Annual Report — Small Business — [x] Reg. S-B Item 405 — Form 10-KSB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10KSB40 Peoplesfinancial10-Ksb 74 395K
2: EX-10.1 Material Contract 10 34K
3: EX-10.2 Material Contract 10 33K
4: EX-10.3 Material Contract 11 34K
5: EX-10.4 Material Contract 10 33K
6: EX-16 Letter re: Change in Certifying Accountant 1 7K
7: EX-20 Other Document or Statement to Security Holders 1 9K
8: EX-21 Subsidiaries of the Registrant 1 5K
9: EX-27 Financial Data Schedule (Pre-XBRL) 2± 8K
10: EX-99 Miscellaneous Exhibit 3 15K
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended SEPTEMBER 30, 1996
OR ------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from______________to___________________
Commission File Number: 0-28838
PEOPLES FINANCIAL CORPORATION
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(Name of small business issuer in its charter)
Ohio 34-1822228
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
211 Lincoln Way East, Massillon, Ohio 44646
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (330) 832-7441
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Securities registered pursuant to Section 12(b) of the Exchange Act:
None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, without par value
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(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. [X]
The issuer's revenues for the fiscal year ended September 30,
1996, were $5,656,000.
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 November 29, 1996, was $16.6 million.
1,491,012 of the issuer's common shares were issued and
outstanding on December 1, 1996.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Peoples Financial Corporation ("PFC"), an Ohio corporation, 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 federal savings and loan association chartered
under the laws of the United States. On September 12, 1996, PFC acquired all of
the common shares 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 lending 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. In addition, on
June 3, 1996, Peoples Federal opened for business a new lending office in the
Belden Village area of North Canton. 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 lending 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-
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information with respect to the composition of Peoples Federal's loan portfolio
at the dates indicated:
[Enlarge/Download Table]
At September 30,
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1996 1995 1994
-------------------- -------------------- ---------------------
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Residential real estate loans:
One- to four-family (first and
second mortgage) $34,542 68.18% $31,923 81.66% $32,582 85.36%
Home equity (secured by mortgages) 1,316 2.60 330 .84 198 .52
Multifamily 122 .24 303 .78 63 .16
Nonresidential real estate loans 3,695 7.29 3,725 9.53 3,370 8.83
Construction loans 10,579 20.88 2,392 6.12 1,729 4.53
------- ------- ------- ------- ------- -------
Total real estate loans 50,254 99.19 38,673 98.93 37,942 99.40
Consumer loans:
Loans on deposits 185 .36 215 .55 229 .60
Other consumer loans 227 .45 203 .52 -- --
------- ------- ------- ------- ------- -------
Total consumer loans 412 .81 418 1.07 229 .60
------- ------- ------- ------- ------- -------
Total loans 50,666 100.00% 39,091 100.00% 38,171 100.00%
====== ====== ======
Net items:
Deferred loan origination costs 70 74 28
Loans in process (6,337) (1,064) (1,061)
Allowance for loan losses (193) (80) (68)
------- ------- -------
Net loans $44,206 $38,021 $37,070
======= ======= =======
LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of September 30, 1996, 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.
[Enlarge/Download Table]
Due during the year ending
September 30, Due 4-5 Due 6-10 Due 11-20 Due more than
------------------------------- years after years after years after 20 years after
1997 1998 1999 9/30/96 9/30/96 9/30/96 9/30/96 Total
--------- --------- --------- --------- ---------- --------- --------- -------
(In thousands)
Mortgage loans:
One- to four-family
(first mortgage) $11,246 $2,416 $2,469 $4,916 $9,913 $8,923 $5,238 $45,121
Home equity (second
mortgage) 76 84 91 189 503 373 - 1,316
Multifamily 6 6 7 15 34 30 24 122
Nonresidential 560 221 243 544 1,384 722 21 3,695
Consumer loans 148 129 83 45 7 - - 412
------- ------ ------ ------ ------- ------- ------ -------
Total loans $12,036 $2,856 $2,893 $5,709 $11,841 $10,048 $5,283 $50,666
======= ====== ====== ====== ======= ======= ====== =======
Of the loans due more than one year after September 30, 1996, loans
with aggregate balances of $36.0 million have fixed rates of interest, and loans
with aggregate balances of $2.6 million have adjustable interest rates.
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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, non-owner
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.
Peoples Federal commenced the origination of adjustable-rate mortgage
loans ("ARMs") in July 1995. ARMs are offered by Peoples Federal for terms of up
to 30 years and with various alternative features. The interest rate adjustment
periods on the 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 $34.5 million at September 30, 1996, and represented 68.2% of
loans at such date. The largest individual loan balance on a one- to four-family
loan at such date was $519,000. At such date, loans secured by one- to
four-family residential real estate with outstanding balances of $25,000, or
.07% of its one- to four-family residential real estate loan balance, were more
than 90 days delinquent or nonaccruing. See "Delinquent Loans, Non-performing
Assets and Classified Assets."
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.
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 credit-worthiness 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, 1996, loans secured by multifamily properties totaled
approximately $122,000, or .2% 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.
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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, since January 1, 1996, most have been made 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, 1996, a total of $10.6 million, or approximately 20.9%
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, 1996, 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, a manufacturing facility and a party center.
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, 1996, Peoples Federal had a total of $3.7 million
invested in nonresidential real estate loans, including one undeveloped land
loan, all of which were secured by property located within Peoples Federal's
primary market area. Such loans comprised approximately 7.3% of Peoples
Federal's total loans at such date. At such date, Peoples Federal had $572,000
in delinquent nonresidential real estate loans, or 1.1% of total loans. See
"Delinquent Loans, Non-performing Assets and Classified Assets."
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its tangible capital. At September 30,
1996, Peoples Federal's nonresidential mortgage loans totaled 23.1% 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 5 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.
-5-
At September 30, 1996, Peoples Federal had approximately $412,000, or
.8% of its total loans, invested in consumer loans, and none of such loans were
more than 90 days delinquent or nonaccruing. See "Delinquent Loans,
Non-performing Assets and Classified Assets."
COMMERCIAL LOANS. Peoples Federal does not issue any letters of credit
or originate or purchase any loans for commercial, business or agricultural
purposes, other than loans secured by real estate.
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
36%. 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. Commencing in
1993, Peoples Federal has required a survey of the property for 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.
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, although
it is in the process of making the necessary changes to its loan origination
procedures in order to start originating loans in accordance with such
guidelines. Peoples Federal occasionally participates in loans originated by
other institutions.
-6-
The following table presents Peoples Federal's mortgage loan
origination and participation activity for the periods indicated:
[Enlarge/Download Table]
Year ended September 30,
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1996 1995 1994
-------- --------- ---------
(In thousands)
Loans originated:
One- to four-family residential (1) $ 18,742 $ 6,691 $ 8,565
Multifamily residential 350 -- --
Nonresidential 927 545 1,145
Consumer 354 439 174
-------- -------- --------
Total loans originated 20,373 7,675 9,884
-------- -------- --------
Reductions:
Principal repayments (8,805) (6,791) (12,489)
Increase (decrease) in other items, net (2) (5,383) (67) 166
-------- -------- --------
Net increase (decrease) $ 6,185 $ 951 $ (2,771)
======== ======== ========
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<FN>
(1) Includes construction loans.
(2) Consists of unearned and deferred fees, costs and undisbursed loans in
process and the allowance for loan losses.
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, 1996. The largest amount Peoples
Federal had outstanding to one borrower at September 30, 1996, was $1.1 million.
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, 1996.
DELINQUENT LOANS, NON-PERFORMING 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, or deemed 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, or deemed to have been 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, 1996.
Peoples Federal evaluates a loan for nonaccrual status when the
payments are 90 days or more past due.
-7-
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
[Enlarge/Download Table]
September 30,
----------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- --------------------------- ---------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ -------- ------ ------ -------- ------ ------ ------
(Dollars in thousands)
Loans delinquent for (1):
30 - 59 days 12 $342 .68 9 $281 .72% 6 $103 .27%
60 - 89 days 4 99 .20 2 13 .03 4 55 .14
90 days and over 6 597 1.18 5 648 1.66 - - -
-- ------ ---- -- ---- ---- -- ----- ---
Total delinquent loans 22 $1,038(2) 2.06% 16 $942 2.41% 10 $158 .41%
== ====== ==== == ==== ==== == ==== ===
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<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.
(2) Of such amount, $466,000 is secured by one- to four-family real estate,
and $572,000 is secured by nonresidential real estate.
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 non-performing assets at the dates indicated:
[Download Table]
At September 30,
-----------------------------
1996 1995 1994
----- ------ ------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $ 25 $ 76 $--
Nonresidential -- 572 --
Consumer -- -- --
---- ---- -----
Total nonperforming loans 25 648 --
Real estate owned -- -- --
---- ---- -----
Total non-performing assets $ 25 $648 $--
==== ==== =====
Total loan loss allowance $193 $ 80 $ 68
Total non-performing assets as
a percentage of total assets .03% .84% -%
Loan loss allowance as a percent
of non-performing loans 772.00% 12.35% -%
The nonaccruing residential real estate loan was paid in full in May
1996. The $572,000 of nonaccuring nonresidential loans at September 30, 1995,
was comprised of loans secured by a shopping center and a building rented for
parties (the "Partnership Loans"). The individual borrowers transferred the
property to a partnership in which some of the borrowers were partners and then
defaulted on the loans when one of the borrower/partners died in December 1994.
The remaining partners arranged for refinancing of two of the three parcels
through a loan at an area bank (the "Bank") in July 1995. The funds for
refinancing were advanced from the Bank to a title company, which held the funds
pending appointment of a fiduciary for the estate of the deceased partner. The
funds were returned to the Bank at the request of the partners in March 1996. In
January
-8-
1996, management was informed that no further payment would be made on such
loans and that foreclosure would be necessary absent certain concessions
regarding late payment penalties. The loans were placed in foreclosure in April
1996, and sold at public sale in October 1996. In December 1996, Peoples Federal
received $638,000 in proceeds from the sale of the loans, which was sufficient
to cover the outstanding principal, interest and expenses associated with the
Partnership Loans, except for expenses of approximately $1,000.
For the year ended September 30, 1996, 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,
1996, $29,000 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.
Peoples Federal had no classified assets at September 30, 1995 or 1994.
At September 30, 1996, Peoples Federal had $572,000 of assets classified as
substandard consisting of the Partnership Loans.
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 non-performing 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 appraisal value of the real estate. In
addition, these loans are secured by property in Peoples Federal's lending area
of a 50-mile radius from Massillon, Ohio. Peoples Federal's practice of making
loans only in its local market area and requiring a 20% down payment have
contributed to a low historical 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. In December 1995, however, Peoples Federal recorded an addition of
$105,000 to its allowance for loan losses which was heavily influenced by a
$572,000 increase in nonperforming nonresidential real estate loans, and a
$109,000 increase in nonperforming residential real estate loans over the
15-month period beginning September 30, 1994. Of these amounts, the residential
loan was paid in full in May 1996
-9-
while the nonresidential loans were repaid in full with proceeds from a sheriff
sale. See "Delinquent Loans, Non-performing Assets and Classified Assets."
Notwithstanding these reductions in nonperforming loans, management
believes that retention 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.
The following table sets forth an analysis of Peoples Federal's
allowance for loan losses for the periods indicated.
[Enlarge/Download Table]
For the year ended September 30
---------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Balance at beginning of period $ 80 $68 $68
Charge-offs - - 5
Recoveries 8 - -
Provision for loan losses (charged to
operations) 105 12 5
---- --- ---
Balance at end of period $193 $80 $68
==== === ===
Ratio of net charge-offs (recoveries) to
average net loans outstanding during
the period (.02%) - .01%
Ratio of allowance for loan losses to
total loans .38% .20% .18%
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. At September 30, 1995 and 1994, the allowance for loan losses was
unallocated.
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 $972,000 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
-10-
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, 1996, was $289,000.
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, 1996, $14.9 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.
[Enlarge/Download Table]
At September 30,
---------------------------------------------------
1996 1995 1994
-------- -------- ---------
(In thousands)
FNMA certificates $2,637 $ 3,377 $ 4,188
GNMA certificates 8,823 9,380 5,523
FHLMC certificates 7,926 8,969 8,526
Guardian Savings and Loan certificate 972 1,036 1,164
Discovery Resort Limited Partnership Notes 289 405 -
FNMA and FHLMC real estate mortgage
investment conduits ("REMICs") 2,341 2,841 3,469
------ ------- -----
Total mortgage-backed and related
securities $22,988 $26,008 $22,870
======= ======= =======
-11-
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, 1996. 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.
