<Page>
As filed with the Securities and Exchange Commission on August 2, 2001
Registration No. 333-63696
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
PFS Bancorp, Inc.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Articles of Incorporation)
<Table>
Indiana 6711 35-2142534
- --------------------------------------------------------------------------------
- ---------
(State or Jurisdiction of (Primary Standard Industrial (I.R.S.
Employer
Incorporation or Organization) Classification Code Number)
Identification No.)
</Table>
Second and Bridgeway Streets
Aurora, Indiana 47001
(812) 926-0631
- --------------------------------------------------------------------------------
(Address and Telephone Number of Principal Executive
Offices and Principal Place of Business)
Mel Green
Chief Executive Officer
PFS Bancorp, Inc.
Second and Bridgeway Streets
Aurora, Indiana 47001
(812) 926-0631
- --------------------------------------------------------------------------------
(Name, Address, and Telephone Number of Agent for Service)
Copies to:
Kevin M. Houlihan, Esq.
Hugh T. Wilkinson, Esq.
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W., 12th Floor
Washington, D.C. 20005
(202) 347-0300
---------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _________________
<Page>
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<Table>
<Caption>
================================================================================
==============================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM
PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE DOLLAR AMOUNT OFFERING PRICE
AGGREGATE REGISTRATION
REGISTERED TO BE REGISTERED PER SHARE
OFFERING PRICE(1) FEE
- --------------------------------------------------------------------------------
- ----------------------------------------------
Common Stock, par value 1,551,293 shares(2) $10.00
$15,512,930 $3,878.23(3)
$.01 per share
================================================================================
==============================================
</Table>
(1) Estimated solely for the purpose of calculating the
registration fee.
(2) Includes shares that may be issued in the event of a 15%
increase in the maximum size of the offering as well as 30,418
shares issued to PFS Community Foundation.
(3) Previously Paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<Page>
PROSPECTUS
PFS BANCORP, INC.
(Proposed holding company for Peoples Federal Savings Bank)
Up to 1,322,500 Shares of Common Stock
(Anticipated Maximum)
Peoples Federal Savings Bank is converting from the mutual to the stock
form of organization. As part of this conversion, PFS Bancorp, Inc. is offering
its shares of common stock. Peoples Federal will become a subsidiary of PFS
Bancorp, Inc., a recently formed corporation.
IF YOU ARE A CURRENT OR FORMER DEPOSITOR OR A BORROWER OF PEOPLES
FEDERAL
o You may have priority rights to purchase shares at $10.00 per
share in our subscription offering.
o You may purchase up to 15,000 shares but may purchase no fewer
than 25 shares.
o The offering will end at 12:00 noon, Eastern Daylight Time, on
_______, 2001, and may be extended, under certain
circumstances, no later than _______, 2003.
IF YOU ARE NOT A DEPOSITOR OR A BORROWER, BUT ARE INTERESTED IN
PURCHASING SHARES OF OUR COMMON STOCK
o You may be able to purchase shares in a community offering
after priority orders are filled.
o We may begin the community offering at any time beginning
____, 2001 and terminate the community offering at any time
without notice.
================================================================================
TERMS OF THE OFFERING
We are offering a minimum of 977,500 shares and a maximum of 1,322,500
shares. The maximum can be increased by up to 15% to 1,520,875 shares with
regulatory approval. You will not have to pay any sales commission on shares
of common stock that you purchase in the offering.
<Table>
<Caption>
MINIMUM
MAXIMUM MAXIMUM, AS ADJUSTED
-------------------
- --------------- -----------------------
Number of shares......................... 977,500
1,322,500 1,520,875
Gross offering proceeds.................. $9,775,000
$13,225,000 $15,208,750
Estimated offering expenses.............. $460,000
$460,000 $460,000
Estimated net proceeds................... $9,315,000
$12,765,000 $14,748,750
Estimated net proceeds per share......... $9.53
$9.65 $9.70
</Table>
================================================================================
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS DOCUMENT. AN
INVESTMENT IN THE COMMON STOCK IS SUBJECT TO VARIOUS RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS
OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
We have applied to list the common stock on the Nasdaq National Market
under the symbol "____." We must sell a minimum of 977,500 shares of common
stock or we will not sell any shares. We will not sell more than 1,520,875
shares in the subscription offering. We are offering the shares on a best
efforts basis, and Prestige Financial Center, Inc. is assisting in the
subscription offering on a best efforts basis. Best efforts basis means that
Prestige will sell as many shares as possible, but it is not committed to
placing a minimum number of shares. We will place funds we receive for stock
purchases in a separate savings account at Peoples Federal, and we will pay
interest at Peoples Federal's passbook rate on funds received until we complete
or terminate the offering. If the offering is terminated, we will return all
funds promptly with interest.
PRESTIGE FINANCIAL CENTER, INC.
The date of this prospectus is August __, 2001
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
Map of Our Market
Area...........................................................................
iii
Questions and Answers About the Stock
Offering................................................... 1
Summary.........................................................................
................. 4
Risk
Factors.........................................................................
............ 9
Selected Financial and Other
Data................................................................ 14
Recent
Developments....................................................................
.......... 16
Proposed Management
Purchases....................................................................
18
How Our Net Proceeds Will be
Used................................................................ 18
We Intend to Pay Quarterly Cash
Dividends........................................................ 20
There May Be a Limited Market for Our Common
Stock............................................... 21
Peoples Federal Meets All of Its Regulatory Capital
Requirements................................. 21
Our
Capitalization..................................................................
............. 23
Pro Forma
Data............................................................................
....... 25
Comparison of Independent Valuation and Pro Forma Data With and Without the
Foundation........... 34
Peoples Federal Savings Bank Statements of
Earnings.............................................. 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Peoples
Federal..................................................................
37
Business of PFS
Bancorp.........................................................................
. 47
Business of Peoples
Federal......................................................................
47
Regulation......................................................................
................. 62
Taxation........................................................................
................. 69
Management......................................................................
................. 72
The
Conversion......................................................................
............. 77
Restrictions on Acquisition of Us and Peoples Federal and Related
Anti-Takeover
Provisions......................................................................
. 101
Description of Our Capital
Stock................................................................. 108
Experts.........................................................................
................. 109
Legal and Tax
Opinions........................................................................
... 110
Additional
Information.....................................................................
...... 110
Index to Financial
Statements....................................................................
F-1
</Table>
ii
<Page>
[MAP WHICH SHOWS THE STATE OF INDIANA, WITH A HIGHLIGHT OF DEARBORN,
OHIO AND SWITZERLAND COUNTIES AND SHOWING AURORA.]
iii
<Page>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
The following are frequently asked questions. You should read this
entire prospectus, including the "Risk Factors" beginning on page 9 and "The
Conversion" beginning on page 77, for more information.
Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A. We are offering for sale up to 1,322,500 shares of common stock at a
subscription price of $10.00 per share. We must sell at least 977,500
shares. If the appraised market value of the common stock changes due
to market conditions, then, without notice to you, we may be required
to sell up to 1,520,875 shares.
Q. WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER TO
PURCHASE THE STOCK?
A. There are many important factors for you to consider before making an
investment decision such as our profitability, lending activities
and the competition we face for our products and services. Therefore,
you should read this entire prospectus before making your investment
decision.
Q. WILL DIVIDENDS BE PAID ON THE STOCK?
A. Yes. We intend to pay annual dividends of $.20 per share on our common
stock. We expect to begin paying dividends commencing with the period
ending March 31, 2002.
Q. WILL I BE ABLE TO SELL MY STOCK AFTER I PURCHASE IT?
A. Yes. We anticipate having our stock quoted on the Nasdaq National
Market under the symbol "____." However, we expect the market for our
stock may be limited. There can be no assurance that someone will want
to buy your shares or that you will be able to sell them for more money
than you originally paid. There may also be a wide spread between the
bid and asked price for our stock.
Q. WILL MY STOCK BE COVERED BY DEPOSIT INSURANCE OR GUARANTEED BY ANY
GOVERNMENT AGENCY?
A. No. Unlike insured deposit accounts at Peoples Federal, our stock will
not be insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Q. WHEN IS THE DEADLINE TO SUBSCRIBE FOR STOCK?
A. We must receive a properly signed and completed order form with the
required payment on or before 12:00 noon, Eastern Daylight Time, on
_______, 2001.
Q. CAN THE OFFERING BE EXTENDED?
A. Yes. If we do not receive sufficient orders, we can extend the offering
beyond _______, 2001. We must complete any offering to general members
of the public within 45 days after the close of the subscription
offering, unless we receive regulatory approval to further extend the
offering. No single extension can exceed 90 days, and the extensions
may not go beyond _______, 2003.
Q. HOW DO I PURCHASE THE STOCK?
A. First, you should read this prospectus. Then complete and return the
enclosed stock order and certification form together with your payment.
Subscription orders may be delivered in person to our main office in
1
<Page>
Aurora, Indiana during regular business hours, or by mail in the
enclosed envelope marked STOCK ORDER RETURN. Subscription orders
received after the subscription offering expiration date may be held
for participation in any community offering. If the stock offering is
not completed by _______, 2001 and is not extended, then all funds will
be returned promptly with interest, and all withdrawal authorizations
will be canceled.
Q. CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO SUBSCRIBE FOR STOCK?
A. No. After we receive your order form and payment, you may not cancel or
modify your order. However, if we extend the offering beyond _______,
2001, you will be able to change or cancel your order. If you cancel
your order, you will receive a prompt refund plus interest.
Q. HOW CAN I PAY FOR THE STOCK?
A. You have three options: (1) pay cash if it is delivered to us in
person; (2) send us a check or money order; or (3) authorize a
withdrawal from your deposit account at Peoples Federal (without any
penalty for early withdrawal). Please do not send cash in the mail.
Q. WILL I RECEIVE INTEREST ON MY SUBSCRIPTION PAYMENT?
A. Yes. Subscription payments will be placed in an interest-bearing escrow
account at Peoples Federal, and will earn interest at its passbook
rate. Depositors who elect to pay by withdrawal will continue to
receive the stated interest on that account until the funds are
withdrawn at the completion of the conversion.
Q. CAN I SUBSCRIBE FOR SHARES USING FUNDS IN MY INDIVIDUAL RETIREMENT
ACCOUNT AT PEOPLES FEDERAL?
A. Yes. You may use Peoples Federal individual retirement account, or IRA,
funds to purchase shares, however, you must first establish a
self-directed IRA with an outside trustee to subscribe for stock using
your IRA funds. Peoples Federal is not permitted to hold stock in any
Peoples Federal IRAs. Please call our Stock Information Center
(812-___-____) to get more information. Please understand that the
transfer of IRA funds takes time, so please make arrangements as soon
as possible.
Q. WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES OF STOCK TO FILL ALL
ORDERS?
A. If there is an oversubscription, then you may not receive any or all of
the shares you want to purchase. If we receive orders for more shares
than are available, we will allocate stock according to the priorities
defined in our plan of conversion.
Q. WHAT HAPPENS IF WE DO NOT SELL THE MINIMUM AMOUNT OF SHARES BEING
OFFERED?
A. If we do not sell the minimum amount, or 977,500 shares, in the
offering, then we will not sell any shares and the offering will be
withdrawn. Purchase orders will be cancelled and any funds received by
us from investors will be promptly refunded with interest.
2
<Page>
Q: CAN I PURCHASE STOCK ON BEHALF OF SOMEONE ELSE WHO DOES NOT HAVE AN
ACCOUNT AT PEOPLES FEDERAL?
A: No. You may not transfer the subscription rights that you have as a
depositor at Peoples Federal. You will be required to certify that you
are purchasing shares solely for your own account and that you have no
agreement or understanding with another person involving the transfer
of the shares that you purchase. We will not honor orders for shares of
the common stock by anyone known to us to be a party to such an
agreement and we will pursue all legal remedies against any person who
is a party to such an agreement.
Q. WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE STOCK
OFFERING?
A. For answers to other questions we encourage you to read this
prospectus. Questions may also be directed to our Stock Information
Center at 812-___-_____, Monday through Friday, between the hours of
9:00 a.m. and 4:30 p.m., Eastern Daylight Time.
TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS
PRIOR TO THE EXPIRATION DATE OF ________, 2001 IN ACCORDANCE WITH FEDERAL LAW,
NO PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS PRIOR TO _______, 2001 OR
HAND DELIVERED ANY LATER THAN TWO DAYS PRIOR TO _______, 2001.
3
<Page>
SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to financial statements of Peoples
Federal. References in this document to "we", "us", "our" and "Peoples Federal"
refer to Peoples Federal Savings Bank. In certain instances where appropriate,
"we", "us", or "our" refer collectively to PFS Bancorp and Peoples Federal
Savings Bank.
PFS BANCORP, INC.
PFS Bancorp, Inc. was formed on June 19, 2001 as an Indiana
corporation. We will be the holding company for Peoples Federal following the
conversion. We are not an operating company and have not engaged in any
significant business to date. Our executive offices are located at Second and
Bridgeway Streets, Aurora, Indiana 47001, and our telephone number is (812)
926-0631.
