ended September 30, 1995 - - - - - 394 394
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - - 122 - 122
-- ------- --- ------ ------ ----- --------
Balance at September 30, 1995 - - - - 504 9,378 9,882
Reorganization to common stock form and issuance
of shares in connection therewith - net - 14,203 (597) - - - 13,606
Net earnings for the year ended September 30, 1996 - - - - - 77 77
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - - 141 - 141
-- ------- --- ------ ------ ----- --------
Balance at September 30, 1996 - 14,203 (597) - 645 9,455 23,706
Return of capital distribution to shareholders - (7,083) - - - - (7,083)
Purchase of shares for stock benefit plan - - (919) - - - (919)
Purchase of treasury shares - - - (1,285) - - (1,285)
Amortization expense of stock benefit plan - 45 100 - - - 145
Dividends of $.325 per share - - - - - (482) (482)
Net earnings for the year ended September 30, 1997 - - - - - 806 806
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - - 438 - 438
-- ------- ------ ------ ------ ----- --------
Balance at September 30, 1997 $- $ 7,165 $(1,416) $(1,285) $1,083 $9,779 $15,326
== ======= ====== ====== ===== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
44
<PAGE>
Peoples Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 806 $ 77 $ 394
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts on
investments and mortgage-backed securities - net 36 64 62
Gain on sale of investment and mortgage-backed
securities designated as available for sale (15) - -
Amortization of deferred loan origination (fees) costs (9) 29 18
Depreciation and amortization 102 95 82
Provision for losses on loans 12 105 12
Federal Home Loan Bank stock dividends (54) (62) (32)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 81 (22) (44)
Prepaid expenses and other assets (384) (3) (11)
Other liabilities (201) 345 33
Accrued interest payable 5 3 (8)
Federal income taxes
Current (23) (1) 16
Deferred 161 (87) 27
-------- --------- -------
Net cash provided by operating activities 517 543 549
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities - - (8,160)
Purchase of mortgage-backed securities designated
as available for sale (3,498) (2,243) -
Proceeds from sale of mortgage-backed securities
designated as available for sale 6,501 - -
Principal repayments on mortgage-backed securities 4,616 5,090 4,956
Purchase of investment securities designated as available
for sale (1,500) (3,502) -
Proceeds from sale of investment securities designated
as available for sale 3,499 - -
Purchase of investment securities designated as
held to maturity (2,000) (1,000) (4,246)
Proceeds from maturity of investment securities 1,967 6,770 7,281
Loan principal repayments 16,323 8,805 6,791
Loan disbursements (28,702) (15,125) (7,772)
Purchase of office premises and equipment (9) (67) (111)
---------- --------- ------
Net cash used in investing activities (2,803) (1,272) (1,261)
------- ------- -----
Net cash used in operating and investing
activities (balance carried forward) (2,286) (729) (712)
------- -------- ------
</TABLE>
45
<PAGE>
Peoples Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $ (2,286) $ (729) $ (712)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 1,305 (2,208) 764
Proceeds from note payable 3,000 - -
Return of capital distribution on common stock (7,083) - -
Purchase of treasury shares (1,285) - -
Purchase of shares for stock benefit plans (919) - -
Dividends paid on common stock (482) - -
Net proceeds from the issuance of common stock - 13,606 -
------- ------ ----
Net cash provided by (used in) financing activities (5,464) 11,398 764
------- ------ ------
Net increase (decrease) in cash and cash equivalents (7,750) 10,669 52
Cash and cash equivalents at beginning of year 12,533 1,864 1,812
------ ------- -----
Cash and cash equivalents at end of year $ 4,783 $12,533 $1,864
======= ====== =====
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 298 $ 108 $ 135
======== ======== ======
Interest on deposits and borrowings $ 3,039 $ 3,387 $3,150
======= ======= =====
Supplemental disclosure of noncash investing activities:
Securities transferred to an available for sale classification
in accordance with SFAS No. 115 $ - $14,855 $ 809
======= ====== ======
Unrealized gains on securities designated as
available for sale, net of related tax effects $ 438 $ 141 $ 504
======== ======== ======
</TABLE>
The accompanying notes are an integral part of these statements.
46
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On October 16, 1995, the Board of Directors of Peoples Federal Savings and
Loan Association of Massillon (the Association) adopted a Plan of Conversion
(the Plan) whereby the Association would convert to the stock form of
ownership, followed by the issuance of all of the Association's outstanding
stock to a newly formed holding company, Peoples Financial Corporation (the
Corporation). Pursuant to the Plan, the Corporation offered common shares
for sale to certain depositors of the Association and members of the
community. The conversion was completed on September 12, 1996, and resulted
in the issuance of 1,491,012 common shares of the Corporation which, after
consideration of offering expenses totaling approximately $707,000, and
share purchases by the Employee Stock Ownership Plan (ESOP) totaling
$597,000, resulted in net equity proceeds of $13.6 million. Condensed
financial statements of the Corporation are presented in Note L. Future
references are made either to the Corporation or the Association as
applicable.
The Corporation is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Association. The Association
conducts a general banking business in northeast Ohio which consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and nonresidential purposes.
The Association'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. 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 Association 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.
A summary of significant accounting policies which have been consistently
applied in the preparation of the accompanying consolidated financial
statements follows:
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and the Association, and its wholly-owned subsidiary, Massillon
Community Service Corporation (Massillon) . At September 30, 1997 and 1996,
Massillon had no assets and was inactive. All intercompany balances and
transactions have been eliminated in the accompanying consolidated financial
statements.