[Enlarge/Download Table]
At September 30, 1996
-----------------------------------------------------------------------------------------
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)
FNMA certificates $ - - % $ - -% $ - -% $ 2,637 7.36%
GNMA certificates - - - - - - 8,823 6.57
FHLMC certificates 926 6.28 2,334 6.58 398 8.33 4,268 7.15
Guardian Savings and
Loan certificate - - - - - - 972 6.80
Discovery Resort
Limited Partnership - - - - 289 7.67 - -
Notes
FNMA and FHLMC
REMICs - - - - - - 2,341 6.17
---- ---- ------ ---- ---- ---- ------- ----
Total $926 6.28% $2,334 6.58% $687 8.05% $19,041 6.77%
==== ==== ====== ==== ==== ==== ======= ====
At September 30, 1996
--------------------------------------------
Total mortgage-backed and related securities
portfolio
---------------------------------------------
Carrying Market Average
value value yield
-------- ------- -----
FNMA certificates $ 2,637 $ 2,700 7.36%
GNMA certificates 8,823 8,882 6.57
FHLMC certificates 7,926 7,940 6.94
Guardian Savings and
Loan certificate 972 972 6.80
Discovery Resort
Limited Partnership 289 289 7.67
Notes
FNMA and FHLMC
REMICs 2,341 2,341 6.17
------- ------- ----
Total $22,988 $23,124 6.77%
======= ======= ====
For additional information, see Note B of the Notes to Consolidated
Financial Statements.
-12-
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. See "REGULATION."
Peoples Federal's investments include 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 some 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. Carrying value
of these certifications at September 30, 1996, was $178,000. The certificates
are still performing in accordance with their terms.
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:
[Enlarge/Download Table]
At September 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ -------------------------------- ----------------------------------
Carrying % of Market % of Carrying % of Market % of Carrying % of Market % of
value Total value Total value Total value Total value Total value Total
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Certificates of deposit
in $ 500 6.65% $ 500 6.63% $5,500 58.47% $5,500 58.29% $ 8,000 68.72% $ 8,000 65.62%
the FHLB
Investment securities:
U.S. government and
federal agency
securities 3,702 49.21 3,703 49.06 199 2.12 203 2.15 1,200 10.31 1,205 9.89
FHLB and FHLMC stock 1,890 25.12 1,890 25.04 1,494 15.88 1,494 15.83 699 6.00 1,277 10.48
Automobile loan
pass-through 443 5.89 443 5.87 1,108 11.79 1,111 11.78 1,376 11.82 1,350 11.07
certificates
Municipal securities 988 13.13 1,011 13.40 1,105 11.74 1,127 11.95 367 3.15 359 2.94
------- ----- ------- ------- ------ ------ ------ ------ ------- ------ ------- ------
Total interest-bearing
deposits and
investment securities $7,523 100.00% $7,547 100.00% $9,406 100.00% $9,435 100.00% $11,642 100.00% $12,191 100.00%
====== ====== ======= ====== ====== ====== ====== ====== ======= ====== ======= ======
-13-
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,
1996.
[Enlarge/Download Table]
At September 30, 1996
-------------------------------------------------------------------------------------
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)
Certificates of deposit in the
FHLB $ 500 7.45% $ - -% $ - -%
Investment securities:
U.S. government and federal
agency securities 3,702 5.79 - - - -
FHLB and FHLMC stock 1,890 3.65 - - - -
Automobile loan
pass-through certificates 95 6.44 348 7.38 - -
Municipal securities 12 6.31 122 6.32 854 6.10
------ ---- ---- ---- ---- ----
Total $6,199 6.42% $470 7.10% $854 6.10%
====== ==== ==== ==== ==== ====
[Download Table]
At September 30, 1996
----------------------------------------------------------------
Average Weighted
life Carrying Market average
in years value value yield
-------- ----- ----- -----
(Dollars in thousands)
Certificates
of deposit .01 $ 500 $ 500 7.45%
in the FHLB
Investment
securities:
U.S.
government .65 3,702 3,703 5.79
and
federal
agency
securities
FHLB and - 1,890 1,890 3.65
FHLMC
stock
Automobile
loan 1.98 443 443 7.16
pass-through
certificates
Municipal 7.81 988 1,011 6.13
securities ---- -------- ------- ----
Total 2.09 $7,523 $7,547 5.49%
==== ====== ====== ====
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-
At September 30, 1996, Peoples Federal's certificates of deposit
totaled $47.9 million, or 74.4% of total deposits. Of such amount, approximately
$25.5 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:
[Enlarge/Download Table]
At September 30,
--------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- ----------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Transaction accounts:
NOW accounts (1) $ 1,293 2.01% $ 1,035 1.56% $ 880 1.34%
Money market accounts (2) 3,067 4.77 3,723 5.59 4,433 6.74
Passbook savings accounts (3) 12,120 18.83 12,524 18.81 13,551 20.59
-------- ----- -------- ------- ------- -------
Total transaction accounts 16,480 25.61 17,282 25.96 18,864 28.67
Certificates of deposit:
2.01 - 4.00% 192 .30 1,263 1.90 11,776 17.90
4.01 - 6.00% 33,243 51.65 23,404 35.16 23,264 35.35
6.01 - 8.00% 14,391 22.36 21,015 31.57 7,731 11.75
8.01 - 10.00% 49 .08 3,600 5.41 4,165 6.33
------- ------ ------- ------ ------- -------
Total certificates of deposit 47,875 74.39 49,282 74.04 46,936 71.33
------- ------ ------- ------ ------- -------
Total deposits (4) $64,355 100.00% $66,564 100.00% $65,800 100.00%
======= ====== ======= ====== ======= ======
-----------------------------
<FN>
(1) Peoples Federal's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At September
30, 1996, 1995 and 1994, the weighted average rates on NOW accounts
were 1.50%, 1.75% and 1.40%, respectively.
(2) Peoples Federal's weighted average interest rate paid on money market
accounts fluctuates with the general movement of interest rates. At
September 30, 1996, 1995 and 1994, the weighted average rates on money
market accounts were 2.35%, 2.65% and 2.65%, respectively.
(3) Peoples Federal's weighted average rate on passbook savings accounts
fluctuates with the general movement of interest rates. The weighted
average interest rate on passbook accounts was 2.25%, 2.50% and 2.50%,
at September 30, 1996, 1995 and 1994, respectively.
(4) IRAs are included in the various certificates of deposit balances. IRAs
totaled $192,000, $267,000 and $347,000 as of September 30, 1996, 1995
and 1994, respectively.
-15-
The following table shows rate and maturity information for Peoples
Federal's certificates of deposit as of September 30, 1996:
[Download Table]
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)
2.01 - 4.00% $ 155 $ 37 $ - $ - $ 192
4.01 - 6.00 19,369 9,336 2,932 1,606 33,243
6.01 - 8.00 5,899 5,158 2,382 952 14,391
8.01 - 10.00 49 - - - 49
------- ------- ------ ------ -------
Total certificates
of deposit $25,472 $14,531 $5,314 $2,558 $47,875
======= ======= ====== ====== =======
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, 1996:
[Download Table]
Maturity Amount
-------- ------
(In thousands)
Three months or less $ 512
Over 3 months to 6 months 344
Over 6 months to 12 months 1,661
Over 12 months 1,225
-----
Total $3,742
======
The following table sets forth Peoples Federal's deposit account
balance activity for the periods indicated:
[Download Table]
Year ended September 30,
--------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Beginning balance $ 66,564 $ 65,800 $ 68,293
Deposits 52,260 42,618 38,589
Withdrawals 57,229 44,231 43,286
-------- -------- --------
Net decreases before interest credited (4,969) (1,613) (4,697)
Interest credited 2,760 2,377 2,204
-------- -------- --------
Ending balance $ 64,355 $ 66,564 $ 65,800
======== ======== ========
Net increase (decrease) $ (2,209) $ 764 $ (2,493)
Percent increase (decrease) (3.32)% 1.16% (3.65)%
BORROWINGS. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. See "REGULATION - Federal Home Loan Banks." 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"). See "REGULATION - OTS
Regulations -- Qualified Thrift Lender Test." If
-16-
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. At September 30, 1996, Peoples Federal was in
compliance with the QTL Test. Peoples Federal has not utilized FHLB advances
during the three fiscal years ended September 30, 1996.
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 decreased to 2.25% for the
year ended September 30, 1996, from 2.46% for the year ended September 30, 1995.
The spread for the year ended September 30, 1995, increased from 2.28% for the
year ended September 30, 1994.
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 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.
The yield on interest-earning assets increased to 7.27% for the year ended
September 30, 1995, from 6.92% for the year ended September 30, 1994. Increased
average interest rates on interest-bearing deposits, investment securities and
mortgage-backed and related securities, partly offset by a decrease in average
interest rate on loans, made up the net increase for the year ended September
30, 1995. The cost of funds to Peoples Federal increased to 4.81% for the year
ended September 30, 1995, from 4.64% for the year ended September 30, 1994, due
to the increased rates of interest on certificates of deposit.
-17-
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 customer deposits 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
customer deposits, 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.
[Enlarge/Download Table]
Year ended September 30,
-------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------- ---------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits $ 7,130 $ 319 4.47% $ 1,989 $ 118 5.93% $ 2,662 $ 92 3.46%
Investment securities 7,292 435 5.96 11,060 672 6.08 10,721 529 4.93
Mortgage-backed and related 23,671 1,569 6.63 23,680 1,466 6.19 23,715 1,246 5.25
securities
Loans receivable (1) 39,844 3,309 8.31 37,007 3,103 8.39 37,293 3,283 8.80
-------- ------ ------- ------ -------- -----
Total interest-earning assets 77,937 5,632 7.23 73,736 5,359 7.27 74,391 5,150 6.92
Non-interest-earning assets:
Cash and amounts due from
depository institutions 250 257 274
Premises and equipment, net 1,517 1,493 1,528
Other nonearning assets 565 357 528
--------- ------- ---------
Total assets $80,269 $75,843 $76,721
======= ======= =======
Interest-bearing liabilities:
NOW accounts $ 1,431 18 1.28 $ 985 15 1.53 $ 820 13 1.59
Money market accounts 3,402 87 2.55 4,076 109 2.67 4,559 123 2.71
Passbook savings accounts 13,958 326 2.34 12,877 323 2.51 14,120 364 2.58
Certificates of deposit 49,249 2,960 6.01 47,445 2,695 5.68 47,754 2,620 5.49
-------- ------- ------- ------ ------- ------
Total deposits 68,040 3,391 4.98 65,383 3,142 4.81 67,253 3,120 4.64
-------- ------- ------- ------ ------- ------
Non-interest-bearing liabilities 1,032 917 641
--------- ------- -------
Total liabilities 69,072 66,300 67,894
Shareholder's equity (2) 11,197 9,543 8,827
-------- ------- --------
Total liabilities and retained $80,269 $75,843 $76,721
======= ======= =======
earnings
Net interest income; interest rate $2,241 2.25% $2,217 2.46% $2,030 2.28%
====== ==== ====== ==== ====== ====
spread
Net interest margin (net interest
income as a percent of average 2.88% 3.01% 2.73%
==== ==== ====
interest-earning assets)
Average interest-earning assets to
interest-bearing liabilities 114.55% 112.78% 110.61%
====== ====== ======
------------------------------------
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and allowance for loan losses.
(2) In fiscal years ended September 30, 1995 and 1994, consisted of retained
earnings only.
-18-
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.
[Enlarge/Download Table]
At September 30,
----------------------------------------
1996 1995 1994
---- ---- ----
Weighted average yield on loan portfolio 8.50% 8.58% 8.63%
Weighted average yield on mortgage-backed and related
securities 6.75 6.42 5.32
Weighted average yield on investment securities 5.52 5.97 5.49
Weighted average yield on interest-bearing deposits 4.81
4.99 4.03
Weighted average yield on all interest-earning assets 7.26
7.43 6.99
Weighted average yield paid on all interest-bearing
liabilities (1) 4.99 5.32 4.49
---- ---- ----
Interest rate spread (spread between weighted average
interest rate on all interest-bearing assets and
all interest-bearing liabilities) 2.27% 2.11% 2.50%
==== ==== ====
------------------------------
<FN>
(1) All of Peoples Federal's interest-bearing liabilities are in the form
of deposits.