PEOPLES FEDERAL SAVINGS BANK
Founded in 1887, Peoples Federal Savings Bank is a community and
customer oriented mutual savings bank organized under the laws of the United
States. Peoples Federal conducts business out of its main office located in
Aurora, Indiana and two branch offices in Rising Sun and Vevay, Indiana. Peoples
Federal's business consists principally of attracting deposits from the general
public and using those funds to originate loans secured by one- to four-family
residential loans. Peoples Federal's profitability depends primarily on its net
interest income, which is the difference between the income it receives on loans
and other assets and its cost of funds, which consists of the interest paid on
deposits and borrowings. At March 31, 2001, Peoples Federal had total assets of
$113.4 million, deposits of $95.8 million and total equity of $13.6 million.
CONVERSION FROM MUTUAL TO STOCK FORM
The conversion involves a series of transactions by which Peoples
Federal will convert from its current status as a mutual savings bank to a stock
savings bank. Following the conversion, Peoples Federal will become our
subsidiary. As a stock savings bank, Peoples Federal intends to continue to
follow its same business strategies, and it will be subject to the regulation
and supervision of the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation.
At present, all depositors and borrowers of Peoples Federal are members
of, and have voting rights in, Peoples Federal as to all matters requiring
membership action. When we complete the conversion, depositors and borrowers
will cease to be members and will no longer be entitled to vote at meetings of
Peoples Federal. After the conversion, we will have all of the voting rights in
Peoples Federal since we will be the sole stockholder of Peoples Federal.
Exclusive voting rights with respect to us will be vested in the holders of our
common stock. Depositors and borrowers of Peoples Federal will not have voting
rights in us after the conversion, except to the extent that they become our
stockholders.
As part of the conversion, we are offering between $9,775,000 and
$13,225,000 of our common stock. The purchase price will be $10.00 per share.
All investors will pay the same price per share in the offering. Subject to
regulatory approval, we may increase the amount of stock to be sold to
$15,208,750 without any further notice to you if market or financial conditions
change before we complete the conversion.
The conversion will permit Peoples Federal's customers and possibly
other members of the local community and of the general public to become
equity owners and to share in our future. The conversion also will provide
additional funds for lending and investment activities, facilitate future
access to the capital markets, enhance our ability to diversify and expand
into other markets. The conversion to stock form is subject to approval by
the members of Peoples Federal entitled to vote on the matter.
PFS COMMUNITY FOUNDATION
To continue its long-standing commitment to its local communities,
Peoples Federal intends to establish a charitable foundation, PFS Community
Foundation, as part of the conversion. The foundation would be funded with PFS
Bancorp common stock equal to 2% of the shares sold in the conversion. This
would range from 19,550 shares, assuming 977,500 shares are sold in the
conversion, to 26,450 shares, assuming 1,322,500 shares are sold in the
conversion, or 30,418 shares if the number of shares sold in the conversion is
increased to 1,520,875 shares. Based on the purchase price of $10.00 per share,
the foundation would be funded with between $195,500 and $264,500 of common
stock, or $304,180, if the number of shares sold in the conversion is increased
to 1,520,875 shares. Peoples Federal's charitable contributions amounted to
$6,210, $3,379 and $5,576 in fiscal 2000, 1999 and 1998, respectively. PFS
Community Foundation will make grants and donations to non-profit and community
groups and projects located within the communities in which Peoples Federal
operates. If PFS Community Foundation is not established as part of the
conversion, our valuation would be slightly higher, the amount of common stock
sold would be slightly greater and we would receive slightly more proceeds. The
establishment of the PFS Community Foundation is subject to approval by the OTS
and members of Peoples Federal entitled to vote on the matter. For a further
discussion of the foundation, see "Risk Factors - The Contribution to the PFS
Community Foundation Means That Your Total Ownership Interest Will Be 2.0% Less
After the Contribution," "- The Contribution to the PFS Community Foundation May
Not Be Tax Deductible Which Could Negatively Impact Our Profits," "- The
Establishment of the PFS Community Foundation Will Negatively Impact Our Profits
for the Fiscal Year 2002," "Comparison of Independent Valuation and Pro Forma
Financial Information With and Without the Foundation" and "The Conversion - We
Plan to Establish the PFS Community Foundation."
4
<Page>
HOW WE DETERMINED THE PRICE PER SHARE AND THE OFFERING RANGE
The offering range is based on an independent appraisal of Peoples
Federal's pro forma market value following the conversion by RP Financial, LC,
an appraisal firm experienced in appraisals of savings institutions. The pro
forma market value is the estimated market value of Peoples Federal assuming the
sale of shares in this offering. RP Financial has estimated that in its opinion
as of June 8, 2001, Peoples Federal's estimated market value was between
$9,775,000 and $13,225,000, with a midpoint of $11,500,000. The appraisal was
based in part upon Peoples Federal's financial condition and operations and the
effect of the additional capital Peoples Federal will raise from the sale of
common stock in this offering.
Subject to regulatory approval, we may increase the amount of common
stock offered by up to 15%. Accordingly, at the minimum of the offering range,
we are offering 977,500 shares, and at the maximum, as adjusted, of the offering
range we are offering 1,520,875 shares in the subscription offering. The
appraisal will be updated before the conversion is completed. If the pro forma
market value of the common stock at that time is either below $9,775,000 or
above $15,208,750, we will notify subscribers, and subscribers will have the
opportunity to modify or cancel their order. See "The Subscription Offering -
How Peoples Federal Determined the Price Per Share and the Offering Range" for a
description of the factors and assumptions used in determining the stock price
and offering range.
Two of the measures investors use to analyze whether a stock might be a
good investment are the ratio of the offering price to the issuer's "book value"
and the ratio of the offering price to the issuer's annual net income. RP
Financial considered these ratios, among other factors, in preparing its
appraisal. Book value is the same as total equity, and represents the difference
between the issuer's assets and liabilities. The percentage of our offering
price of $10.00 per share to our pro forma book value per share ranges from
45.79% to 54.29% at March 31, 2001, and the offering price represents between
11.90 and 15.31 times our pro forma earnings for the nine months ended March 31,
2001 on an annualized basis. See "Pro Forma Data" for a description of the
assumptions we used in making these calculations.
The peer group selected by RP Financial had a price to book
percentage of 83.68% and traded at 15.44 times the last 12 months earnings.