47
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities
The Corporation accounts for investments 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 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
shareholders' equity, respectively.
In November 1995, the Financial Accounting Standards Board (the "FASB")
issued a Special Report on Implementation of SFAS No. 115 (the Special
Report), which provided for the reclassification of securities between the
held-to- maturity, available for sale and trading portfolios during a
forty-five day period, without calling into question management's prior
intent with respect to such securities. Management elected to restructure
the Association's securities portfolio pursuant to the Special Report, and
transferred investment and mortgage-backed securities totaling $14.9
million from the held-to-maturity portfolio to an available for sale
classification. At September 30, 1997 and 1996, the Corporation's
shareholders' equity reflected a net unrealized gain on securities
designated as available for sale of $1.1 million and $645,000,
respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. Loans Receivable
Loans receivable are stated at the principal balance outstanding, adjusted
for deferred loan origination fees and costs 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.
48
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Loan Origination Fees
The Association accounts for loan origination fees and costs 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. Fees received for loan
commitments that are expected to be drawn upon, based on the Association'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 Loan Losses
It is the Association's policy to provide valuation allowances for estimated
losses on loans based on past loan loss experience, changes in the
composition of the loan portfolio, 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
Association records a 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).
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". This Statement, which was amended by SFAS No. 118 as
to certain income recognition and financial statement disclosure provisions,
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 if the loan is collateral dependent. The Association
adopted SFAS No. 114 effective October 1, 1995, without material effect on
consolidated financial condition or results of operations.
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 Association
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
Association's investment in nonresidential and multi-family residential real
estate loans, and its evaluation of impairment thereof, such loans are
generally collateral dependent and, as a result, are carried as a practical
expedient at the lower of cost or fair value.
49
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
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, 1997 and 1996, the Association had no loans that would be
defined as impaired under SFAS No. 114.
6. 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.
7. 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 method over
the useful lives of the assets, estimated to be fifty years for the
building, ten to thirty years for building improvements and five to ten
years for furniture and equipment. An accelerated method is used for tax
reporting purposes.
8. Income Taxes
The Corporation accounts for federal income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 established financial accounting
and reporting standards for the effects of income taxes that result from the
Corporation's activities within the current and previous years. In
accordance with 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 temporary differences between the tax basis of an asset or
liability and its reported amount in the consolidated financial statements
that will result in net 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.
50
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Income Taxes (continued)
Deferral of income taxes results primarily from the different methods of
accounting for deferred loan origination fees and costs, Federal Home Loan
Bank stock dividends, general loan loss allowances, percentage of earnings
bad debt deductions and the Savings Association Insurance Fund (SAIF)
special assessment discussed in Note K. Additional temporary differences
result from depreciation computed using accelerated methods for tax
purposes.
9. Benefit Plans
In conjunction with its reorganization to stock form, the Corporation
implemented an Employee Stock Ownership Plan (ESOP). The ESOP provides
retirement benefits for substantially all employees who have completed one
year of service and have attained the age of 21. 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 the measure of compensation expense recorded by employers to equal
the fair value of ESOP shares allocated to participants during a fiscal
year. Expense recognized related to the ESOP totaled approximately $203,000
and $35,000 for the fiscal years ended September 30, 1997 and 1996,
respectively.
The Association also provides retirement benefits through contributions to a
discretionary 401(k) plan. Expense under the plan totaled $21,000, $58,000
and $37,000 for fiscal 1997, 1996 and 1995, respectively. Due to
contributions made to the ESOP, the Company did not make matching
contributions to the 401(k) plan during fiscal 1997.
The Corporation also has a Recognition and Retention Plan ("RRP").
Subsequent to the common stock offering the RRP purchased 59,640 shares of
the Corporation's common stock in the open market. During fiscal 1997, a
total of 47,712 shares available under the RRP were granted to officers and
directors of the Corporation effective upon receipt of shareholder approval
of the RRP, leaving 11,928 shares available for allocation. Common stock
granted under the RRP vests ratably over a five year period, commencing with
the date of grant. A provision of $80,000 related to the RRP was charged to
expense for the year ended September 30, 1997.
10. Earnings Per Share and Capital Distributions
Earnings per share for the year ended September 30, 1997 is based upon the
weighted-average shares outstanding during the year plus those stock options
that are dilutive, less shares in the ESOP that are unallocated and not
committed to be released. Weighted-average common shares deemed outstanding
totaled 1,420,414 for the year ended September 30, 1997. The provisions of
Accounting Principles Board Opinion No. 15, "Earnings Per Share," are not
applicable for fiscal 1996 and 1995, as the Corporation completed its
conversion to stock form in September 1996. There was no dilutive effect
attendant to the Corporation's stock option plan. During fiscal 1997, the
Corporation paid capital distributions with respect to its common stock of
$5.32 per share. Of this amount, $5.00 per share was deemed by management to
constitute a return of capital.
51
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. 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.
12. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of 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, 1997 and 1996:
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.
Federal Home Loan Bank stock: The carrying amount presented in
the consolidated statements of financial condition is deemed
to approximate fair value.
52
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
Deposits: The fair value of NOW accounts, passbook accounts, and
money market demand 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.
Borrowings: The fair value of the 90 day unsecured note payable
is deemed to approximate the carrying value.