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:
[Enlarge/Download Table]
Year ended September 30,
------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
------------------------- ------------------------- -------------------------
Increase Increase Increase
(decrease) (decrease) (decrease)
due to due to due to
--------------- --------------- -----------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
(In thousands)
Interest income attributable to:
Interest-bearing deposits $230 $ (29) $201 $ (39) $ 65 $ 26 $ (104) $ 31 $ (73)
Investment securities (224) (13) (237) 20 123 143 256 (91) 165
Mortgage-backed and related (1) 104 103 (2) 222 220 (51) (272) (323)
securities
Loans receivable 236 (30) 206 (24) (156) (180) (161) (383) (544)
---- ----- ----- ----- ------ ----- ------ ------ ----
Total interest income 241 32 273 (45) 254 209 (60) (715) (775)
---- ---- ----- ----- ------ ----- ------ ----- ----
Interest expense attributable to:
NOW accounts 5 (2) 3 3 (1) 2 2 (3) (1)
Money market accounts (25) (5) (22) (13) (1) (14) (3) (13) (16)
Passbook savings accounts 25 (22) 3 (31) (10) (41) 4 (51) (47)
Certificates of deposit 109 156 265 (18) 93 75 (52) (304) (356)
---- ---- ----- ----- ------- ------ ------- ------ ----
Total interest expense 122 127 249 (59) 81 22 (49) (371) (420)
---- ----- ----- ----- ------- ------ ------- ------ ----
Increase (decrease) in
net interest income $119 $ (95) $ 24 $ 14 $173 $187 $ (11) $(344) ($355)
==== ====== ===== ===== ==== ==== ====== ===== =====
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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. See "Liquidity and
Capital Resources."
At September 30, 1996, 2% of the present value of Peoples Federal's
assets was approximately $1.7 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 $2.7 million at September
30, 1996, Peoples Federal would have been required to deduct approximately
$489,000 (50% of the approximate $978,000 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, 1996, would still have exceeded the regulatory requirement by
$12.4 million.
Presented below, as of September 30, 1996, 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.
[Download Table]
September 30, 1996
---------------------------
Change in Interest Rate Board Limit $ Change % Change
(Basis Points) % Change in NPV in NPV
-------------- -------- ------ ------
+300 (70)% $(4,290) (23)%
+200 (45) (2,660) (14)
+100 (25) (1,164) (6)
- - - -
-100 (25) 820 4
-200 (45) 1,119 6
-300 (70) 1,472 8
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,
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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. In addition, at September 30, 1996, $14.9 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.
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 ("MCSC"), the only asset of which was stock of
Intrieve, a data processing company. Such shares were redeemed by Intrieve on
October 20, 1995.
PERSONNEL
As of September 30, 1996, Peoples Federal had 19 full-time employees
and 3 part-time employees. Peoples Federal believes that relations with its
employees are good. Peoples Federal offers health and life insurance benefits.
None of the employees of Peoples Federal are represented by a collective
bargaining unit.
REGULATION
GENERAL
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.
PFC also is subject to regulation, examination and oversight by the OTS
as the holding company of Peoples Federal and is required to submit periodic
reports to the OTS.
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Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
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 which may limit the
activities in which PFC may engage and subject PFC to other 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 may change the activities in which either PFC and
Peoples Federal may engage, it is not anticipated that the current activities of
either PFC or Peoples Federal will be materially affected by those activity
limits. See Exhibit 99, "Safe Harbor Under the Private Securities Litigation
Reform Act of 1995 - Legislation and Regulation that may Adversely Affect PFC's
Earnings."
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 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. Neither
PFC nor Peoples Federal has 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 certain 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. The Control Share
Acquisition Statute was intended, in part, to protect shareholders of Ohio
corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation, including savings and loan associations.
Such statute provides that no offeror may make a takeover bid unless (i) at
least 20 days prior thereto the offeror announces publicly the terms of the
proposed takeover bid and files with the Ohio Division of Securities (the
"Securities Division") and provides the target company with certain information
in respect of the offeror, his ownership of the company's shares and his plans
for the company, and (ii) within ten days following such filing either (a) no
hearing is required by the Securities Division, (b) a hearing is requested by
the target company within such time but the Securities Division finds no cause
for hearing exists, or (c) a hearing is ordered and upon such hearing the
Securities Division adjudicates that the offeror proposes to make full, fair and
effective disclosure to offers of all information material to a decision to
accept or reject the offer.
-22-
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company, or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
OTS REGULATIONS
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all savings associations the
deposits of which are insured by the FDIC in the SAIF and all federally
chartered savings institutions. The OTS issues regulations governing the
operation of savings associations, regularly examines such institutions and
imposes assessments on savings associations based on their asset size to cover
the costs of this supervision and examination. It also promulgates regulations
that prescribe the permissible investments and activities of federally chartered
savings associations, including the type of lending that such associations may
engage in and the investments in real estate, subsidiaries and securities they
may make. 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.
Federally chartered savings associations are subject to regulatory
oversight by the OTS under various consumer protection and fair lending laws.
These laws govern, among other things, truth-in-lending disclosure, 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
transaction. Community reinvestment regulations evaluate how well and to what
extent an institution lends and invests in its designated service area, with
particular emphasis on low-to-moderate income areas and borrowers. Peoples
Federal has received a "Satisfactory" examination rating under those
regulations.
REGULATORY CAPITAL REQUIREMENTS. Peoples Federal is required by OTS
regulations to meet certain minimum capital requirements. These requirements
call for tangible capital of 1.5% of adjusted total assets, core capital (which
for Peoples Federal is equal to tangible capital) of 3% of adjusted total
assets, and risk-based capital (which for Peoples Federal consists of core
capital and general valuation allowances) equal to 8% of risk-weighted assets.
Assets and certain off balance sheet items are weighted at percentage levels
ranging from 0% to 100% depending on their relative risk.
The OTS has proposed to amend the core capital requirement so that
those associations that do not have the highest examination rating and 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. Peoples Federal's core
capital ratio at September 30, 1996, was 18.9%.
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 that requirement, a savings association would 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, and Peoples Federal currently qualifies for such exemption. 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 capital category, an institution is
subject to more restrictive and 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 can downgrade an
association's designation notwithstanding its capital level, based on less than
satisfactory examination ratings in areas other than capital or, after notice
and an opportunity for hearing, if the institution is deemed to be in an unsafe
or unsound condition or to be engaging in an unsafe or unsound practice. Each
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes
-23-
undercapitalized. Such institution 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. A critically
undercapitalized institution must be placed in conservatorship or receivership
within 90 days after reaching such capitalization level, except under limited
circumstances. Peoples Federal's capital at September 30, 1996, meets the
standards for a well-capitalized association.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with the terms of an
OTS-approved capital plan until the institution has been adequately capitalized
on an average during each of four consecutive 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
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution at the time the
institution fails to comply with its capital restoration plan.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions according to ratings of associations based on their capital level
and supervisory condition. Capital distributions, for purposes of such
regulation, include, without limitation, payments of cash dividends, repurchases
and certain other acquisitions by an association of its shares and payments to
stockholders of another association in an acquisition of such other association.
The first rating category is Tier 1, consisting of associations that,
before and after the proposed capital distribution, meet their fully phased-in
capital requirement. Associations in this category may make capital
distributions during any calendar year equal to the greater of 100% of its 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, or the amount authorized for a Tier 2 association. The second
category, Tier 2, consists of associations that, before and after the proposed
capital distribution, meet their current minimum, but not fully phased-in
capital requirement. Associations in this category may make capital
distributions up to 75% of their net income over the most recent four quarters.
Tier 3 associations do not meet their current minimum capital requirement and
must obtain OTS approval of any capital distribution. A Tier 1 association
deemed to be in need of more than normal supervision by the OTS may be treated
as a Tier 2 or a 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. As a subsidiary
of PFC, Peoples Federal will also be required to give the OTS 30 days' notice
prior to declaring any dividend on its common shares. The OTS may object to the
dividend during that 30-day period based on safety and soundness concerns.
Moreover, the OTS may prohibit any capital distribution otherwise permitted by
regulation if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
In December 1994, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, an association not owned by a holding
company and having a CAMEL examination rating of 1 or 2 could make a capital
distribution without notice to the OTS, if it remains adequately capitalized, as
described above, after the distribution is made. Any other association seeking
to make a capital distribution that would not cause the association to fall
below the capital levels to qualify as adequately capitalized or better would
have to provide notice to the OTS. Except under limited circumstances and with
OTS approval, no capital distribution would be permitted if it would cause the
association to become undercapitalized or worse.
LIQUIDITY. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each member institution to maintain an average
daily balance of short-term liquid assets of 1% of the total of its net
withdrawable savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed upon member institutions failing to meet these
liquidity requirements. The eligible liquidity of Peoples Federal, as computed
under current regulations, at September 30, 1996, was approximately $12.6
million, or 19.0%, and exceeded the then applicable 5% liquidity requirement by
approximately $9.3 million, or 14.0%.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, there was only one QTL test. Such
test required savings associations to maintain a specified level of investments
in assets that are designated as qualifying thrift investments ("QTI"), which
are generally related to domestic residential real
-24-
estate and manufactured housing and include credit card, student and small
business loans, 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 9 out of every 12 months.
Congress created a second QTL test, effective September 30, 1996, pursuant to
which a savings association may also qualify under the Internal Revenue Code of
1986, as amended (the "Code"), for thrift institution status. According to the
test under the Code, at least 60% of the institution's assets (on a tax basis)
must consist of specified assets (generally loans secured by residential real
estate or deposits, educational loans, cash 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, 1996, 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 total capital under the regulatory capital requirements plus
any additional loan reserve not included in total capital. A savings association
may loan to one borrower an additional amount not to exceed 10% of total capital
plus additional reserves if the additional loan 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 these
limits. In applying these limits, loans to certain borrowers may be aggregated.
Notwithstanding the specified limits, an association may lend to one borrower up
to $500,000 "for any purpose." At September 30, 1996, Peoples Federal was in
compliance with this lending limit. See "THE BUSINESS OF PEOPLES FEDERAL -
Lending Activities -- Loan Originations, Purchases and Sales."
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
assets). 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, 1996.
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, purchase 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, 1996.
HOLDING COMPANY REGULATION. PFC is a savings and loan holding company
within the meaning of the Home Owners' Loan Act (the "HOLA"). As such, PFC
registered with the OTS and is subject to OTS regulations, examination,
supervision and reporting requirements, in addition to the reporting
requirements of the Securities and Exchange Commission (the "SEC"). Congress is
considering legislation which may require that PFC become or be treated as a
bank holding company regulated by the FRB. Bank holding companies with more than
$150 million in assets are subject to capital requirements similar to those
imposed on Peoples Federal and have more extensive interstate acquisition
authority than savings and loan holding companies. They are also subject to more
restrictive activity and investment limits than savings and loan holding
companies. No assurances can be given that such legislation will be enacted, and
PFC cannot be certain of the legislation's impact on its future operations until
it is enacted.
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
-25-
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 the holding
company. 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 company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other savings
and loan holding company.
PFC is a unitary savings and loan holding company. There are generally
no restrictions on the activities of a unitary savings and loan holding company,
and such companies are the only financial institution holding companies which
may engage in commercial, securities and insurance activities without
limitation. Congress is considering, however, either limiting unitary savings
and loan holding companies to the same activities as other financial institution
holding companies or permitting certain bank holding companies to engage in
commercial activities and expanded securities and insurance activities. PFC
cannot predict if and in what form these proposals might become law. The broad
latitude to engage in activities under current law can be restricted, however,
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 the holding company 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, 1996, Peoples Federal met the QTL Test. See "Qualified Thrift
Lender Test."
If PFC were to acquire control of another savings institution other
than through a merger or other business combination with Peoples Federal, PFC
would thereupon become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets 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 further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
institution shall commence, or shall continue 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)
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 also approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state, if the multiple savings and loan holding company involved
controls a savings association which 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.