The price to book percentage for the peer group is higher than our ratio on a
pro forma basis and the price to earnings ratio for the peer group is higher
than our ratio on a pro forma basis except at the maximum, as adjusted, of
the offering range. Our independent appraiser determined that our ratios
should be lower than the peer group primarily due to our anticipated lower
return on equity and less active trading market. RP Financial's fees and
out-of-pocket expenses are estimated to be $35,000 for preparing the
appraisal and assisting with the preparation of Peoples Federal's business
plan.
5
<Page>
USE OF PROCEEDS FROM THE SALE OF OUR COMMON STOCK
We will use the proceeds from the offering as follows:
<Table>
<Caption>
PERCENTAGE OF NET
USE AMOUNT,
AMOUNT, OFFERING PROCEEDS AT
OF PROCEEDS AT THE MINIMUM AT
THE MAXIMUM THE MAXIMUM
- ------------------------------------------- --------------
- -------------- --------------------
Loan to our employee stock ownership plan $782,000
$1,058,000 8.3%
Investment in Peoples Federal $4,657,500
$6,382,500 50.0%
General corporate purposes; possible $3,875,500
$5,324,500 41.7%
dividend payments or stock repurchases
</Table>
The proceeds to be invested in Peoples Federal will be available for
general corporate purposes. However, Peoples Federal intends to use a portion
of the proceeds to increase its loan portfolio substantially consistent with
the composition of its present portfolio. In addition, Peoples Federal may
use a portion of the net proceeds to leverage its balance sheet by purchasing
investment and mortgage-backed securities funded by advances from the Federal
Home Loan Bank of Indianapolis.
THE AMOUNT OF STOCK YOU MAY PURCHASE
The minimum purchase is 25 shares. You may purchase no more than 15,000
shares of common stock offered in any single priority category. You and any of
the following persons, when combined with your purchases, cannot exceed 25,000
of the shares of common stock offered in the conversion, subject to the
limitation set forth below:
o persons on joint accounts with you,
o relatives living in your house,
o other persons who have the same address as you on our records,
o companies, trusts or other entities in which you have a
controlling interest or hold a position, or
o other persons who may be acting together with you.
We may decrease or increase the maximum purchase limitation without notifying
you.
HOW WE WILL PRIORITIZE ORDERS IF WE RECEIVE ORDERS FOR MORE SHARES THAN ARE
AVAILABLE FOR SALE
You might not receive any or all of the shares you order. If we receive
orders for more shares than are available, we will allocate stock to the
following persons or groups.
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS (Peoples Federal
depositors with a balance of at least $50 at the close of
business on December 31, 1999).
PRIORITY 2: OUR EMPLOYEE STOCK OWNERSHIP PLAN.
6
<Page>
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (Peoples
Federal depositors with a balance of at least $50 at the close
of business on June 30, 2001).
PRIORITY 4: OTHER MEMBERS (Peoples Federal depositors and
borrowers at the close of business on _____, 2001).
PRIORITY 5: OUR DIRECTORS, OFFICERS AND EMPLOYEES. These
individuals also may be entitled to purchase stock in the
above categories.
If the above persons do not subscribe for all of the shares offered, we
will offer the remaining shares to the general public, giving preference to
persons who reside in Dearborn, Ohio and Switzerland counties, Indiana.
YOUR SUBSCRIPTION RIGHTS ARE NOT TRANSFERABLE
You may not assign or sell your subscription rights. Any transfer of
subscription rights is prohibited by law. If you exercise subscription rights,
you will be required to certify that you are purchasing shares solely for your
own account and that you have no agreement or understanding regarding the sale
or transfer of shares. We intend to pursue any and all legal and equitable
remedies if we learn of the transfer of any subscription rights. We will reject
orders that we determine involve the transfer of subscription rights.
7
<Page>
BENEFITS TO MANAGEMENT FROM THE OFFERING
Our full-time employees will benefit from the offering through our
employee stock ownership plan. This plan will buy shares of our common stock
with a portion of the net proceeds of the offering and then allocate the stock
to employees over a period of time, at no cost to the employees. You can find
more information about our employee stock ownership plan by reading the section
of this document entitled "Management - New Stock Benefit Plans - Employee Stock
Ownership Plan." Following the conversion, we also intend to implement a stock
recognition plan and a stock option plan, which will benefit our officers and
directors. These two plans will not be implemented unless we receive stockholder
approval of the plans at least six months after the conversion. If our stock
recognition plan is approved by stockholders, our officers and directors will be
awarded shares of our common stock at no cost to them. If our stock option plan
receives stockholder approval, then stock options will be granted at no cost to
directors and officers, but such persons will be required to pay the applicable
exercise price at the time of exercise to receive the shares of common stock.
The following table summarizes the benefits that directors, officers
and employees may receive from the conversion at the midpoint of the offering
range:
<Table>
<Caption>
NUMBER OF VALUE OF
%
OF SHARES SHARES
SHARES
BASED ON BASED ON
SOLD
IN MIDPOINT MIDPOINT
INDIVIDUALS ELIGIBLE THE
OF OFFERING OF OFFERING
PLAN TO RECEIVE AWARDS
OFFERING RANGE RANGE
- ------------------------------ --------------------------------
- ---------- ------------- --------------
Employee stock ownership plan. All employees
8.0% 92,000 $920,000
Stock recognition plan........ Directors, officers and selected
4.0 46,000 460,000
employees
Stock option plan............. Directors, officers and selected
10.0 115,000 (1)
employees
</Table>
- -----------------------
(1) Stock options will be granted with a per share exercise price at least
equal to the market price of our common stock on the date of grant. The
value of a stock option will depend upon increases, if any, in the
price of our stock during the life of the stock option.
When combined with the proposed stock purchases by our directors and
officers, the above plans may give our directors and officers effective voting
control following the conversion.
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE CONVERSION
We have received the opinions of Elias, Matz, Tiernan & Herrick L.L.P.
and Grant Thornton LLP that the conversion will not be a taxable event for us
under federal or Indiana income tax laws. If the Internal Revenue Service
determines that your subscription rights have ascertainable value, you could be
taxed as a result of your exercise of those rights in an amount equal to their
value. RP Financial has given us its opinion that the subscription rights
granted to eligible members in the conversion have no value. These opinions,
however, are not binding on the Internal Revenue Service. The full texts of the
opinions are filed as exhibits to the Registration Statement of which this
document is a part, copies of which may be obtained from the Securities and
Exchange Commission. See "Additional Information."
8
<Page>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS DOCUMENT, YOU SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN DECIDING WHETHER TO PURCHASE
OUR COMMON STOCK.
HIGHER INTEREST RATES WOULD HURT OUR PROFITABILITY
Our ability to earn a profit depends on our net interest income, which
is the difference between the interest income we earn on our interest-earning
assets, such as mortgage loans, and the interest expense we pay on our
interest-bearing liabilities, such as deposits and borrowings. Our profitability
depends on our ability to manage our assets and liabilities during periods of
changing interest rates.