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. The difference between the fair value and notional amount
of outstanding loan commitments at September 30, 1997 and 1996,
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>
1997 1996
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 4,783 $ 4,783 $12,533 $12,533
Investment securities 5,264 5,316 6,775 6,799
Mortgage-backed securities 15,498 15,701 22,988 23,124
Loans receivable 56,642 58,315 44,206 44,319
Federal Home Loan Bank stock 802 802 748 748
-------- -------- -------- --------
$82,989 $84,917 $87,250 $87,523
====== ====== ====== ======
Financial liabilities
Deposits $65,660 $65,905 $64,355 $64,526
Borrowings 3,000 3,000 - -
------- ------- ------- ------
$68,660 $68,905 $64,355 $64,526
====== ====== ====== ======
</TABLE>
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
consolidated financial statement presentation.
53
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair value of investment securities at September 30, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
Municipal obligations $ 973 $ 57 $ 5 $1,025
Federal Home Loan Bank obligations 1,000 - - 1,000
----- ----- -- -----
Total investments held to maturity 1,973 57 5 2,025
Available for sale:
U.S. Government obligations 1,500 - 4 1,496
FHLMC stock 46 1,603 - 1,649
Automobile loan pass-through certificates 146 - - 146
------ ----- -- ------
Total investments available for sale 1,692 1,603 4 3,291
----- ----- ----- -----
Total investment securities $3,665 $1,660 $ 9 $5,316
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
Municipal obligations $ 988 $ 29 $ 6 $1,011
U.S. Government agency obligations 200 1 - 201
Federal Home Loan Bank obligations 500 - - 500
------ ----- -- ------
Total investments held to maturity 1,688 30 6 1,712
Available for sale:
U.S. Government obligations 3,502 - - 3,502
FHLMC stock 46 1,096 - 1,142
Automobile loan pass-through certificates 456 2 15 443
------ -------- ---- ------
Total investments available for sale 4,004 1,098 15 5,087
----- ----- ---- -----
Total investment securities $5,692 $1,128 $ 21 $6,799
===== ===== ==== =====
</TABLE>
54
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of investment securities at
September 30, 1997, including those designated as available for sale, are
shown below by term to maturity.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
(In thousands)
<S> <C> <C>
Due in one year or less $1,028 $1,028
Due after one year through five years 1,753 1,747
Due in five to ten years 197 204
Due after ten years 641 688
------ ------
3,619 3,667
FHLMC stock 46 1,649
------- -----
$3,665 $5,316
===== =====
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of mortgage-backed securities at September 30, 1997 and
1996, are shown below:
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
Government National Mortgage
Association participation certificates $ 3,168 $ 89 $- $ 3,257
Federal Home Loan Mortgage
Corporation participation certificates 2,294 47 - 2,341
Federal National Mortgage Association
participation certificates 1,379 67 - 1,446
------- ---- -- -------
Total mortgage-backed securities
held to maturity 6,841 203 - 7,044
Available for sale:
Government National Mortgage
Association participation certificates 3,253 49 - 3,302
Federal Home Loan Mortgage
Corporation participation certificates 1,951 18 3 1,966
Collateralized mortgage obligations -
FNMA and FHLMC REMICs 2,314 8 9 2,313
Guardian Savings and Loan participation
certificates 916 - 19 897
Discovery Resort Limited, partnership
notes 179 - - 179
-------- -- -- --------
Total mortgage-backed securities
available for sale 8,613 75 31 8,657
------- ---- ---- -------
Total mortgage-backed securities $15,454 $278 $ 31 $15,701
====== === ==== ======
</TABLE>
55
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity:
Government National Mortgage
Association participation certificates $ 3,779 $ 59 $- $ 3,838
Federal Home Loan Mortgage
Corporation participation certificates 3,320 39 25 3,334
Federal National Mortgage Association
participation certificates 1,776 63 - 1,839
------- ---- -- -------
Total mortgage-backed securities
held to maturity 8,875 161 25 9,011
Available for sale:
Government National Mortgage
Association participation certificates 5,051 7 14 5,044
Federal Home Loan Mortgage
Corporation participation certificates 4,630 8 32 4,606
Federal National Mortgage
Association participation certificates 869 - 8 861
Collateralized mortgage obligations -
FNMA and FHLMC REMICs 2,384 10 53 2,341
Guardian Savings and Loan participation
certificates 995 - 23 972
Discovery Resort Limited, partnership
notes 289 - - 289
-------- -- -- --------
Total mortgage-backed securities
available for sale 14,218 25 130 14,113
------ ---- --- ------
Total mortgage-backed securities $23,093 $186 $155 $23,124
====== === === ======
</TABLE>
The amortized cost and estimated fair values of mortgage-backed securities
at September 30, 1997, including those designated as available for sale, are
shown below by contractual term to maturity. Expected maturities will differ
from contractual maturities because borrowers may generally prepay
obligations without prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
(In thousands)
<S> <C> <C>
Due in one year or less $ 733 $ 734
Due in five to ten years 630 642
Due after ten years 14,091 14,325
------ ------
$15,454 $15,701
====== ======
</TABLE>
56
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family $49,574 $35,858
Multi-family 345 122
Nonresidential real estate 2,653 3,695
Construction 9,140 10,579
Consumer and other loans 401 412
Deferred loan origination costs, net 48 70
--------- ---------
62,161 50,736
Less:
Undisbursed portion of loans in process 5,374 6,337
Allowance for losses on loans 145 193
-------- -------
$56,642 $44,206
====== ======
</TABLE>
The Association's lending efforts have historically focused on one- to
four-family residential real estate loans, which comprise approximately
$53.5 million, or 94%, of the total loan portfolio at September 30, 1997,
and approximately $39.9 million, or 90% of the total loan portfolio, at
September 30, 1996. Generally, such loans have been underwritten on the
basis of no more than an 80% loan-to-value ratio, which has historically
provided the Association with adequate collateral coverage in the event of
default. Nevertheless, the Association, as with any lending institution, is
subject to the risk that real estate values could deteriorate in its primary
lending area of northeast Ohio, thereby impairing collateral values.