FDIC REGULATIONS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and thrifts and safeguards the safety and soundness of the bank and thrift
industries. The FDIC administers two separate insurance funds, the BIF for
commercial banks and state savings banks and the SAIF for savings associations
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund. The reserves of
the SAIF are below the level required by law because a significant portion of
the assessments paid into the fund are used to pay the cost of prior thrift
failures. The reserves of the BIF met the level required by law in May 1995.
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Depository institutions are generally prohibited from converting from
one insurance fund to the other until the SAIF meets its designated reserve
level, except with the prior approval of the FDIC in certain limited cases,
provided applicable exit and entrance fees are paid. The insurance fund
conversion provisions do not prohibit a SAIF member from converting to a bank
charter or merging with a bank during the moratorium, as long as the resulting
bank continues to pay the applicable insurance assessments to the SAIF during
that period and certain other conditions are met.
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.
ASSESSMENTS. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance each for members of the BIF and 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 its target level within a
reasonable time and may decrease such rates if such target level has been met.
The reserves of the SAIF are below the level required by law because a
significant portion of the assessments paid into the SAIF are used to pay the
cost of prior thrift failures. The BIF has, however, met its required reserve
level.
The assessments paid by healthy savings associations exceeded those
paid by healthy BIF members by approximately $.19 per $100 in deposits for 1995,
and no BIF assessments will be required of healthy commercial banks in 1996
except a $2,000 minimum fee. The disparity in the premiums paid between savings
associations and commercial banks could have a negative competitive impact on
Peoples Federal and other savings associations.
Legislation to recapitalize the SAIF and eliminate the significant
premium disparity became effective September 30, 1996. The recapitalization plan
provides for a special assessment equal to $.657 per $100 of SAIF deposits held
at March 31, 1995, in order to increase SAIF reserves to the level required by
law. In addition, the cost of prior thrift failures will be shared by both the
SAIF and the BIF, which will increase BIF assessments in 1997. SAIF assessments
for healthy savings associations will be approximately $.064 per $100 in
deposits in 1997 but can never be reduced below the level set for healthy BIF
institutions.
On the basis of its $65.7 million in deposits at March 31, 1996,
Peoples Federal paid on November 27, 1996, an additional pre-tax assessment of
approximately $428,000. Such payment was recorded as an expense and accounted
for by Peoples Federal as of September 30, 1996. Earnings and capital were,
therefore, negatively affected for the quarter ended September 30, 1996, by an
after-tax amount of approximately $282,000.
The recapitalization plan also provides for the merger of the SAIF and
the BIF effective January 1, 1999, assuming there are no savings associations
under federal law.
Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, Peoples Federal would have to convert to a different
financial institution charter and would be regulated under federal law as a
bank, including being subject to the more restrictive authority limitations
imposed on national banks.
In addition, PFC may 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 the regulation of Peoples Federal as, a
bank until the legislation requiring such change is enacted.
FRB REGULATIONS
RESERVE REQUIREMENTS. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW accounts) of
3% of deposits in net transaction accounts for that portion of accounts in
excess of $4.3 million up to $52 million, and to maintain reserves of 10% of
deposits in net transaction accounts against that portion of total transaction
accounts in excess of $52 million. These percentages are subject to adjustment
by the FRB. At September 30, 1996, Peoples Federal was in compliance with its
reserve requirements.
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FEDERAL HOME LOAN BANKS
The FHLBs, under the regulatory oversight of the Federal Housing
Financing Board, 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.
Peoples Federal is in compliance with this requirement with an investment in
FHLB of Cincinnati stock of $748,000 at September 30, 1996.
FHLB advances to members such as Peoples Federal who meet the QTL test
are generally limited to the lower of (i) 25% of the member's assets and (ii) 20
times the member's investment in FHLB stock. At September 30, 1996, Peoples
Federal's maximum limit on advances was approximately $15.0 million. The
granting of advances is subject also to the FHLB's collateral and credit
underwriting guidelines. At September 30, 1996, the FHLB of Cincinnati offered
advances with fixed and variable interest rates ranging from 5.45% to 7.90%,
which included the following types of borrowings: short-term advances with terms
ranging from one day to one year, including cash management accounts and lines
of credit; fixed-rate, long-term advances with terms ranging from seven months
to 20 years; and various customized advances with terms ranging from one month
to 30 years and with call, balloon or mortgage-matching features.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati 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 applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. 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 each FHLB must be made only to provide
funds for residential housing finance. The FHLBs have established an "Affordable
Housing Program" to subsidize the interest rate of advances to member
associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. Peoples Federal has not participated in such program.
TAXATION
FEDERAL TAXATION
PFC and Peoples Federal are each subject to the federal tax laws and
regulations which apply to corporations generally. Certain thrift institutions,
including Peoples Federal, were, however, prior to the enactment of the Small
Business Jobs Protection Act, which was signed into law on August 21, 1996,
allowed deductions for bad debts under methods more 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 the reserve method of Section 593 of the Code.
Under Section 593, a thrift institution annually could 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 1996, 1995 and
1994, Peoples Federal used the percentage of taxable income method because such
method provided a higher bad debt deduction than the experience method.
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Section 1616(a) of the Small Business Job Protection Act repealed the
Section 593 reserve method of accounting for bad debts by thrift institutions,
effective for taxable years beginning after 1995. Thrift institutions that would
be 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. The
percentage of taxable income method of accounting for bad debts is no longer
available for any financial institution.
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. Any adjustment under Section 481(a) of the Code
required to be recaptured with respect to such change generally 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 becomes 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
becomes 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 then 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 real and church property and certain
mobile homes), but only to the extent that the loan is made to the owner of the
property to acquire, construct, or improve the property.
In addition to the regular income tax, PFC and Peoples Federal are
subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax
rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. 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. In addition, for taxable years after 1986 and
before 1996, PFC and Peoples Federal are also subject to an environmental tax
equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2.0 million.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Job Protection Act which
requires 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 (excess 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 Peoples Federal's gross
income 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, 1996, Peoples Federal's pre-1988 reserves for tax purposes totaled
approximately $1.8 million. Peoples Federal believes it had approximately $4.9
million of accumulated earnings and
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profits for tax purposes as of September 30, 1996, which would be available for
dividend distributions, provided regulatory restrictions applicable to the
payment of dividends are met. See "REGULATION - OTS Regulations -- Limitations
on Capital Distributions." 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 1992. 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.
In computing its tax under the net worth method, PFC may exclude 100%
of its investment in the capital stock of Peoples Federal after the Conversion,
as reflected on the balance sheet of PFC, in computing its taxable net worth as
long as it owns at least 25% of the issued and outstanding capital stock of
Peoples Federal. The calculation of the exclusion from net worth is based on the
ratio of the excludable investment (net of any appreciation or goodwill included
in such investment) to total assets multiplied by the net value of the stock. As
a holding company, PFC may be entitled to various other deductions in computing
taxable net worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations, including
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 Peoples
Federal's book net worth determined in accordance with GAAP. 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.
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ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at September 30,
1996, regarding the properties on which the main office, the branch office and
the lending office of Peoples Federal are located:
[Enlarge/Download Table]
Owned Date Square Net
Location or leased acquired footage book value(1) Deposits
-------- --------- -------- ------- ------------- --------
Main Office:
211 Lincoln Way East
Massillon, Ohio 44646 Owned 1958 7,200 $686,000 $52.0 million
Branch Office:
2312 Lincoln Way N.W.
Massillon, Ohio 44647 Owned 1978 1,400 $448,000 $12.4 million
Lending Office:
4344 Metro Circle, N.W.
North Canton, Ohio 44720 Leased(2) N/A - $31,000(3) N/A
-----------------------------
<FN>
(1) At September 30, 1996, Peoples Federal's office premises and equipment
had a total net book value of $1.5 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) Peoples Federal has made leasehold improvements with an unamortized
value of $31,000 to the office.
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 1,491,012 common shares of PFC outstanding on December 1,
1996, held of record by approximately 333 shareholders. Price information with
respect to PFC's common shares is quoted on The Nasdaq Small Cap Market
("Nasdaq") under the symbol "PFFC". The high and low sales prices for the common
shares of PFC, as quoted by Nasdaq, were $12.75 and $10.875 per share,
respectively, between September 12, 1996, the date of completion of the
Conversion, and September 30, 1996. PFC had declared no dividends as of December
1, 1996.
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.
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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 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
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, PFC's operations 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
interest rates in the nation and PFC's general market area. The forward-looking
statements contained herein include those with respect to the following matters:
1. Management's determination of the amount of loan loss allowance;
2. The effect of changes in interest rates;
3. Changes in deposit insurance premiums; and
4. Proposed legislation that would eliminate the federal thrift charter and
the separate federal regulation of thrifts.
CHANGES IN FINANCIAL CONDITION
PFC's consolidated assets totaled $89.3 million at September 30, 1996,
an increase of $12.0 million, or 15.5%, over the $77.3 million total at
September 30, 1995. The principal changes in the composition of assets during
the year ended September 30, 1996, consisted of increases in loans receivable
and interest-bearing deposits in other financial institutions, offset by
decreases in investment securities and mortgage-backed securities. The increase
in total assets was funded primarily by the $13.6 million of net proceeds from
PFC's offering of common shares, which was partially offset by a $2.2 million
decrease in deposits.
Interest-bearing deposits in other financial institutions totaled $12.3
million at September 30, 1996, an increase of $10.6 million. This increase was
primarily funded by the net proceeds from the offering of common shares.
Investment securities and mortgage-backed securities totaled $29.8 million at
September 30, 1996, as compared to $34.7 million at September 30, 1995, a
decrease of $4.9 million, or 14.3%. Investment securities decreased due to
maturities, principally of
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FHLB certificates of deposit, and principal repayments totaling $6.8 million,
which were partially offset by purchases of $4.5 million. Mortgage-backed
securities decreased due to principal repayments of $5.1 million, which were
partially offset by purchases of $2.2 million.
Loans receivable increased to $44.2 million at September 30, 1996, from
$38.0 million at September 30, 1995, an increase of $6.2 million, or 16.3%. One-
to four-family loans increased by $11.3 million, but such increase was partially
offset by an increase in undisbursed loans in process of $5.3 million. Loan
disbursements of multi-family and nonresidential real estate loans also
increased, and consumer and other loans decreased, all by small amounts. Loan
disbursements of $15.1 million were partially offset by principal repayments of
$8.8 million during the year ended September 30, 1996. Fiscal 1995 loan
disbursements totaled $7.8 million and principal repayments amounted to $6.8
million.
Peoples Federal's allowance for loan losses totaled $193,000, or .4% of
total loans and 772% of nonperforming loans at September 30, 1996, compared to
the fiscal 1995 allowance of $80,000, which represented .2% of total loans and
12.3% of nonperforming loans. This increase was due to a provision for losses on
loans of $105,000 and a recovery of loans written off in prior years. The loss
provision was primarily related to three delinquent loans with total unpaid
balances of $572,000. The properties securing these loans were placed in
foreclosure in April 1996, and sold at a sheriff's sale in October 1996, with
Peoples Federal receiving full repayment in December 1996.
Notwithstanding the reduction in nonperforming loans during the year,
management believes that retention of the allowance for loan losses at September
30, 1996 levels is prudent, based on facts and circumstances available to it.
There can be no assurances, 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 increases 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.
Savings deposits totaled $64.4 million at September 30, 1996, as
compared to $66.6 million at September 30, 1995, a decrease of $2.2 million, or
3.3%. The decline was primarily due to depositors' withdrawals to purchase
shares of PFC, as well as withdrawals on certificates of deposit maturing late
in the year.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND
1995
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 is 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 savings deposits.
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
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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.
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 OPERATING 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 Savings Association
Insurance Fund (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. As a result of the recapitalization of
the SAIF, the current disparity between bank and thrift insurance assessments
will be reduced. Thrifts had been paying assessments of $.23 per $100 of
deposits, which, for most thrifts, will be reduced to $.064 per $100 in deposits
in January 1997, and to $.024 per $100 in deposits no later than January 2000.
If Peoples Federal's deposits were to remain constant next year, annual deposit
insurance premiums would be reduced by approximately $110,000, increasing net
earnings by approximately $70,000.
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.