A sustained increase in market interest rates could adversely affect
our earnings. Approximately 20% of our loans have fixed interest rates and our
net interest income could be adversely affected when the rates we pay on
deposits and borrowings are increasing. In addition, the market value of our
fixed-rate assets would decline if interest rates increase.
OUR LOW RETURN ON EQUITY MAY CAUSE OUR COMMON STOCK PRICE TO DECLINE
Net earnings divided by average equity, known as "return on equity," is
a ratio many investors use to compare the performance of a financial institution
to its peers. Our return on average equity amounted to 5.07%, 6.47% and 6.33%,
respectively, for the nine months ended March 31, 2001 and the fiscal years
ended June 30, 2000 and 1999. These returns are significantly lower than returns
on equity for our peer group. We expect our return on equity to remain low until
we are able to increase our interest-earning assets, thereby increasing net
interest income. Our return on equity will be adversely impacted by increased
equity from the conversion and increased expenses due to added expenses
associated with our employee stock ownership plan, our restricted stock plan, if
adopted by stockholders, and the costs of being a public company.
OUR FUTURE GROWTH MAY BE LIMITED
To continue growing and thereby improve our return on equity, we may
seek to either open or purchase one or more new branches or acquire another
financial institution. We cannot assure you that we will be able to continue to
grow or successfully integrate any acquired branches or other financial
institutions. Our ability to establish new branch offices depends on whether we
can identify advantageous locations and generate new deposits and loans from
those locations that will create an acceptable level of net income. New
branches, for example, also typically entail start-up expenses and branch
purchases entail acquisition costs. Our ability to build or acquire other
branches depends on whether we can identify, acquire and integrate such
branches.
WE FACE STRONG COMPETITION IN DEARBORN, OHIO AND SWITZERLAND COUNTIES, INDIANA
WHICH MAY ADVERSELY IMPACT OUR PROFITABILITY
Competition in the banking and financial services industry is intense
in our market area. Our profitability depends upon our continued ability to
successfully compete. We compete with commercial banks, savings institutions,
credit unions, finance companies, mutual funds, insurance companies, and
brokerage and investment banking firms. Most of these competitors have
substantially greater resources and lending limits than we do and may offer
certain services that we do not or cannot provide.
9
<Page>
OUR STOCK VALUE MAY SUFFER FROM ANTI-TAKEOVER PROVISIONS THAT MAY IMPEDE
POTENTIAL TAKEOVERS
Provisions in our corporate documents and in Indiana corporate law, as
well as certain federal regulations, may make it difficult, and expensive, to
pursue a tender offer, change in control or takeover attempt that our board of
directors opposes. As a result, you may not have an opportunity to participate
in such a transaction, and the trading price of our stock may not rise to the
level of other institutions that are more vulnerable to hostile takeovers.
Anti-takeover provisions include:
o restrictions on acquiring more than 10% of our common stock
and limitations on voting rights;
o the election of members of the board of directors to staggered
three-year terms;
o the absence of cumulative voting by stockholders in the
election of directors;
o provisions governing nominations of directors by stockholders;
o provisions governing the submission of stockholder proposals;
o provisions restricting special meetings of stockholders;
o our ability to issue preferred stock and additional shares of
common stock without stockholder approval;
o super-majority voting provisions for the approval of certain
business combinations; and
o super-majority voting provisions to amend our corporate
documents.
These provisions also will make it more difficult for an outsider to remove our
current board of directors or management. See "Restrictions on Acquisition of Us
and Peoples Federal and Related Anti-Takeover Provisions" for a description of
anti-takeover provisions in our corporate documents and under Indiana law and
federal regulations.
For three years following the conversion, Office of Thrift Supervision
regulations prohibit any person from acquiring or offering to acquire more than
10% of our common stock without the prior written approval of the Office of
Thrift Supervision. There are limited exceptions to this prohibition. See
"Restrictions on Acquisitions of Us and Peoples Federal and Related
Anti-Takeover Provisions - Regulatory Restrictions" for a discussion of
applicable Office of Thrift Supervision regulations regarding acquisitions.
THE AMOUNT OF STOCK EXPECTED TO BE OWNED BY OUR OFFICERS AND DIRECTORS MAY
IMPEDE POTENTIAL TAKEOVERS
Our directors, executive officers and employees are expected to control
a large amount of stock, which will also impede potential takeovers. Our
directors and executive officers and our employee stock ownership plan intend to
purchase 24.9% of the outstanding shares at the minimum of the offering range
and 20.5% at the maximum of the range. In addition, if we implement a restricted
stock plan with stockholder approval, an additional 4% of the common stock will
be controlled by our directors, officers and employees. These purchases, along
with potential exercises of future stock options, could make it difficult to
obtain majority support for stockholder proposals we oppose. In addition, by
voting these shares directors and officers could most likely block the approval
of transactions requiring the approval of 75% or more of the stockholders.
Examples of transactions that could be blocked are certain business combinations
or amendments to our corporate documents. For a description of our employee
stock ownership plan, restricted stock plan and stock option plan, see
"Management - New Stock Benefit Plans."
10
<Page>
WE INTEND TO REMAIN INDEPENDENT WHICH MAY MEAN YOU WILL NOT RECEIVE A PREMIUM
FOR YOUR COMMON STOCK
We intend to remain independent for the foreseeable future. Because we
do not plan on seeking possible acquirors, it is unlikely that we will be
acquired in the foreseeable future. Accordingly, you should not purchase our
common stock with any expectation that a takeover premium will be paid to you in
the near term.
OUR EMPLOYEE STOCK BENEFIT PLANS WILL INCREASE OUR COSTS
We anticipate that our employee stock ownership plan will purchase 8%
of the common stock issued in the conversion, with funds borrowed from us. The
cost of acquiring the employee stock ownership plan shares will be between
$782,000 at the minimum of the offering range and approximately $1.2 million at
the adjusted maximum of the offering range. We will record annual employee stock
ownership plan expenses in an amount equal to the fair value of shares committed
to be released to employees. If shares of common stock appreciate in value over
time, compensation expense relating to the employee stock ownership plan will
increase. We also intend to submit a stock recognition plan to our stockholders
for approval at least six months after completion of the conversion. Our
officers and directors could be awarded (at no cost to them) under the stock
recognition plan up to an aggregate of 4% of the shares issued in the
conversion. Assuming the shares of common stock to be awarded under the plan
cost the same as the purchase price in the conversion, the reduction to
stockholders' equity from the plan would be between $391,000 and $529,000 at the
minimum and maximum of the offering range, respectively. See "Pro Forma Data "
for a discussion of the increased benefit costs we will incur after the
conversion and how these costs could decrease our return on equity.