However, management is of the belief that real estate values in the
Association's primary lending area are presently stable.
In the ordinary course of business, the Association has made loans to some
of its directors, officers and their related business interests. In the
opinion of management, such loans are consistent with sound lending
practices and are within applicable regulatory lending limitations. The
balance of such loans totaled approximately $277,000 and $393,000 at
September 30, 1997 and 1996, respectively.
From time to time, the Corporation has retained a director to perform legal
services. Fees paid for such services totaled approximately $17,000 and
$16,000 for the years ended September 30, 1997 and 1996.
57
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $193 $ 80 $ 68
Provision for losses on loans 12 105 12
Charge-offs (60) - -
Recoveries - 8 -
-- ----- -
Balance at end of year $145 $193 $ 80
=== === ====
</TABLE>
As of September 30, 1997, the Association'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.
Nonperforming and nonaccrual loans at September 30, 1997, 1996 and 1995,
totaled $2,000, $25,000 and $648,000, respectively. Interest income that
would have been recognized had nonaccrual loans performed pursuant to
contractual terms totaled approximately $29,000 for the year ended September
30, 1995. There was no material loss of interest income on nonperforming
loans for the years ended September 30, 1997 and 1996.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Land $ 355 $ 355
Building and improvements 1,216 1,215
Furniture and equipment 846 838
------ ------
2,417 2,408
Less accumulated depreciation and
amortization 995 893
------ ------
$1,422 $1,515
====== ======
</TABLE>
58
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
Deposit type and weighted-
average interest rate 1997 1996
Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts
1997 - 1.50% $ 2,497 3.8
1996 - 1.50% $ 1,293 2.0
Passbook
1997 - 2.00% 11,395 17.4
1996 - 2.25% 12,120 18.8
Money market demand accounts
1997 - 2.10% 2,588 3.9
1996 - 2.35% 3,067 4.8
------- ------ ------- -----
Total demand, transaction and
passbook deposits 16,480 25.1 16,480 25.6
Certificates of deposit
Original maturities of:
Up to 12 months
1997 - 5.29% 11,019 16.8
1996 - 5.20% 12,300 19.1
Over 12 months to 94 months
1997 - 5.99% 38,001 57.9
1996 - 6.02% 35,383 55.0
Individual retirement accounts
1997 - 1.50% 160 .2
1996 - 2.00% 192 .3
------- ----- ------ -----
Total certificates of deposit 49,180 74.9 47,875 74.4
------ ----- ------ -----
Total deposit accounts $65,660 100.0 $64,355 100.0
====== ===== ====== =====
</TABLE>
At September 30, 1997 and 1996, the Association had deposit accounts with
balances of $100,000 or more totaling $4.3 million and $3.7 million,
respectively.
Interest expense on deposits is summarized as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
NOW accounts $ 18 $ 18 $ 15
Passbook 241 326 323
Money market demand accounts 57 87 109
Certificates of deposit 2,727 2,960 2,695
----- ----- -----
$3,043 $3,391 $3,142
===== ===== =====
</TABLE>
59
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Up to one year $27,334 $25,472
Over one year to two years 16,174 14,531
Over two years to three years 3,216 5,314
Over three years to four years 1,858 1,356
Over four years to five years 221 732
Over five years 377 470
-------- --------
$49,180 $47,875
====== ======
</TABLE>
NOTE G - NOTE PAYABLE
In connection with the September 1997 return of capital distribution, the
Corporation borrowed funds from another financial institution. At September
30, 1997, the related note payable consisted of an unsecured 90-day loan
bearing interest at 8.50%.
NOTE H - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate at September 30 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $422 $ 33 $194
Increase (decrease) in taxes resulting from:
Interest on municipal obligations (12) (12) (17)
Other 26 - -
---- -- -
Federal income taxes per consolidated
financial statements $436 $ 21 $177
=== ==== ===
Effective tax rate 35.1% 21.4% 31.0%
==== ==== ====
</TABLE>
60
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE H - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at September
30 is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1997 1996
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Net deferred loan origination fees $ 71 $ 71
SAIF recapitalization assessment - 145
General loan loss allowance 70 66
Other 3 -
-------- --
Deferred tax assets 144 282
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (174) (155)
Difference between book and tax depreciation (104) (101)
Percentage of earnings bad debt deduction (190) (190)
Unrealized gains on securities designated
as available for sale (560) (333)
------ ----
Deferred tax liabilities (1,028) (779)
----- ----
Net deferred tax liability $ (884) $(497)
====== ====
</TABLE>
The Association was 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 previously qualified 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, 1997, include approximately $2.4 million for which
federal income taxes have not been provided. The approximate amount of
unrecognized deferred tax liability relating to the cumulative bad debt
deduction was approximately $630,000 at September 30, 1997. See Note K for
additional information regarding future percentage of earnings bad debt
deductions.
61
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE I - LOAN COMMITMENTS
The Association 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 Association's involvement in such financial instruments.
The Association'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
Association uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet instruments.
At September 30, 1997, the Association had outstanding commitments of
approximately $2.0 million to originate loans. Additionally, the Association
had undisbursed loans in process of $5.4 million at September 30, 1997. In
the opinion of management, all loan commitments equaled or exceeded
prevalent market interest rates as of September 30, 1997, and will be funded
from normal cash flow from operations.