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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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND
1994
GENERAL
Net earnings totaled $394,000 for the fiscal year ended September 30,
1995, an increase of $15,000, or 4.0%, over the net earnings of $379,000
reported for fiscal 1994. The increase resulted primarily from an increase of
$187,000 in net interest income, which was partially offset by increases of
$7,000 in the provision for loan losses, $159,000 in general, administrative and
other expense and $2,000 in the provision for federal income taxes.
NET INTEREST INCOME
Total interest income for the year ended September 30, 1995, totaled
$5.4 million, an increase of $209,000, or 4.1%, over the $5.2 million recorded
in fiscal 1994. Interest income from loans declined by $180,000, or 5.5%. The
reduction resulted primarily from a $286,000 decrease in the weighted-average
outstanding balance, and a decrease in weighted-average yield to 8.39% in 1995,
from 8.80% in fiscal 1994. Interest income on mortgage-backed securities,
investment securities and interest-bearing deposits increased by $389,000, or
20.8%. The increase resulted primarily from an increase in weighted-average
yields on such investments, which was partially offset by a decrease in average
outstanding balances of $369,000. Funds available to invest in interest-earning
assets decreased as customers deposit balances decreased.
Interest expense on deposits for the years ended September 30, 1995 and
1994, totaled $3.1 million both years, an increase of $22,000 for fiscal 1995
over 1994. This increase was due to an increase in the weighted-average interest
rate paid to 4.81% in fiscal 1995 from 4.64% in fiscal 1994, offset by a
decrease of $1.9 million in the weighted-average outstanding balance of
deposits.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by approximately $187,000, or 9.2%, to
$2.2 million for the year ended September 30, 1995, from $2.0 million for fiscal
1994. The interest rate spread increased to 2.46% in 1995, from 2.28% in 1994,
while the net interest margin increased to 3.01% in 1995, from 2.73% in 1994.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans amounted to $12,000 for fiscal 1995,
compared to $5,000 in fiscal year 1994.
OTHER OPERATING INCOME
Other operating income totaled $23,000 for fiscal 1995, compared to
$27,000 for fiscal 1994. Such income consisted primarily of service fees, safe
deposit box rentals, service charges on NOW accounts and mortgage late charges.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
General, administrative and other expense totaled $1.7 million for
fiscal 1995, compared to $1.5 million for fiscal 1994, an increase of $159,000,
or 10.6%. Growth in general, administrative and other expense related to
increases of $31,000, or 43.1%, in data processing, $29,000, or 70.7%, in
advertising, $23,000, or 3.5%, in employee compensation and benefits, $8,000, or
6.1%, in franchise taxes, $4,000, or 2.1%, in occupancy and equipment and
$69,000, or 27.6%, in other operating. Data processing costs were higher in
fiscal 1995 due to contract cancellation fees, while Peoples Federal engaged an
advertising firm to promote the Association, which increased advertising costs
for the use of outdoor, radio and television advertising, and printing
brochures. Employee compensation and benefits increased due to normal merit
increases, increased salaries resulting from extended office hours, provision
for an officer's retirement payment recorded in fiscal 1995, and a reduction in
the amount of loan costs deferred, which were partially offset by a reduction in
health care costs, a decrease in retirement plan costs resulting from a 1994
excess provision, and elimination of the retired officer's salary. Attendance at
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additional industry seminars by directors and officers and additional legal and
professional expenses incurred, offset by deferral of a smaller amount of loan
costs due to decreased loan originations, accounted for the significant
increases in other operating expenses. Federal deposit insurance premiums
decreased by $5,000, or 3.2%.
FEDERAL INCOME TAXES
The provision for federal income taxes totaled $177,000 for the year
ended September 30, 1995, an increase of $2,000 from the $175,000 recorded in
fiscal 1994. The increase was primarily due to the increase in net earnings
before taxes of $17,000, or 3.1%. PFC's effective tax rates were 31.0% for
fiscal 1995 and 31.6% for 1994.
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AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
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 customer deposits 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 customer
deposits, respectively, for the years presented. Average balances are derived
from month-end balances, which include nonaccruing loans in the loan portfolio,
net of the allowance for loan losses.
[Enlarge/Download Table]
Year ended September 30,
--------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ----------------------------- ----------------------------
Average Average Average
outstanding Interest outstanding Interest outstanding Interest Yield/
balance earned/paid Yield/rate balance earned/paid Yield/rate balance earned/paid rate
------- ----------- ---------- ------- ----------- ---------- ------- ----------- ----
(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits $ 7,130 $ 319 4.47% $ 1,989 $ 118 5.93% $ 2,662 $ 92 3.46%
Investment securities 7,292 435 5.96 11,060 672 6.08 10,721 529 4.93
Mortgage-backed and related securities 23,671 1,569 6.63 23,680 1,466 6.19 23,715 1,246 5.25
Loans receivable (1) 39,844 3,309 8.31 37,007 3,103 8.39 37,293 3,283 8.80
------- ------- ---- ------- ------- ---- ------- ------- ----
Total interest-earning assets 77,937 5,632 7.23 73,736 5,359 7.27 74,391 5,150 6.92
Non-interest-earning assets
Cash and amounts due from depository 250 257 274
institutions
Premises and equipment, net 1,517 1,493 1,528
Other non-earning assets 565 357 528
------- ------- -------
Total assets $80,269 $75,843 $76,721
======= ======= =======
Interest-bearing liabilities:
NOW accounts $ 1,431 $ 18 1.26% 985 $ 15 1.52% $ 820 $ 13 1.59%
Money market accounts 3,402 87 2.56 4,076 109 2.67 4,559 123 2.70
Passbook savings accounts 13,958 326 2.34 12,877 323 2.51 14,120 364 2.58
Certificates of deposit 49,249 2,960 6.01 47,445 2,695 5.68 47,754 2,620 5.49
------- ----- ------ ------- ------- ------ ------- ------- ----
Total interest-bearing liabilities 68,040 3,391 4.98 65,383 3,142 4.81 67,253 3,120 4.64
----- ------ ------- ------ ------- ----
Non-interest-bearing liabilities 1,032 917 641
------- ------- -------
Total liabilities 69,072 66,300 67,894
Shareholders' equity (2) 11,197 9,543 8,827
------- ------- -------
Total liabilities and shareholders' equity $80,269 $75,843 $76,721
======= ======= =======
Net interest income; interest rate spread $2,241 2.25% $ 2,217 2.46% $ 2,030 2.28%
===== ====== ======= ======= ======= ====
Net interest margin (net interest income 2.88% 3.01% 2.73%
as a percent of average ====== ======= ====
interest-earning assets)
Average interest-earning assets to average
interest-bearing liabilities 114.55% 112.78% 110.61%
====== ====== ======
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
the allowance for loan losses. (2) In fiscal years ended September 30, 1995 and
1994, consisted of retained earnings only.
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RATE/VOLUME TABLE
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected PFC and 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:
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30,
1996 VS. 1995 1995 VS. 1994
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
(In thousands)
Interest income attributable to:
Interest-bearing deposits $ 230 $ (29) $ 201 $ (39) $ 65 $ 26
Investment securities (224) (13) (237) 20 123 143
Mortgage-backed and related securities (1) 104 103 (2) 222 220
Loans receivable 236 (30) 206 (24) (156) (180)
----- ----- ----- ----- ----- -----
Total interest income 241 32 273 (45) 254 209
----- ----- ----- ----- ----- -----
Interest expense attributable to:
NOW accounts 5 (2) 3 3 (1) 2
Money market accounts (17) (5) (22) (13) (1) (14)
Passbook savings accounts 25 (22) 3 (31) (10) (41)
Certificates of deposit 109 156 265 (18) 93 75
----- ----- ----- ----- ----- -----
Total interest expense 122 127 249 (59) 81 22
----- ----- ----- ----- ----- -----
Increase (decrease) in net interest income $ 119 $ (95) $ 24 $ 14 $ 173 $ 187
===== ===== ===== ===== ===== =====
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 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 can illustrate Peoples Federal's degree of 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. See "Liquidity and
Capital Resources."
At September 30, 1996, 2% of the present value of Peoples Federal's
assets was approximately $1.7 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 $2.7 million at September
30, 1996, Peoples Federal would have been required to deduct approximately
$489,000 (50% of the approximate $978,000 difference) from its capital in
determining whether Peoples Federal met is risk-based capital requirement.
Regardless of such reduction, however, Peoples Federal's risk-based capital at
September 30, 1996, would still have exceeded the regulatory requirement by
$12.4 million.
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Presented below, as of September 30, 1996, 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. At September 30, 1996,
fixed-rate loans constituted 90.3% of Peoples Federal's loan portfolio. 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 of
repricing. Assumptions in calculating the amounts in this table are OTS
assumptions.
[Download Table]
SEPTEMBER 30, 1996
CHANGE IN INTEREST RATE BOARD LIMIT $ CHANGE % CHANGE
(BASIS POINTS) % CHANGE IN NPV IN NPV
+300 (70)% $(4,290) (23)%
+200 (45) (2,660) (14)
+100 (25) (1,164) (6)
- - - -
-100 (25) 820 4
-200 (45) 1,119 6
-300 (70) 1,472 8
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 rise, 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.
LIQUIDITY AND CAPITAL RESOURCES
Peoples Federal's principal sources of funds are deposits, loan and
mortgage-backed securities repayments, maturities of securities and other funds
provided by operations. Although it has never done so, Peoples Federal also has
the ability to borrow from the FHLB of Cincinnati. While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and loan and mortgage-backed securities prepayments are more influenced by
interest rates, general economic conditions and competition. Peoples Federal
maintains investments in liquid assets based upon management's assessment of (1)
the need for funds, (2) expected deposit flows, (3) the yield available on
short-term liquid assets and (4) the objectives of the asset/liability
management program.
OTS regulations presently require Peoples Federal to maintain an
average daily balance of cash, investments in United States Treasury and agency
securities and other investments having maturities of five years or less in an
amount equal to 5% of the sum of Peoples Federal's average daily balance of net
withdrawable deposit accounts. The liquidity requirement, which may be changed
from time to time by the OTS to reflect changing economic conditions, is
intended to provide a source of relatively liquid funds upon which Peoples
Federal may rely if necessary to fund deposit withdrawals or other short-term
funding needs. At September 30, 1996, Peoples Federal's regulatory liquidity
ratio was 19.0%. At such date, Peoples Federal had commitments to originate
loans totaling $1.9 million and, in addition, had undisbursed loans in
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process of $6.3 million. At September 30, 1996, Peoples Federal had no
commitments to purchase or sell loans. Peoples Federal considers its liquidity
and capital sufficient to meet its outstanding short- and long-term needs. At
September 30, 1996, Peoples Federal had no material commitments for capital
expenditures.
Peoples Federal's liquidity, primarily represented by cash and cash
equivalents, is a result of the funds used in or provided by Peoples Federal's
operating, investing and financing activities. These activities are summarized
below for the years ended September 30, 1996, 1995 and 1994:
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30,
1996 1995 1994
(In thousands)
Net earnings $ 77 $ 394 $ 379
Adjustments to reconcile net earnings to
net cash from operating activities 466 155 131
-------- ------ ------
Net cash from operating activities 543 549 510
Net cash from investing activities (1,272) (1,261) 474
Net cash from financing activities 11,398 764 (2,493)
------ ------ -----
Net change in cash and cash equivalents 10,669 52 (1,509)
Cash and cash equivalents at
beginning of year 1,864 1,812 3,321
------- ----- -----
Cash and cash equivalents at end
of year $12,533 $1,864 $1,812
====== ===== =====
Peoples Federal is required by applicable law and regulation to meet
certain minimum capital standards. Such capital standards include a tangible
capital requirement, a core capital requirement or leverage ratio and a
risk-based capital requirement.
The tangible capital requirement requires savings associations to
maintain "tangible capital" of not less than 1.5% of the association's adjusted
total assets. Tangible capital is defined in OTS regulations as core capital
minus intangible assets.
"Core capital" is comprised of common shareholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual association. OTS regulations require savings
associations to maintain core capital of at least 3% of the association's total
assets. The OTS has proposed to increase such requirement to 4% or 5%, except
for those associations with the highest examination rating and acceptable levels
of risk.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of "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
$193,000 at September 30, 1996.