OUR EMPLOYEE STOCK BENEFIT PLANS MAY BE DILUTIVE
If the conversion is completed and stockholders subsequently approve a
stock recognition plan and a stock option plan, we will allocate stock to our
officers and directors through these plans. If the shares for the stock
recognition plan are issued from our authorized but unissued stock, your
ownership percentage could be diluted by approximately 3.8% and the trading
price of our stock may be reduced. However, it is our intention to repurchase
shares of our common stock in the open market to fund the stock recognition
plan. Your ownership percentage would also decrease by approximately 8.9% if all
potential stock options are exercised from our authorized but unissued stock.
See "Pro Forma Data" for data on the dilutive effect of the restricted stock
plan and "Management - New Stock Benefit Plans" for a description of the plans.
THE CONTRIBUTION TO THE PFS COMMUNITY FOUNDATION MEANS YOUR TOTAL OWNERSHIP
INTEREST WILL BE 2.0% LESS AFTER THE CONTRIBUTION
Purchasers of shares will have their ownership and voting interests in
PFS Bancorp diluted by 2.0% at the close of the conversion if we issue an
additional 2% of shares sold in the conversion and contribute those shares to
the foundation. For a further discussion regarding the effect of the
contribution to the foundation, see "Pro Forma Data" and "Comparison of
Independent Valuation and Pro Forma Financial Information With and Without the
Foundation."
THE CONTRIBUTION TO THE PFS COMMUNITY FOUNDATION MAY NOT BE TAX DEDUCTIBLE WHICH
COULD NEGATIVELY IMPACT OUR PROFITS.
We believe that our contribution to the PFS Community Foundation
should be deductible for federal income tax purposes. However, we do not have
any assurance that the Internal Revenue Service will grant tax-exempt status
to the foundation. If the contribution is not deductible, we would not
receive any tax benefit from the contribution. Based on the pro forma
assumptions, the loss of the tax benefit would negatively impact profits by
$78,000, $92,000, $106,000 and $122,000 at the minimum, midpoint, maximum and
15% above the maximum of the offering range, respectively. In addition, even
if the contribution is tax deductible, we may not have sufficient profits to
be able to fully use the
11
<Page>
deduction. For a further discussion of the contribution to the charitable
foundation, see "The Conversion - Establishment of the Charitable Foundation -
Tax Considerations."
THE ESTABLISHMENT OF THE PFS COMMUNITY FOUNDATION WILL NEGATIVELY IMPACT OUR
PROFITS FOR THE FISCAL YEAR 2002.
We intend to contribute to the PFS Community Foundation shares of
our common stock equal to 2% of the shares sold in the conversion. This
contribution will negatively impact net earnings during the fiscal year in
which the foundation is established, which is expected to be 2002, possibly
resulting in an operating loss for that year. Based on the pro forma
assumptions, the creation of the PFS Community Foundation would reduce net
earnings by $118,000, $138,000, $159,000 and $182,000 at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively.
FAILURE TO APPROVE THE PFS COMMUNITY FOUNDATION MAY MATERIALLY AFFECT THE PRO
FORMA MARKET VALUE OF PEOPLES FEDERAL
The establishment and funding of the foundation as part of the
conversion is subject to the approval of the members of Peoples Federal. In the
event that Peoples Federal's members approve the Plan of Conversion, but not the
foundation, Peoples Federal may determine to complete the conversion without the
establishment of the foundation and may do so without amending the Plan of
Conversion or obtaining any further vote of Peoples Federal's members or consent
of subscribers. Failure of the members to approve the foundation may materially
affect the pro forma market value of Peoples Federal. In such an event, Peoples
Federal may establish a new pro forma market value and commence a resolicitation
of subscribers. For instance, at the maximum of the offering range, based on the
assumptions set forth under "Pro Forma Data," the estimated pro forma valuation
with the foundation would be $13,225,000 and the estimated pro forma valuation
without the foundation would be $13,513,000, a difference of $288,000 or 2.2%.
For a further discussion regarding the effect of the contribution to the
foundation, see "The Conversion - We Plan To Establish the Charitable
Foundation."
AN INCREASE IN THE OFFERING RANGE WOULD BE DILUTIVE
We can increase the maximum of the offering range by up to 15% to
reflect changes in market or financial conditions or to fill the order of our
employee stock ownership plan. An increase in the offering will decrease our net
income per share and our stockholders' equity per share. This would also
increase the purchase price per share as a percentage of pro forma stockholders'
equity per share and net income per share.
OUR VALUATION IS NOT INDICATIVE OF THE FUTURE PRICE OF OUR COMMON STOCK
We cannot assure you that if you purchase common stock in the offering
you will later be able to sell it at or above the purchase price in the
offering. The final aggregate purchase price of the common stock in the
conversion will be based upon an independent appraisal. The appraisal is not
intended, and should not be construed, as a recommendation of any kind as to the
advisability of purchasing shares of common stock. The valuation is based on
estimates and projections of a number of matters, all of which are subject to
change from time to time. See "The Conversion - How We Determined the Price Per
Share and the Offering Range" for the factors considered by RP Financial in
determining the appraisal.
DUE TO POSSIBLE CONTINUED MARKET VOLATILITY OUR STOCK PRICE MAY DECLINE AFTER
THE OFFERING
Due to possible continued market volatility and to other factors,
including certain risk factors discussed in this document, we cannot assure you
that, following the conversion, the trading price of our common stock will be at
or above the initial per share offering price. Publicly traded stocks, including
stocks of financial institutions, have recently experienced substantial market
price volatility. These market fluctuations may be unrelated to the operating
performance of particular companies whose shares are traded. The purchase price
of our common stock in the offering is based on the independent appraisal by RP
Financial. After our shares begin trading, the trading price of our common stock
will be determined by the marketplace, and may be influenced by many factors,
including prevailing interest rates, investor perceptions and general industry
and economic conditions as well as factors specifically related to us such as
our low return on both equity and assets and our compressed interest rate spread
and net interest margin.
12
<Page>
LIMITED MARKET FOR OUR COMMON STOCK MAY LOWER OUR MARKET PRICE
Since this is an initial public offering of shares of common stock of
PFS Bancorp, there is no market for the common stock at this time. Investors
could have difficulty disposing of their shares on short notice and should not
view the common stock as a short term investment. Accordingly, investors should
consider the possibility that they may be unable to easily sell shares of PFS
Bancorp common stock. The limited market for the stock may depress trading
prices to an amount below the $10.00 per share price.