NOTE J - REGULATORY CAPITAL
The Association is subject to the regulatory capital requirements of 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 Association's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Association's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk-weightings, and other factors.
Such minimum capital standards 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 stockholders' equity 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
such as capitalized mortgage servicing rights) equal to 3.0% of adjusted
total assets. A recent OTS proposal, if adopted in present form, would
increase the core capital requirement to a
62
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE J - REGULATORY CAPITAL (continued)
range of 4% - 5% of adjusted total assets for substantially all savings
institutions. Management anticipates no material change to the Association's
present excess regulatory capital position as a result of this change in the
regulatory capital requirement. The risk-based capital requirement 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
Association 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%.
During the calendar year, the Association was notified from its regulator
that it was categorized as "well-capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well-capitalized" the
Association must maintain minimum capital ratios as set forth in the
following table.
As of September 30, 1997, management believes that the Association met all
capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
As of September 30, 1997
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 $16,126 19.3% =>$1,251 =>1.5% =>$4,170 => 5.0%
Core capital $16,126 19.3% =>$2,502 =>3.0% =>$5,004 => 6.0%
Risk-based capital $16,271 43.9% =>$2,966 =>8.0% =>$3,708 =>10.0%
</TABLE>
The Corporation's management believes that, under the current regulatory
capital regulations, the Association will continue to meets its minimum
capital requirements in the foreseeable future. However, events beyond the
control of management, such as increased interest rates or an economic
downturn in the Association's market areas, could adversely affect future
earnings and, consequently, the ability to meet future minimum regulatory
capital requirements.
63
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE K - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Association and of other savings associations
are insured by the Federal Deposit Insurance Corporation (FDIC) in the
SAIF. The reserves of the SAIF were below the level required by law,
because a significant portion of the assessments paid into the fund had
been used to pay the cost of prior thrift failures. The deposit accounts of
commercial banks are insured by the FDIC in the Bank Insurance Fund
("BIF"), except to the extent such banks have acquired SAIF deposits. The
reserves of the BIF met the level required by law in 1995. As a result of
the respective reserve levels of the funds, deposit insurance assessments
paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in 1995. In
1996, no BIF assessments were required for healthy commercial banks except
for a $2,000 minimum fee.
On September 30, 1996, the President enacted legislation to recapitalize
the SAIF which provided for a special assessment of $.657 per $100 of
deposits held at March 31, 1995. The Association had $65.7 million in SAIF
deposits at March 31, 1995, resulting in an assessment of approximately
$428,000, or $282,000 after-tax, which was recorded as a charge in fiscal
1996, and was paid in November 1996.
The legislation also provided for a reduction of future annual deposit
insurance premiums from $.235 per $100 of SAIF deposits to $.064 per $100
of SAIF deposits.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1999, assuming all savings associations have
become banks. Pending legislation has proposed the elimination of the
thrift charter or of the separate federal regulation of thrifts. As a
result, the Association would be regulated as a bank under federal laws
which would subject it to the more restrictive activity limits imposed on
national banks. Under separate but related legislation recently enacted
into law, the Association is required to recapture as taxable income
approximately $560,000 of its bad debt reserve, which represents the
post-1987 additions to the reserve, and is unable to utilize the percentage
of earnings method to compute its reserve in the future. The Association
has provided deferred taxes for this amount and will be permitted by such
legislation to amortize the recapture of its bad debt reserve over six
years.
64
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE L - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of Peoples Financial Corporation as of September 30, 1997 and 1996,
and the results of its operations and its cash flows for the periods ended
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Peoples Financial Corporation
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
ASSETS 1997 1996
<S> <C> <C>
Interest-bearing deposits in other financial institutions $ 310 $ 2,957
Investment securities designated as available for sale -
at market - 3,502
Mortgage-backed securities designated as available for
sale - at market - 1,269
Loan receivable from ESOP 497 597
Investment in Peoples Federal Savings and Loan Association
of Massillon 17,209 15,962
Other assets 400 38
-------- ---------
Total assets $18,416 $24,325
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable to Peoples Federal Savings and Loan
Association of Massillon $ 79 $ 609
Note payable 3,000 -
Other liabilities 11 10
--------- ---------
Total liabilities 3,090 619
Shareholders' equity
Common stock - -
Additional paid-in capital 16,372 23,310
Unrealized gains on securities designated as available
for sale, net of related tax effects 1,083 645
Retained earnings (deficit) 75 (249)
Shares acquired by stock benefit plans (919) -
Treasury shares (1,285) -
------- ------
Total shareholders' equity 15,326 23,706
------ ------
Total liabilities and shareholders' equity $18,416 $24,325
====== ======
</TABLE>
65
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE L - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION
(continued)
<TABLE>
<CAPTION>
Peoples Financial Corporation
STATEMENTS OF OPERATIONS
Period ended September 30,
(In thousands)
1997 1996
<S> <C> <C>
Revenue (expense)
Interest income $ 437 $ 32
Other income 4 -
Equity in earnings (loss) of subsidiary 664 (268)
------ ----
1,105 (236)
Interest expense 20 -
General and administrative expenses 198 2
------ ------
Earnings (loss) before income taxes 887 (238)
Federal income taxes 81 11
------- -----
NET EARNINGS (LOSS) $ 806 $(249)
====== ====
</TABLE>
66
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE L - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION
(continued)
<TABLE>
<CAPTION>
Peoples Financial Corporation
STATEMENTS OF CASH FLOWS
Period ended September 30,
(In thousands)
1997 1996
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings (loss) for the period $ 806 $ (249)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Undistributed (earnings) loss of consolidated subsidiary (809) 268
Amortization of expense related to employee
benefit plans 145 -
Gain on sale of securities designated as available for sale (4) -
Increases (decreases) in cash due to changes in:
Other assets (362) (38)
Other liabilities 1 10
Other (530) 609
------ --------
Cash provided by (used in) operating activities (753) 600
Cash flows provided by (used in) investing activities:
Purchase of securities available for sale (3,020) (4,771)
Maturities of investment securities 3,502 -
Proceeds from sale of securities designated as available
for sale 4,293 -
Investment in subsidiary - (6,478)
----- -------
Net cash provided by (used in) investment activities 4,775 (11,249)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock - 13,606
Proceeds from note payable 3,000 -
Return of capital distribution (7,083) -
Repayments on ESOP loan 100 -
Dividends on common stock (482) -
Purchase of shares for stock benefit plan (919) -
Purchase of treasury stock (1,285) -
----- ------
Net cash provided by (used in) financing activities (6,669) 13,606
----- ------
Net increase (decrease) in cash and cash equivalents (2,647) 2,957
Cash and cash equivalents at beginning of period 2,957 -
----- ------
Cash and cash equivalents at end of period $ 310 $ 2,957
====== =======
</TABLE>
67
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE M - STOCK OPTION PLAN
During fiscal 1997, the Board of Directors adopted a Stock Option Plan that
provided for the issuance of 104,371 shares of authorized, but unissued
shares of common stock at the fair market value at the date of grant. The
Corporation granted options to purchase 37,275 shares to members of the
Board of Directors and 67,096 shares to certain employees at an exercise
price of $16.00 per share.