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Peoples Federal exceeded all of its regulatory capital requirements at
September 30, 1996. The following table summarizes Peoples Federal's regulatory
capital requirements and regulatory capital at September 30, 1996:
[Enlarge/Download Table]
EXCESS OF
REGULATORY CAPITAL
OVER CURRENT APPLICABLE
REGULATORY CAPITAL CURRENT REQUIREMENT REQUIREMENT ASSET
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT TOTAL
Tangible capital $15,317 18.9% $1,219 1.5% $14,098 17.4% $81,245
Core capital 15,317 18.9% 2,437 3.0% 12,880 15.9% 81,245
Risk-based capital 15,510 47.6% 2,609 8.0% 12,901 39.6% 32,608
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures about Fair Values of Financial Instruments" requires PFC to
disclose the fair value of its financial instruments, which include the majority
of Peoples Federal's balance sheet accounts, in addition to selected off balance
sheet items. SFAS No. 107 became effective for PFC during fiscal 1996 because
PFC has less than $150 million in total assets. Earlier adoption was required
for entities with assets in excess of $150 million. SFAS No. 107 requires only
disclosure of fair values in the financial statements and, therefore, had no
effect on PFC's consolidated financial condition or results of operations.
In May 1993, the Financial Accounting Standards Board (the "FASB")
issued SFAS No, 114, "Accounting by Creditors for Impairment of a Loan," which
further clarifies the accounting treatment, classification and valuation of
impaired loans. SFAS No. 114, which was amended by SFAS No. 118 as to certain
income recognition and financial statement disclosure provisions, and which was
effective for PFC's fiscal year beginning October 1, 1995, 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 observable market price or fair value of the collateral. PFC's current
procedures for evaluating impaired loans result in carrying loans at the lower
of cost or fair value. Management adopted SFAS No. 114 as of October 1, 1995,
without effect on PFC's financial position or results of operations.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", which revises the accounting
treatment, classification and carrying value of investment securities. This
accounting standard results in adjusting certain investment securities to market
value. Under SFAS No. 115, investment securities are classified for balance
sheet purposes based on whether such securities are either held in trading
accounts, available for sale or strictly to be held to maturity. Under SFAS No.
115, trading account securities are marked to market and the corresponding
unrealized gains and losses are reflected in earnings. Investment securities
"available for sale" are adjusted to market value with the corresponding
unrealized gain or loss shown as an adjustment to shareholders' equity net of
deferred income taxes. Investment securities earmarked to be held to maturity
are carried at amortized cost. Peoples Federal adopted SFAS No. 115 for the
fiscal year beginning October 1, 1994, by designating all debt and
mortgage-backed securities as held to maturity. The effect of the adoption was
to initially increase retained earnings by approximately $382,000 on October 1,
1994, representing the unrealized market value appreciation of Peoples Federal's
FHLMC stock, net of applicable deferred federal income taxes.
In November 1995, 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, 1996, the Corporation's shareholders' equity
reflected a net unrealized gain of $645,000 on securities designated as
available for sale.
In October 1994, the FASB issued SFAS No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments." SFAS
No. 119 requires financial statement disclosure of certain derivative financial
instruments, defined as futures, forwards, swaps, option contracts, or other
financial instruments with similar characteristics. In the opinion of
management, the disclosure requirements of SFAS No. 119 will have no material
effect on PFC's consolidated financial condition or results of operations, as
PFC does not invest in derivative financial instruments, as
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defined. As a result, the applicability of SFAS No. 119 relates solely to
disclosure requirements pertaining to fixed-rate and adjustable-rate loan
commitments.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed
of." SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 requires an impairment
loss to be recognized when the carrying amount of the asset exceeds the fair
value of the asset. The fair value of an asset is the amount at which the asset
could be bought or sold in a current transaction between willing parties (i.e.,
other than in a forced liquidation sale). An entity that recognizes an
impairment loss shall disclose additional information in the financial
statements related to the impaired asset. All long-lived assets and certain
identifiable intangibles to be disposed of and for which management has
committed to a plan to dispose of the assets, whether by sale or abandonment,
shall be reported at the lower of the carrying amount or fair value less cost to
sell. Subsequent revisions in estimates of fair value less cost to sell shall be
reported as adjustments to the carrying amount of assets to be disposed of,
provided that the carrying amount of the asset does not exceed the carrying
amount of the asset before an adjustment was made to reflect the decision to
dispose of the asset. SFAS No. 121 requires additional disclosure in the notes
to financial statements regarding assets to be disposed of and is effective for
fiscal years beginning after December 15, 1995. Management adopted SFAS No. 121
on October 1, 1996, without material effect on PFC's consolidated financial
condition or results of operations.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No. 122 requires that Peoples Federal recognize as
separate assets rights to service mortgage loans for others, regardless of how
those servicing rights were acquired. An institution that acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and sells those loans with servicing rights retained would allocate some of the
cost of the loans to the mortgage servicing rights. SFAS No. 122 also requires
that an enterprise allocate the cost of purchasing or originating the mortgage
loans between the mortgage servicing rights and the loans when mortgage loans
are securitized, if it is practicable to estimate the fair value of mortgage
servicing rights. Additionally, SFAS No. 122 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed for
impairment. Impairment would be measured based on fair value. SFAS No. 122 is
effective for PFC's fiscal year beginning October 1, 1996, to transactions in
which an entity acquires mortgage servicing rights and to impairment evaluations
of all capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive adoption is prohibited. Management
adopted SFAS No. 122 effective October 1, 1996, without effect on PFC's
consolidated financial position or results of operations.
In October 1995, the FASB issued 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.
-42-
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.
SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996, 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.
CHARTER UNIFICATION LEGISLATION
The deposit accounts of Peoples Federal and other savings associations
are insured up to applicable limits by the FDIC in the SAIF. Legislation to
recapitalize the SAIF was enacted on September 30, 1996. Such legislation
provided that the SAIF will be merged into the Bank Insurance Fund if there are
no more savings associations. Such legislation also requires the Department of
Treasury to submit a report to Congress on the development of a common charter
for all financial institutions. In addition, in September 1996, a bill was
introduced to address this charter unification by eliminating the federal thrift
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 may 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, Peoples
Federal might become subject to a different form of holding company regulation,
which may limit the activities in which PFC may engage, and subject PFC to other
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 may change the activities in which either PFC
and Peoples Federal may engage, it is not anticipated that the current
activities of both PFC and Peoples Federal will be materially affected by those
activity limits.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto included herein
have been prepared in accordance with generally accepted accounting principles,
which require PFC to measure financial position and results of operations in
terms of historical dollars with the exception of investment and mortgage-backed
securities available-for-sale, which are carried at fair value. Changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
rate of inflation. While interest rates are greatly influenced by changes in the
rate of inflation, they do not change at the same rate or in the same magnitude
as the rate of inflation. Rather, interest rate volatility is based on changes
in the expected rate of inflation, as well changes in monetary and fiscal
policies.
-43-
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Peoples Financial Corporation
We have audited the accompanying consolidated statement of financial
condition of Peoples Financial Corporation as of September 30, 1996, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for the year 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 audit. The
consolidated financial statements as of September 30, 1995, and for the years
ended September 30, 1995 and 1994, 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 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 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 1996 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Peoples
Financial Corporation as of September 30, 1996, and the consolidated results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Grant Thornton, LLP
Cincinnati, Ohio
December 5, 1996
-44-
PEOPLES FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
[Enlarge/Download Table]
ASSETS 1996 1995
Cash and due from banks $ 276 $ 218
Interest-bearing deposits in other financial institutions 12,257 1,646
-------- --------
Cash and cash equivalents 12,533 1,864
Investment securities designated as available
for sale - at market 5,087 809
Investment securities - at cost, approximate market value
of $1,712 and $7,941 as of September 30, 1996 and 1995 1,688 7,912
Mortgage-backed securities designated as available for
sale - at market 14,113 --
Mortgage-backed securities - at amortized cost,
approximate market value of $9,011 and $25,820
as of September 30, 1996 and 1995 8,875 26,008
Loans receivable - net 44,206 38,021
Office premises and equipment - at depreciated cost 1,515 1,541
Stock in Federal Home Loan Bank - at cost 748 685
Accrued interest receivable 397 375
Prepaid expenses and other assets 95 92
-------- --------
Total assets $ 89,257 $ 77,307
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $64,355 $ 66,564
Other liabilities 667 318
Accrued federal income taxes 32 33
Deferred federal income taxes 497 510
-------- --------
Total liabilities 65,551 67,425
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 and outstanding in 1996 -- --
Additional paid-in capital 14,203 --
Retained earnings - restricted 9,455 9,378
Unrealized gains on securities designated as available
for sale, net of related tax effects 645 504
Shares acquired by Employee Stock Ownership Plan (ESOP) (597) --
-------- --------
Total shareholders' equity 23,706 9,882
-------- --------
Total liabilities and shareholders' equity $ 89,257 $ 77,307
======== ========
The accompanying notes are an integral part of these statements.
-45-
PEOPLES FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands)
[Download Table]
1996 1995 1994
Interest income
Loans $ 3,309 $ 3,103 $ 3,283
Mortgage-backed securities 1,569 1,466 1,246
Investment securities 435 672 529
Interest-bearing deposits and other 319 118 92
------- ------- -------
Total interest income 5,632 5,359 5,150
Interest expense
Deposits 3,391 3,142 3,120
------- ------- -------
Net interest income 2,241 2,217 2,030
Provision for losses on loans 105 12 5
------- ------- -------
Net interest income after
provision for losses on loans 2,136 2,205 2,025
Other operating income 24 23 27
General, administrative and other expense
Employee compensation and benefits 790 682 659
Occupancy and equipment 228 193 189
Franchise taxes 122 140 132
Federal deposit insurance premiums 581 150 155
Data processing 75 103 72
Advertising 31 70 41
Other operating 235 319 250
------- ------- -------
Total general, administrative
and other expense 2,062 1,657 1,498
------- ------- -------
Earnings before income taxes 98 571 554
Federal income taxes
Current 108 150 105
Deferred (87) 27 70
------- ------- -------
Total federal income taxes 21 177 175
------- ------- -------
NET EARNINGS $ 77 $ 394 $ 379
======= ======= =======
The accompanying notes are an integral part of these statements.
-46-
PEOPLES FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1996, 1995 and 1994
(In thousands)
[Enlarge/Download Table]
SHARES
ACQUIRED BY UNREALIZED
EMPLOYEE GAINS ON
STOCK SECURITIES
ADDITIONAL OWNERSHIP DESIGNATED
COMMON PAID-IN PLAN AS AVAILABLE RETAINED
STOCK CAPITAL (ESOP) FOR SALE EARNINGS TOTAL
Balance at October 1, 1993 $- $ -- $ -- $- $ 8,605 $ 8,605
Net earnings for the year ended September 30, 1994 - -- -- -- 379 379
-- ------- ------- ------- ------- -------
Balance at June 30, 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
== ======= ======= ======= ======= =======
The accompanying notes are an integral part of these statements.
-47-
PEOPLES FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
[Enlarge/Download Table]
1996 1995 1994
Cash flows from operating activities:
Net earnings for the year $ 77 $ 394 $ 379
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 64 62 220
Amortization of deferred loan origination (fees) costs 29 18 (5)
Depreciation and amortization 95 82 79
Provision for losses on loans 105 12 5
Federal Home Loan Bank stock dividends (62) (32) (33)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (22) (44) (62)
Prepaid expenses and other assets (3) (11) (1)
Other liabilities 345 33 (41)
Accrued interest payable 3 (8) (4)
Federal income taxes
Current (1) 16 (97)
Deferred (87) 27 70
-------- -------- --------
Net cash provided by operating activities 543 549 510
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities -- (8,160) (3,828)
Purchase of mortgage-backed securities designated
as available for sale (2,243) -- --
Principal repayments on mortgage-backed securities 5,090 4,956 7,503
Purchase of investment securities designated as available
for sale (3,502) -- --
Purchase of investment securities designated as
held to maturity (1,000) (4,246) (16,193)
Proceeds from maturity of investment securities 6,770 7,281 10,297
Loan principal repayments 8,805 6,791 12,489
Loan disbursements (15,125) (7,772) (9,717)
Purchase of office premises and equipment (67) (111) (77)
-------- -------- --------
Net cash provided by (used in) investing activities (1,272) (1,261) 474
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (2,208) 764 (2,493)
Net proceeds from the issuance of common stock 13,606 -- --
-------- -------- --------
Net cash provided by (used in) financing activities 11,398 764 (2,493)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 10,669 52 (1,509)
Cash and cash equivalents at beginning of year 1,864 1,812 3,321
-------- -------- --------
Cash and cash equivalents at end of year $ 12,533 $ 1,864 $ 1,812
======== ======== ========
-48-
PEOPLES FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
[Enlarge/Download Table]
1996 1995 1994
Supplemental disclosure of cash flow information: Cash paid during the year for:
Federal income taxes $ 108 $ 135 $ 202
======= ======= =======
Interest on deposits $ 3,387 $ 3,150 $ 3,125
======= ======= =======
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 $ 141 $ 504 $ --
======= ======= =======
The accompanying notes are an integral part of these statements.