EXERCISE OF SUBSCRIPTION RIGHTS MAY BE TAXABLE
If the Internal Revenue Service determines that your subscription
rights have ascertainable value, you could be taxed as a result of your exercise
of those rights in an amount equal to their value. RP Financial has given us
their opinion that the subscription rights granted to eligible members in the
conversion have no value. However, this opinion is not binding on the Internal
Revenue Service.
IF WE ARE UNABLE TO MAKE TECHNOLOGICAL ADVANCES, OUR ABILITY TO SUCCESSFULLY
COMPETE MAY BE REDUCED
Our industry is experiencing rapid changes in technology. In addition
to improving customer services, effective use of technology increases efficiency
and enables financial institutions to reduce costs. As a result, our future
success will depend in part on our ability to address our customers' needs by
using technology. We cannot assure you that we will be able to effectively
develop new technology-driven products and services or be successful in
marketing these products to our customers. Most of our competitors have far
greater resources than we have to invest in technology.
13
<Page>
SELECTED FINANCIAL AND OTHER DATA
The following tables contain certain information concerning the
financial position and results of operations of Peoples Federal. You should
read this information in conjunction with the financial statements included
in this Prospectus. The data presented as of and for the year ended June 30,
2000, 1999 and 1998 has been derived from the audited financial statements.
The data presented at March 31, 2001 and for the nine month periods ended
March 31, 2001 and 2000 are derived from unaudited condensed financial
statements, but in the opinion of management reflect all adjustments
necessary to present fairly the results for these interim periods. These
adjustments consist only of normal recurring adjustments. The results of
operations for the nine months ended March 31, 2001 are not necessarily
indicative of the results of operations that may be expected for the year
ending June 30, 2001.
<Table>
<Caption>
At June 30,
At March 31,
- -------------------------------------------------
2001 2000
1999 1998
----------------
- ----------------- -------------- ----------------
(Unaudited)
(Dollars In Thousands)
SELECTED BALANCE SHEET DATA:
Total assets................................. $113,387
$107,975 $102,377 $99,900
Cash and cash equivalents(1)................. 13,283
8,801 5,378 6,917
Investment securities available for sale..... 1,343
1,054 1,509 1,224
Investment securities held to maturity....... 169
178 185 193
Mortgage-backed securities held to
maturity.................................. --
1 5 8
Loans receivable net ....................... 96,141
95,492 92,827 89,228
Deposits..................................... 95,754
90,822 85,561 82,766
Borrowings................................... 3,000
3,750 3,750 5,000
Total equity................................. 13,551
12,852 12,342 11,400
Full service offices......................... 3
3 2 2
</Table>
<Table>
<Caption>
Nine Months Ended
March 31,
Year Ended June 30,
-----------------------------
- ------------------------------------------
2001 2000
2000 1999 1998
--------------- -------------
- ------------- ------------- --------------
(Unaudited)
(In Thousands)
SELECTED OPERATING DATA:
Total interest income.................. $6,303 $5,701
$7,703 $7,523 $7,941
Total interest expense................. 3,725 3,176
4,309 4,348 4,564
--------------- -------------
- ------------- ------------- --------------
Net interest income.................... 2,578 2,525
3,394 3,175 3,377
Provision for losses on loans ......... 132 64
88 84 80
--------------- -------------
- ------------- ------------- --------------
Net interest income after
provision for losses on loans ....... 2,446 2,461
3,306 3,091 3,297
Total other income..................... 593 201
291 274 250
Total general, administrative and other
expense.............................. 2,152 1,740
2,209 2,118 1,812
--------------- -------------
- ------------- ------------- --------------
Income before income tax............... 887 922
1,388 1,247 1,735
Income tax expense..................... 382 374
578 493 673
--------------- -------------
- ------------- ------------- --------------
Net earnings........................... $ 505 $ 548 $
810 $ 754 $1,062
=============== =============
============= ============= ==============
</Table>
(FOOTNOTES ON FOLLOWING PAGE)
14
<Page>
<Table>
<Caption>
Nine Months Ended
March 31,
Year Ended June 30,
--------------------------
- ----------------------------------------
2001 2000
2000 1999 1998
------------- ------------
- ------------- ------------- ------------
SELECTED OPERATING RATIOS(2):
PERFORMANCE RATIOS:
Return on average assets..................... .61% .70%
.77% .75% 1.07%
Return on average equity..................... 5.07 5.87
6.47 6.33 9.90
Equity to assets at end of period............ 11.95 12.01
11.90 12.06 11.41
Interest rate spread(3)...................... 2.65 2.85
2.86 2.70 2.99
Net interest margin(3)....................... 2.41 2.50
3.33 3.22 3.49
Average interest-earning assets to
average interest-bearing liabilities....... 112.08 111.30
111.34 111.85 110.55
Net interest income after provision
for loan losses to total other
expenses................................... 113.66 141.44
149.66 145.94 186.37
Total other expenses to average total assets. 2.61 2.23
2.11 2.10 1.83
ASSET QUALITY RATIOS:
Non-performing loans to total
loans at end of period(4).................. .32% .53%
.66% .69% .37%
Non-performing assets to
total assets at end of period(4)........... .36 .53
.59 .74 .33
Allowance for loan losses to total
loans at end of period..................... .70 .65
.66 .61 .58
Allowance for loan losses to total
non-performing loans at end of
period(4)................................... 217.68 123.15
98.89 88.61 158.72
CAPITAL RATIOS:
Tangible capital ratio....................... 11.3% 11.3%
11.3% 11.2% 10.7%
Core capital ratio........................... 11.3 11.3
11.3 11.2 10.7
Total capital ratio.......................... 19.7 19.4
19.4 18.3 17.6
</Table>
- ----------------------
(1) Consists of cash and short-term interest-bearing deposits in other
financial institutions.
(2) With the exception of end of period ratios, all ratios are based on
average monthly balances during the periods and are annualized where
appropriate.
(3) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate
on interest-bearing liabilities. Net interest margin represents net
interest income as a percentage of average interest-earning assets.
(4) Non-performing loans consist of non-accrual loans and non-performing
assets consist of non-performing loans and real estate acquired by
foreclosure or deed-in-lieu thereof.
15
<Page>
RECENT DEVELOPMENTS
The following tables contain certain information concerning the
financial position and results of operations of Peoples Federal. You should read
this information in conjunction with the financial statements and related notes
included in this prospectus. The results of operations and ratios and other data
at or for the twelve months ended June 30, 2000 are derived from audited
financial statements. The results of operations and ratios and other data at or
for the twelve months ended June 30, 2001 are derived from unaudited financial
statements.