The Corporation applies Accounting Principles Board 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 been reduced to
the pro forma amounts indicated below for the year ended September 30, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
Net earnings As reported $806
Pro-forma $767
Earnings per share As reported $.57
Pro-forma $.54
</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 1997; dividend yield of
1.7% and expected volatility of 12.0%; risk-free interest rate of 6.5% and
expected life of ten years.
A summary of the status of the Corporation's fixed stock option plan as of
September 30, 1997, and changes during the year ended September 30, 1997,
is presented below:
<TABLE>
<CAPTION>
Weighted-
average
exercise
Shares price
<S> <C> <C>
Outstanding at beginning of year - $ -
Granted 104,371 $16.00
Exercised - $ -
Forfeited - $ -
--------- -----
Outstanding at end of year 104,371 $16.00
======= =====
Options exercisable at year-end - $ -
========= =====
Weighted-average fair value of
options granted during the year $ 4.76
======
</TABLE>
68
<PAGE>
Peoples Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE M - STOCK OPTION PLAN (continued)
The following information applies to options outstanding at September 30,
1997:
Number outstanding 104,371
Exercise price $16.00
Weighted-average exercise price $16.00
Weighted-average remaining contractual life 9.5 years
NOTE N - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
On October 16, 1995, the Association's Board of Directors adopted a Plan of
Conversion whereby the Association would convert to the stock form of
ownership, followed by the issuance of all of the Association's outstanding
common stock to a newly formed holding company, Peoples Financial
Corporation.
On September 12, 1996, the Association completed its conversion to the stock
form of ownership, and issued all of the Association's outstanding common
shares to the Corporation.
In connection with the conversion, the Corporation sold 1,491,012 shares at
a price of $10.00 per share which, after consideration of offering expenses
totaling approximately $707,000, and shares purchased by the ESOP totaling
$597,000, resulted in net equity proceeds of approximately $13.6 million.
At the date of the conversion, the Association established 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 the Association 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 common stock. Except
for the repurchase of stock and payment of dividends by the Association, the
existence of the liquidation account will not restrict the use or
application of such retained earnings. The Association may not declare, pay
a cash dividend on, or repurchase any of its common stock, if the effect
thereof would cause retained earnings to be reduced below either the amount
required for the liquidation account or the regulatory capital requirements
for SAIF insured institutions.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On September 16, 1996, the Board of Directors approved the
recommendation of its Audit Committee to change the independent accountant of
Peoples Federal from Hall, Kistler & Company P.L.L. ("Hall, Kistler"), to Grant
Thornton LLP ("Grant Thornton"). No adverse opinion, disclaimer or qualification
was contained in Hall, Kistler's report for either of the last two fiscal years
for which Hall, Kistler completed an audit of Peoples Federal's financial
statements, nor were such reports modified as to uncertainty, audit scope or
accounting principles. Further, there was no disagreement between Peoples
Federal and Hall, Kistler or Grant Thornton on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
69
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The information contained in the definitive Proxy Statement for the 1998
Annual Meeting of Shareholders of PFC (the "Proxy Statement"), which is included
as Exhibit 99.1 hereto, under the caption "PROPOSAL ONE - Election of Directors
- - Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated
herein by reference.
Item 10. Executive Compensation
The information contained in the Proxy Statement under the caption
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information contained in the Proxy Statement under the caption
"VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information contained in the Proxy Statement under the caption
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS - Certain Transactions" is
incorporated herein by reference.