-49-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
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 J. 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). 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, with the exception of
the policy described in Note A-2, 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, at September 30, 1995, its
wholly-owned subsidiary, Massillon Community Service Corporation (Massillon)
. At September 30, 1995, Massillon's principal asset was an investment in
the stock of the Association's former data processor. At September 30, 1996,
Massillon had no assets and was inactive. All intercompany balances and
transactions have been eliminated in the accompanying consolidated financial
statements.
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Prior to October 1, 1994, investment securities and mortgage-backed
securities were carried at cost, adjusted for amortization of premiums and
accretion of discounts. The investment and mortgage-backed securities were
carried at cost as it was management's intent, and the Corporation had the
ability, to hold the securities until maturity. Investment securities and
mortgage-backed securities held for indefinite periods of time, or which
management utilized as part of its asset/liability management strategy, or
that would be sold in response to changes in interest rates, prepayment
risk, or the perceived need to increase regulatory capital were classified
as held for sale at the point of purchase and carried at the lower of cost
or market.
-50-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In May 1993, the Financial Accounting Standards Board (FASB) issued
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. The
Association adopted SFAS No. 115 on October 1, 1994, by designating all debt
and mortgage-backed securities as held to maturity. The initial effect of
adopting SFAS No. 115 was a $382,000 increase in equity, representing the
unrealized market value appreciation on Federal Home Loan Mortgage
Corporation (FHLMC) stock, net of applicable deferred federal income taxes.
In November 1995, 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, 1996, the Corporation's
shareholders' equity reflected a net unrealized gain of $645,000 on
securities designated as available for sale.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. LOANS RECEIVABLE
Loans 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.
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.
-51-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 loans 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 impaired nonresidential and multi-family
residential real estate loans, such loans are generally collateral dependent
and, as a result, are carried as a practical expedient at the lower of cost
or fair value.
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, 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.
-52-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. INCOME TAXES
The Corporation accounts for 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.
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 I. Additional temporary differences
result from depreciation computed using accelerated methods for tax
purposes.
9. RETIREMENT 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 $37,000
for the fiscal year ended September 30, 1996.
The Association had previously funded its retirement benefits through
contributions to a discretionary 401(k) plan. Expense under the plan totaled
$37,000 and $54,000 for fiscal 1995 and 1994. Due to contributions planned
to be made to the ESOP in future years, contributions to this plan will be
frozen beginning October 1, 1996.
10. EARNINGS PER SHARE
The provisions of Accounting Principles Board Opinion No. 15, "Earnings Per
Share", is not applicable for fiscal 1996, 1995 and 1994, as the Corporation
completed its conversion to stock form in September 1996.
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.
-53-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 1996:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in
the consolidated statement 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 statement of financial condition is deemed to
approximate fair value.
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.
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, 1996 was not material.
-54-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at September 30, 1996, are
as follows:
[Download Table]
CARRYING FAIR
VALUE VALUE
(In thousands)
Financial assets
Cash and cash equivalents $12,533 $12,533
Investment securities 6,775 6,799
Mortgage-backed securities 22,988 23,124
Loans receivable 44,206 44,319
Federal Home Loan Bank stock 748 748
------- -------
$87,250 $87,523
======= =======
Financial liabilities
Deposits $64,355 $64,526
======= =======
13. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1996
consolidated financial statement presentation.
-55-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
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, 1996 and
1995, are as follows:
[Enlarge/Download Table]
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
Municipal obligations $ 988 $ 29 $ 6 $1,011
U.S. Government agency obligations 200 1 -- 201
Federal Home Loan Bank certificates
of deposit 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
====== ====== ====== ======
[Enlarge/Download Table]
1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
Municipal obligations $1,105 $ 22 $-- $1,127
U.S. Government agency obligations 199 4 -- 203
Federal Home Loan Bank certificates
of deposit 5,500 -- -- 5,500
Automobile loan pass-through certificates 1,108 5 2 1,111
------ ------ ------ ------
Total investments held to maturity 7,912 31 2 7,941
AVAILABLE FOR SALE:
FHLMC stock 46 763 -- 809
------ ------ ------ ------
Total investment securities $7,958 $ 794 $ 2 $8,750
====== ====== ====== ======
-56-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of investment securities,
including those designated as available for sale, at September 30, 1996, by
term to maturity are shown below.
[Download Table]
ESTIMATED
AMORTIZED FAIR
COST VALUE
(In thousands)
Due in one year or less $4,316 $4,310
Due after one year through five years 476 469
Due in five to ten years 201 204
Due after ten years 653 674
------ ------
5,646 5,657
FHLMC stock 46 1,142
------ ------
$5,692 $6,799
====== ======
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of mortgage-backed securities at September 30, 1996 and
1995, are shown below:
[Enlarge/Download Table]
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
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
======= ======= ======= =======
-57-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
[Enlarge/Download Table]
1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
Government National Mortgage
Association participation certificates $ 9,380 $ -- $ 36 $ 9,344
Federal Home Loan Mortgage
Corporation participation certificates 8,969 10 99 8,880
Federal National Mortgage Association
participation certificates 3,377 41 -- 3,418
Collateralized mortgage obligations -
FNMA and FHLMC REMICs 2,841 -- 76 2,765
Guardian Savings and Loan participation
certificates 1,036 -- 28 1,008
Discovery Resort Limited, partnership notes 405 -- -- 405
------- ------- ------- -------
Total mortgage-backed securities $26,008 $ 51 $ 239 $25,820
======= ======= ======= =======
The amortized cost and estimated fair values of mortgage-backed securities,
including those designated as available for sale at September 30, 1996, by
contractual term to maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may generally prepay
obligations without prepayment penalties.
[Download Table]
ESTIMATED
AMORTIZED FAIR
COST VALUE
(In thousands)
Due in one year or less $ 932 $ 927
Due after one year through five years 2,335 2,311
Due in five to ten years 687 696
Due after ten years 19,139 19,190
------- -------
$23,093 $23,124
======= =======
-58-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
[Download Table]
1996 1995
(In thousands)
Residential real estate
One- to four-family $35,858 $32,253
Multi-family 122 303
Nonresidential real estate 3,695 3,725
Construction 10,579 2,392
Consumer and other loans 412 418
Deferred loan origination costs, net 70 74
------- -------
50,736 39,165
Less:
Undisbursed portion of loans in process 6,337 1,064
Allowance for losses on loans 193 80
------- -------
$44,206 $38,021
======= =======
The Association's lending efforts have historically focused on one- to
four-family residential real estate loans, which comprise approximately
$39.9 million, or 90%, of the total loan portfolio at September 30, 1996,
and approximately $33.9 million, or 89% of the total loan portfolio, at
September 30, 1995. 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 $393,000 and $49,000 at
September 30, 1996 and 1995, respectively.
From time to time, the Association has retained a director to perform legal
services. Fees paid for such services totaled approximately $14,000 and
$16,200 for the years ended September 30, 1996 and 1995.
-59-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
[Download Table]
1996 1995 1994
(In thousands)
Balance at beginning of year $ 80 $ 68 $ 68
Provision for losses on loans 105 12 5
Loan charge-offs -- -- 5
Recoveries 8 -- --
---- ---- ----
Balance at end of year $193 $ 80 $ 68
==== ==== ====
As of September 30, 1996, 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, 1996 and 1995, totaled
$25,000 and $648,000, respectively. There were no nonperforming or
nonaccrual loans at September 30, 1994. 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 loss of interest income on nonperforming loans for the years ended
September 30, 1996 and 1994.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 is comprised of the following:
[Download Table]
1996 1995
(In thousands)
Land $ 355 $ 355
Building and improvements 1,215 1,180
Furniture and equipment 838 806
------ ------
2,408 2,341
Less accumulated depreciation and
amortization 893 800
------ ------
$1,515 $1,541
====== ======
-60-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
[Download Table]
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1996 1995
AMOUNT % AMOUNT %
(In thousands)
NOW accounts
1996 - 1.50% $ 1,293 2.0
1995 - 1.75% $ 1,035 1.6
Passbook
1996 - 2.25% 12,120 18.8
1995 - 2.50% 12,524 18.8
Money market demand accounts
1996 - 2.35% 3,067 4.8
1995 - 2.65% 3,723 5.6
------- ----- ------- -----
Total demand, transaction and
passbook deposits 16,480 25.6 17,282 26.0
Certificates of deposit
Original maturities of:
Up to 12 months
1996 - 5.68% 25,280 39.3
1995 - 6.11% 23,104 34.7
Over 12 months to 94 months
1996 - 5.96% 22,403 34.8
1995 - 6.16% 25,911 38.9
Individual retirement accounts
1996 - 2.00% 192 .3
1995 - 2.00% 267 .4
------- ----- ------- -----
Total certificates of deposit 47,875 74.4 49,282 74.0
------ ----- ------- -----
Total deposit accounts $64,355 100.0 $66,564 100.0
======= ===== ======= =====
At September 30, 1996 and 1995, the Corporation had deposit accounts with
balances greater than $100,000 totaling $3.7 million and $3.9 million,
respectively.
Interest expense on deposits is summarized as follows for the years ended
September 30:
[Download Table]
1996 1995 1994
In thousands)
NOW accounts $ 18 $ 15 $ 13
Passbook 326 323 364
Money market demand accounts 87 109 123
Certificates of deposit 2,960 2,695 2,620
------ ------ ------
$3,391 $3,142 $3,120
====== ====== ======
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PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
[Download Table]
1996 1995
(In thousands)
Up to one year $25,472 $23,371
Over one year to two years 14,531 13,794
Over two years to three years 5,314 6,918
Over three years to four years 1,356 4,999
Over four years to five years 732 163
Over five years 470 37
------- -------
$47,875 $49,282
======= =======
NOTE G - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate at September 30 as follows:
[Download Table]
1996 1995 1994
(In thousands)
Federal income taxes at statutory rate $ 33 $ 194 $ 188
Decrease in taxes resulting from:
Interest on municipal obligations (12) (17) (13)
----- ----- -----
Federal income taxes per consolidated
financial statements $ 21 $ 177 $ 175
===== ===== =====
Effective tax rate 21.4% 31.0% 31.6%
===== ===== =====
-62-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE G - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at September
30 is as follows:
[Download Table]
Taxes (payable) refundable on temporary 1996 1995
differences at statutory rate: (In thousands)
Deferred tax assets:
Net deferred loan origination fees $ 71 $ 51
SAIF special assessment 145 --
General loan loss allowance 66 27
Franchise taxes -- 85
----- -----
Deferred tax assets 282 163
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (155) (138)
Difference between book and tax depreciation (101) (91)
Percentage of earnings bad debt deductions (190) (185)
Unrealized gains on securities designated
as available for sale (333) (259)
----- -----
Deferred tax liabilities (779) (673)
----- -----
Net deferred tax liability $(497) $(510)
===== =====
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, 1996, 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 $600,000 at September 30, 1996. See Note I for
additional information regarding future percentage of earnings bad debt
deductions.
-63-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE H - 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, 1996, the Association had outstanding commitments of
approximately $1.9 million to originate loans. Additionally, the Association
had undisbursed loans in process of $6.3 million at September 30, 1996. In
the opinion of management, all loan commitments equaled or exceeded
prevalent market interest rates as of September 30, 1996, and will be funded
from normal cash flow from operations.
NOTE I - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Association is subject to minimum regulatory capital standards
promulgated by the Office of Thrift Supervision (OTS). The 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 shareholders' 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) equal to 3.0% of adjusted
total assets. An OTS proposal, if adopted in present form, would increase
the core capital requirement to a range of 4.0% to 5.0% of adjusted total
assets for substantially all savings associations.