70
<PAGE>
<TABLE>
<CAPTION>
Item 13. Exhibits and Reports on Form 8-K
<S> <C>
(a) Exhibits
3.1 Articles of Incorporation (incorporated by reference)
3.2 Code of Regulations (incorporated by reference)
10.1 Employment Agreement with Mr. Paul von Gunten (incorporated
by reference)
10.2 Employment Agreement with Ms. Linda Fowler (incorporated
by reference)
10.3 Employment Agreement with Mr. James Rinehart (incorporated
by reference)
10.4 Employment Agreement with Ms. Cynthia Wagner (incorporated
by reference)
10.5 Peoples Financial Corporation 1997 Stock Option and Incentive Plan
(incorporated by reference)
10.6 Peoples Financial Corporation Recognition and Retention Plan and Trust
Agreement (incorporated by reference)
16 Opinion of Hall, Kistler
21 Subsidiaries of Peoples Financial Corporation (incorporated by reference)
23.1 Consent of Grant Thornton
23.2 Consent of Hall, Kistler
27 Financial Data Schedule
99.1 Proxy Statement for 1998 Annual Meeting of Shareholders (incorporated by
reference)
99.2 Safe Harbor Under the Private Securities Litigation Reform Act of 1995
</TABLE>
(b) No reports on Form 8-K were filed during the fiscal year
ended September 30, 1997.
71
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PEOPLES FINANCIAL CORPORATION
By /s/ Paul von Gunten
Paul von Gunten
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By /s/ Paul von Gunten By /s/ James R. Rinehart
Paul von Gunten James R. Rinehart
President and Director Treasurer
(Principal Financial Officer)
Date December 17, 1997 Date December 17, 1997
By /s/ Victor C. Baker By /s/ James P. Bordner
Victor C. Baker James P. Bordner
Director Director
Date December 17, 1997 Date December 17, 1997
By /s/ Vincent G. Matecheck By /s/ Thomas E. Shelt
Vincent G. Matecheck Thomas E. Shelt
Secretary and Director Director
Date December 17, 1997 Date December 17, 1997
By /s/ Vincent E. Stephan
Vincent E. Stephan
Chairman of the Board and Director
Date December 17, 1997
72
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
3.1 Articles of Incorporation of Peoples Financial Incorporated by reference to Pre-Effective Amendment
Corporation No. 1 to the Registration Statement on Form S-1 of
the Registrant (No. 333-2690) filed with the
Securities and Exchange Commission (the "SEC") on
June 28, 1996 (the "S-1"), Exhibit 3.1.
3.2 Code of Regulations of Peoples Financial Corporation Incorporated by reference to Exhibit 3.2 to the S-1.
10.1 Employment Agreement with Mr. von Gunten Incorporated by reference to Exhibit 10.1 to the Form
10-KSB filed by the Registrant with the SEC on
December 26, 1996 (the "1996 10-KSB").
10.2 Employment Agreement with Ms. Fowler Incorporated by reference to Exhibit 10.2 to the 1996
10-KSB.
10.3 Employment Agreement with Mr. Rinehart Incorporated by reference to Exhibit 10.3 to the 1996
10-KSB.
10.4 Employment Agreement with Ms. Wagner Incorporated by reference to Exhibit 10.4 to the 1996
10-KSB.
10.5 Peoples Financial Corporation 1997 Stock Option and Incorporated by reference to Exhibit A to the
Incentive Plan definitive Proxy Statement filed with the SEC on
February 6, 1997.
10.6 Peoples Financial Corporation Recognition and Incorporated by reference to Exhibit B to the
Retention Plan and Trust Agreement definitive Proxy Statement filed with the SEC on
February 6, 1997.
16 Opinion of Hall, Kistler
21 Subsidiaries of Peoples Financial Corporation Incorporated by reference to Exhibit 21 to the 1996
10-KSB.
23.1 Consent of Grant Thornton
23.2 Consent of Hall, Kistler
27 Financial Data Schedule
99.1 Proxy Statement for the 1998 Annual Meeting Incorporated by reference to definitive Proxy
of Shareholders. Statement to be filed separately.
99.2 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
</TABLE>
73
EXHIBIT 16
Report of Independent Certified Public Accountants
Board of Directors
Peoples Federal Savings and Loan
Association of Massillon
Massillon, Ohio
We have audited the accompanying consolidated financial statements of
income, retained earnings and cash flows for the year ended September 30, 1995,
for Peoples Federal Savings and Loan Association of Massillon and Subsidiary.
These consolidated financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows for Peoples Financial Savings and Loan Association of Massillon and
Subsidiary for the year ended September 30, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the
Association changed its method of accounting for investments in certain debt and
equity securities as of October 1, 1994.
HALL, KISTLER & COMPANY LLP
Canton, Ohio
October 30, 1995
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We have issued our report dated November 3, 1997, accompanying the consolidated
financial statements of Peoples Financial Corporation which are included in the
Corporation's Annual Report on Form 10-KSB for the year ended September 30,
1997. We hereby consent to the incorporation by reference of said report in the
Registration Statement of Peoples Financial Corporation on Form S-8.
GRANT THORNTON LLP
Cincinnati, Ohio
December 22, 1997
EXHIBIT 23.2
Consent of Independent Accountants
Peoples Federal Savings and Loan
Association of Massillon
211 Lincoln Way, East
Massillon, Ohio 44646
We consent to the incorporation by reference into the Registration
Statement of Peoples Financial Corporation on Form S-8 of our report dated
December 5, 1996, on the consolidated statements of income, changes in
shareholders' equity and cash flows for the year ended September 30, 1995 for
Peoples Federal Savings and Loan Association of Massillon included in the Form
10-KSB of Peoples Financial Corporation for the fiscal year ended September 30,
1997.