In the opinion of management, the proposed revision to the capital
requirement will have no material effect on the Association's excess
regulatory capital position. 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%.
-64-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE I - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
As of September 30, 1996, the Association's regulatory capital exceeded all
minimum capital requirements as shown in the following table:
[Enlarge/Download Table]
REGULATORY CAPITAL
TANGIBLE CORE RISK-BASED
CAPITAL % CAPITAL % CAPITAL %
(In thousands)
Capital under generally accepted
accounting principles $15,962 $15,962 $15,962
General valuation allowances - - 193
Unrealized gains on securities
designated as available for sale, net (645) (645) (645)
------- ------- -------
Regulatory capital computed 15,317 18.9 15,317 18.9 15,510 47.6
Minimum capital requirement 1,219 1.5 2,437 3.0 2,609 8.0
------- ---- ------- ---- ------- ----
Regulatory capital - excess $14,098 17.4 $12,880 15.9 $12,901 39.6
======= ==== ======= ==== ======= ====
The Association met the regulatory requirements of a "well-capitalized"
institution; i.e., a risk-based capital ratio of 10.0% or greater, and a
core capital ratio of 5.0% or greater. The Association's regulatory capital
exceeded these requirements at September 30, 1996 by $12.2 million and $11.3
million, respectively.
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 the quarter ended
September 30, 1996, and was paid in November 1996. In connection with the
recapitalization, it is anticipated that the FDIC will refund a significant
amount of the Association's deposit premium for the calendar fourth quarter.
-65-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE I - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
The legislation also provides 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 introduced in late September 1996 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 will be 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.
-66-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE J - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of Peoples Financial Corporation as of September 30, 1996, and the
results of its operations for the period ended September 30, 1996.
PEOPLES FINANCIAL CORPORATION
STATEMENT OF FINANCIAL CONDITION
September 30, 1996
(In thousands)
[Download Table]
ASSETS
Interest-bearing deposits in other financial institutions $ 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 597
Investment in Peoples Federal Savings and Loan Association of Massillon 15,962
Accrued interest receivable 38
--------
Total assets $ 24,325
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable to Peoples Federal Savings and Loan Association
of Massillon $ 609
Accrued federal income taxes 10
--------
Total liabilities 619
Shareholders' equity
Common stock --
Additional paid-in capital 23,310
Unrealized gains on securities designated as available
for sale, net of related tax effects 645
Accumulated deficit (249)
--------
Total shareholders' equity 23,706
--------
Total liabilities and shareholders' equity $ 24,325
========
PEOPLES FINANCIAL CORPORATION
STATEMENT OF OPERATIONS
Period ended September 30, 1996
(In thousands)
Revenue (loss)
Interest income $ 32
Equity in loss of subsidiary (268)
--------
(236)
General and administrative expenses 2
--------
Loss before income taxes (238)
Federal income taxes 11
--------
NET LOSS $ (249)
========
-67-
PEOPLES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE K - 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.
-68-
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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table presents certain information with respect to the
present directors and executive officers of PFC:
[Enlarge/Download Table]
Director Director
of PFC of Peoples PFC term
Name Age(1) Position(s) held since(2) Federal since expires
---- ------ ---------------- -------- ------------- -------
Victor C. Baker 73 Director and 1995 1984 1997
Vice Chairman of Board
James P. Bordner 54 Director 1995 1992 1998
Vincent G. Matecheck 51 Director, Secretary and Attorney 1995 1987 1997
Thomas E. Shelt 63 Director 1995 1978 1998
Vince E. Stephan 80 Director and Chairman of the Board 1995 1970 1998
Paul von Gunten 69 Director, President, CEO 1995 1968 1997
James R. Rinehart 53 Treasurer - - -
-----------------------------
<FN>
(1) At November 15, 1996.
(2) Each person became a director of PFC in connection with the Conversion.
Mr. Baker retired in 1982 after owning and operating Sunny Slope
Orchard, a family operated, wholesale and retail fruit market, bakery and sweet
shop located in Massillon, Ohio, for 40 years.
Mr. Bordner has been the President of P. J. Bordner and Company, Inc.,
a grocery store chain in Massillon, Ohio, since 1980.
Mr. Matecheck has served as legal counsel to Peoples Federal since 1992
and as Vice President from February 1995 to January 1996. Mr. Matecheck has been
a sole practitioner since 1971. He is also the Secretary and a director of P. J.
Bordner and Company, Inc., and Polymer Packaging, Inc., of Canton, Ohio; a
partner of Federal Avenue Office Building Company; a director of Gordy Graybill,
Inc.; and the President and a member of the Board of Trustees of the United Way
of Western Stark County.
Mr. Shelt was employed by Peoples Federal from 1961 until his
retirement in December 1994. For the last fifteen years of his employment, he
served as Vice President. Mr. Shelt served for 26 years on the Board of
Governors of the Canto-Massillon Chapter of the Institute of Financial Education
and held all offices in such Chapter. He is currently engaged in farming and
real estate investment.
Mr. Stephan has been Chairman of the Board of Peoples Federal since
1989. He is Vice President of Manchester Hardware, Inc., a hardware store
located in Manchester, Ohio, and retired in 1980 after serving for 25 years as
an insurance agent for Nationwide Company in Canal Fulton, Ohio. He currently
operates a family farm.
-69-
Mr. von Gunten has been employed by Peoples Federal since 1948 and has
served as President and Chief Executive Officer since 1979. Mr. von Gunten has
served as President of PFC since 1995.
Mr. Rinehart has served as Treasurer of PFC since 1995. Mr. Rinehart
has also been employed by Peoples Federal since May 1994, first serving as
Accountant and then as Assistant Treasurer from January 1995 to March 1996, when
he became Treasurer. Prior to joining Peoples Federal, Mr. Rinehart was an
accountant with Hall, Kistler from 1963 to 1994, with a two-year interruption
for military service.
ITEM 10. EXECUTIVE COMPENSATION
The following table presents certain information regarding the cash
compensation received by the President and Chief Executive Officer of PFC. No
other executive officer of PFC received cash compensation exceeding $100,000
during the fiscal year ended September 30, 1996, 1995 and 1994.
[Enlarge/Download Table]
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------
Annual Compensation All Other
Compensation
----------------------------------
Name and Year Salary ($) Bonus ($)
Principal
Position
------------------------- ----------- ----------------- ---------------- ----------------
Paul von Gunten 1996 $113,648(1) $12,500 $17,556(2)
President and Chief
Executive Officer
1995 $105,796(3) $11,000 $21,812(4)
-----------------------------
<FN>
(1) Includes salary of $103,148 and director's fees of $10,500. Does not
include amounts attributable to other miscellaneous benefits received
by executive officers. The cost to PFC or Peoples Federal of providing
such benefits to Mr. von Gunten was less than 10% of his cash
compensation.
(2) Consists of Peoples Federal's contribution to Mr. von Gunten's 401(k)
defined contribution plan account in the amount of $17,347 and the
premium of $209 paid by Peoples Federal for insurance on the life of
Mr. von Gunten payable to a beneficiary designated by Mr. von Gunten.
(3) Includes a salary of $97,496 and directors' fees of $8,300. Does not
include amounts attributable to other miscellaneous benefits received
by executive officers. The cost to Peoples Federal of providing such
benefits to Mr. von Gunten was less than 10% of his cash compensation.
(4) Consists of Peoples Federal's contribution to Mr. von Gunten's 401(k)
defined contribution plan account in the amount of $21,711 and the
premium of $101 paid by Peoples Federal for insurance on the life of
Mr. von Gunten payable to a beneficiary designated by Mr. von Gunten.
PFC currently pays no directors' fees. Each director of Peoples Federal
receives a retainer fee of $2,400 for service as a director, plus $500 for each
monthly meeting attended. Each director also receives $150 per committee meeting
attended. During the fiscal year ended September 30, 1996, a total of $75,400
was paid in directors' services. The Chairman of the Board and the Vice Chairman
of the Board also receive monthly fees of $600 and $350, respectively.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
only person known to PFC to own beneficially more than five percent of the
outstanding common shares of PFC as of November 30, 1996:
[Enlarge/Download Table]
Amount and Nature of Percent of
Name and Address Beneficial Ownership Shares Outstanding
---------------- -------------------- ------------------
Jeffrey S. Hallis 132,384(1) 8.9%
500 Park Avenue
Fifth Floor
New York, New York 10022
-----------------------------
<FN>
(1) Mr. Hallis possesses sole voting and investment control over (1)
115,192 common shares pursuant to the Agreements of Limited Partnership
of each of Tyndall Partners, L.P., and Madison Avenue Partners, L.P.,
and (2) 17,192 common shares owned jointly with his spouse.
The following table sets forth certain information with respect to the
number of common shares of PFC beneficially owned by each director of PFC and by
all directors and executive officers of PFC as a group as of November 30, 1996:
[Enlarge/Download Table]
Amount and Nature of Percent of
Beneficial Ownership Shares Outstanding
-------------------------------------------- ------------------
Sole Voting and Shared Voting and
Name and Address(1) Investment Power Investment Power
------------------- ---------------- ----------------
Victor C. Baker 8,000 - .54%
James P. Bordner 2,000 3,000 .34
Vincent G. Matecheck 8,300 100 .56
Thomas E. Shelt 16,000 4,500 1.37
Vince E. Stephan 10,000 - .67
Paul von Gunten 38,192 13,000 3.43
All directors and executive officers of
PFC as a group (7 people) 82,492 21,600 6.98%
----------------------------
<FN>
(1) Each of the persons listed in this table may be contacted at the
address of PFC.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with OTS regulations, Peoples Federal makes loans to
executive officers and directors of Peoples Federal and PFC in the ordinary
course of business and on the same terms and conditions, including interest
rates and collateral, as those of comparable loans to other persons. All
outstanding loans to executive officers and directors were made pursuant to such
policy, do not involve more than the normal risk of collectibility or present
other unfavorable features and are current in their payments.
During the fiscal year ended September 30, 1996, Peoples Federal
retained the services of Vincent G. Matecheck, an attorney engaged in private
practice in the Massillon area. Mr. Matecheck is a director of Peoples Federal
and PFC and serves as general counsel to Peoples Federal. During fiscal years
1995 and 1996, Mr. Matecheck was paid $13,549 and $16,199 respectively, for
services rendered as general counsel to Peoples Federal.
-71-
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
[Enlarge/Download Table]
(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
10.2 Employment Agreement with Ms. Linda Fowler
10.3 Employment Agreement with Mr. James Rinehart
10.4 Employment Agreement with Ms. Cynthia Wagner
16 Letter on Change in Certifying Accountant
20 Opinion of Prior Accountant
21 Subsidiaries of Peoples Financial Corporation
27 Financial Data Schedule
99 Safe Harbor Under the Private Securities Litigation Reform Act of 1995
(b) On September 23, 1996, PFC filed a report on
Form 8-K with respect to its change of
accountant.
-72-
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 Office)
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 18, 1996 Date December 18, 1996
By /s/ Victor C. Baker By /s/ James P. Bordner
-------------------------- ----------------------------
Victor C. Baker James P. Bordner
Director Director
Date December 18, 1996 Date December 18, 1996
By /s/ Vincent G. Matecheck By /s/ Thomas E. Shelt
-------------------------- ----------------------------
Vincent G. Matecheck Thomas E. Shelt
Director Director
Date December 18, 1996 Date December 18, 1996
By /s/ Vincent E. Stephan
------------------------
Vincent E. Stephan
Director
Date December 18, 1996
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INDEX TO EXHIBITS
[Enlarge/Download Table]
EXHIBIT
NUMBER DESCRIPTION
------ -----------
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
Peoples Financial Corporation (No. 333-2690), filed
with the Securities and Exchange Commission 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 of the S-1.
10.1 Employment Agreement with Mr. von Gunten
10.2 Employment Agreement with Ms. Fowler
10.3 Employment Agreement with Mr. Rinehart
10.4 Employment Agreement with Ms. Wagner
16 Letter on Change in Certifying Accountant
20 Opinion of Prior Accountant
21 Subsidiaries of Peoples Financial Corporation
27 Financial Data Schedule
99 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
-74-
Dates Referenced Herein and Documents Incorporated by Reference
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