HALL, KISTLER & COMPANY LLP
Canton, Ohio
December 17, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 343
<INT-BEARING-DEPOSITS> 4,440
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,948
<INVESTMENTS-CARRYING> 8,814
<INVESTMENTS-MARKET> 9,069
<LOANS> 56,642
<ALLOWANCE> 145
<TOTAL-ASSETS> 85,206
<DEPOSITS> 65,660
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 1,220
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 15,326
<TOTAL-LIABILITIES-AND-EQUITY> 85,206
<INTEREST-LOAN> 4,000
<INTEREST-INVEST> 1,931
<INTEREST-OTHER> 322
<INTEREST-TOTAL> 6,253
<INTEREST-DEPOSIT> 3,043
<INTEREST-EXPENSE> 3,047
<INTEREST-INCOME-NET> 3,206
<LOAN-LOSSES> 12
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 2,004
<INCOME-PRETAX> 1,242
<INCOME-PRE-EXTRAORDINARY> 806
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 806
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
<YIELD-ACTUAL> 3.75
<LOANS-NON> 2
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 193
<CHARGE-OFFS> 60
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 145
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 145
</TABLE>
EXHIBIT 99.2
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. Peoples
Financial Corporation ("PFC") desires to take advantage of the "safe harbor"
provisions of the Act. Certain information, particularly information regarding
future economic performance and finances and plans and objectives of management,
contained or incorporated by reference in PFC's Annual Report on Form 10-KSB for
fiscal year 1997 is forward-looking. In some cases, information regarding
certain important factors that could cause actual results of operations or
outcomes of other events to differ materially from any such forward-looking
statement appear together with such statement. In addition, forward-looking
statements are subject to other risks and uncertainties affecting the financial
institutions industry, including, but not limited to, the following:
Interest Rate Risk
PFC's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from loans
and investments and interest expense on deposits and borrowings. The interest
income and interest expense of PFC change as the interest rates on mortgages,
securities and other assets and on deposits and other liabilities change.
Interest rates may change because of general economic conditions, the policies
of various regulatory authorities and other factors beyond PFC's control. The
interest rates on specific assets and liabilities of PFC will change or
"reprice" in accordance with the contractual terms of the asset or liability
instrument and in accordance with customer reaction to general economic trends.
In a rising interest rate environment, loans tend to prepay slowly and new loans
at higher rates increase slowly, while interest paid on deposits increases
rapidly because the terms to maturity of deposits tend to be shorter than the
terms to maturity or prepayment of loans. Such differences in the adjustment of
interest rates on assets and liabilities may negatively affect PFC's income.
Moreover, rising interest rates tend to decrease loan demand in general,
negatively affecting PFC's income.
Possible Inadequacy of the Allowance for Loan Losses
Peoples Federal Savings and Loan Association of Massillon ("Peoples
Federal") maintains an allowance for loan losses based upon a number of relevant
factors, including, but not limited to, trends in the level of nonperforming
assets and classified loans, current and anticipated economic conditions in the
primary lending area, past loss experience, possible losses arising from
specific problem assets and changes in the composition of the loan portfolio.
While the Board of Directors of Peoples Federal believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in material adjustments, and net earnings could
be significantly adversely affected if circumstances differ substantially from
the assumptions used in making the final determination.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by one-
to four-family residential real estate due, in part, to the effects of general
economic conditions. The repayment of multifamily residential and nonresidential
real estate loans generally depends upon the cash flow from the operation of the
property, which may be negatively affected by national and local economic
conditions that cause leases not to be renewed or that negatively affect the
operations of a commercial borrower. Construction loans may also be negatively
affected by such economic conditions, particularly loans made to developers who
do not have a buyer for a property before the loan is made. The risk of default
on consumer loans increases during periods of recession, high unemployment and
other adverse economic conditions. When consumers have trouble paying their
bills, they are more likely to pay mortgage loans than consumer loans, and the
collateral securing such loans, if any, may decrease in value more rapidly than
the outstanding balance of the loan.
<PAGE>
Competition
Peoples Federal competes for deposits with other savings associations,
commercial banks and credit unions and 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, Peoples Federal competes with other savings associations,
commercial banks, consumer finance companies, credit unions, leasing companies,
mortgage companies and other lenders. 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. The size of financial institutions competing with Peoples Federal
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 PFC.
Legislation and Regulation that may Adversely Affect PFC's Earnings
Peoples Federal is subject to extensive regulation by the Office of
Thrift Supervision (the "OTS") and the Federal Deposit Insurance Corporation
(the "FDIC") and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. As a savings and loan holding
company, PFC is also subject to regulation and examination by the OTS. Such
supervision and regulation of Peoples Federal and PFC are intended primarily for
the protection of depositors and not for the maximization of shareholder value
and may affect the ability of the company to engage in various business
activities. The assessments, filing fees and other costs associated with
reports, examinations and other regulatory matters are significant and may have
an adverse effect on the PFC's net earnings.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to the target level within a reasonable time and
may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
such system, assessments may vary depending on the risk the institution poses to
its deposit insurance fund. Such risk level is determined by reference to the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Congress recently enacted a plan to recapitalize the SAIF. The
recapitalization plan also provides for the merger of the SAIF and BIF effective
January 1, 1999, assuming there are no savings associations under federal law.
Congress is considering legislation to eliminate the federal thrift charter and
the separate federal regulation of savings and loan associations. As a result,
Peoples Federal may have to convert to a different financial institution charter
or might be regulated under federal law as a bank. If Peoples Federal becomes a
bank or is regulated as a bank, it would become subject to the more restrictive
activity limitations imposed on national banks. Moreover, PFC might become
subject to more restrictive holding company requirements, including activity
limits and capital requirements similar to those imposed on Peoples Federal. PFC
cannot predict the impact of the conversion of Peoples Federal to, or regulation
of Peoples Federal as, a bank until any legislation requiring such change is
enacted.