<Table>
<Caption>
At June 30,
- --------------------------------------
2001 2000
-------------------
- ------------------
(Unaudited)
(Dollars In Thousands)
SELECTED BALANCE SHEET DATA:
Total assets............................... $114,511
$107,975
Cash and cash equivalents(1)............... 14,851
8,801
Investment securities available for sale... 1,450
1,054
Investment securities held to maturity..... 169
178
Mortgage-backed securities held to
maturity................................ --
1
Loans receivable net ..................... 95,457
95,492
Deposits................................... 98,649
90,822
FHLB advances.............................. 1,000
3,750
Total equity............................... 13,832
12,852
Full service offices....................... 3
3
</Table>
<Table>
<Caption>
Year Ended June 30,
- --------------------------------------
2001 2000
-------------------
- ------------------
(In Thousands)
SELECTED OPERATING DATA:
Total interest income...................... $8,406 $7,703
Total interest expense..................... 4,953 4,309
-------------------
- ------------------
Net interest income........................ 3,453 3,394
Provision for losses on loans ............. 156 88
-------------------
- ------------------
Net interest income after
provision for losses on loans ........... 3,297 3,306
Total other income......................... 682 291
Total general, administrative and other
expense.................................. 2,693 2,209
-------------------
- ------------------
Income before income tax................... 1,286 1,388
Income tax expense......................... 538 578
-------------------
- ------------------
Net income................................. $ 748 $ 810
===================
==================
</Table>
(FOOTNOTES ON FOLLOWING PAGE)
16
<Page>
<Table>
<Caption>
Year Ended June 30,
- --------------------------------------
2001 2000
-------------------
- ------------------
SELECTED OPERATING RATIOS(2):
PERFORMANCE RATIOS:
Return on average assets....................... .68%
.77%
Return on average equity....................... 5.56 6.47
Equity to assets at end of period.............. 12.08 11.90
Interest rate spread(3)........................ 2.64 2.86
Net interest margin(3)......................... 3.19 3.33
Average interest-earning assets to average
interest-bearing liabilities................. 112.15 111.34
Net interest income after provision
for loan losses to total other
expenses..................................... 121.36 149.66
Total other expenses to average total assets... 2.26 2.11
ASSET QUALITY RATIOS:
Non-performing loans to total
loans at end of period(4).................... 1.13%
.66%
Non-performing assets to
total assets at end of period(4)............. 1.03 .59
Allowance for loan losses to total
loans at end of period....................... .73 .66
Allowance for loan losses to total
non-performing loans at end of
period(4)..................................... 63.71 98.89
CAPITAL RATIOS:
Tangible capital ratio......................... 11.3 % 11.3
%
Core capital ratio............................. 11.3 11.3
Total capital ratio............................ 20.0 19.4
</Table>
- ----------------------
(1) Consists of cash and short-term interest-bearing deposits in other
financial institutions.
(2) With the exception of end of period ratios, all ratios are based on
average monthly balances during the periods and are annualized where
appropriate.
(3) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate
on interest-bearing liabilities. Net interest margin represents net
interest income as a percentage of average interest-earning assets.
(4) Non-performing loans consist of non-accrual loans and non-performing
assets consist of non-performing loans and real estate acquired by
foreclosure or deed-in-lieu thereof.
Peoples Federal reported total assets of $114.5 million at June 30,
2001, an increase of $6.5 million or 6.1%, over the total at June 30, 2000. The
increase was funded by a $7.8 million increase in deposits, which was partially
offset by the repayment of $2.8 million of Federal Home Loan Bank advances
during the period. Loans receivable totaled $95.5 million at both June 30, 2001
and 2000. Interest bearing deposits totaled $14.9 million, an increase of $7.0
million or 88.9% over the total at June 30, 2000, which was funded primarily by
the increase in deposits period to period. The amount of interest bearing
deposits at June 30, 2001 was due to excess liquidity at such time.
Net earnings for the year ended June 30, 2001 amounted to $748,000, a
decrease of $62,000 or 7.7% from the $810,000 in net earnings reported for the
year ended June 30, 2000. The decrease in earnings was due primarily to a
$468,000 or 19.7% increase in general administrative and other expenses, which
was partially offset by a $391,000 or 134.4% increase in other income and a
$23,000 or 5.6% decline in the provision for federal income taxes.
Net interest income increased by $60,000 or 1.8% for the year ended
June 30, 2001 compared to the same period in 2000, due primarily to a $443,000
or 6.0% increase in interest income on loans, coupled with a $263,000 or 79.0%
increase in interest income on interest bearing deposits from the year ended
June 30, 2000. These increases were partially offset by a $644,000 or 14.9%
increase in interest expense period to period. Peoples Federal's interest rate
spread amounted to 2.64% and 2.86% for the years ended June 30, 2001 and June
30, 2000, respectively and the net interest margin totaled 3.19% and 3.33% for
fiscal 2001 and 2000, respectively.
Other income increased by $391,000 or 134.4%, during the year ended
June 30, 2001, compared to the same period in 2000, due primarily to a $344,000
gain recognized on the sale of investment securities during the year.
General, administrative and other expense increased by $468,000 or
19.7% during the year ended June 30, 2001, compared to the year ended June 30,
2000. This increase was due primarily to a $611,000 or 60.9% increase in
employee compensation and benefits expense from June 30, 2000 relating to the
establishment of a deferred compensation plan. This increase was partially
offset by a $71,000 or 21.1% decrease in occupancy and equipment expense
relating to declining depreciation expense and data processing costs.
The federal income tax provision decreased by $23,000 or 5.6%, due
primarily to a $85,000 or 7.0% decrease in pre-tax earnings period to period.
The effective tax rates were 34.0% and 33.6% for the years ended June 30, 2001
and 2000, respectively.
17
<Page>
PROPOSED MANAGEMENT PURCHASES
The following table sets forth, for each of our directors and executive
officers (and their associates) and for all of the directors and executive
officers as a group, the proposed purchases of common stock, assuming sufficient
shares are available to satisfy their subscriptions. The amounts include shares
that may be purchased through individual retirement accounts.
<Table>
<Caption>
NUMBER OF
NAME AND TITLE SHARES
AMOUNT PERCENT (1)
- ----------------------------------- ----------------------
- ------------------- -----------------
Robert L. Laker, Chairman of the Board 25,000
$250,000 2.17%
Gilbert L. Houze, Director 25,000
250,000 2.17
Jack D. Tandy, Director 25,000
250,000 2.17
Dale R. Moeller, Director 25,000
250,000 2.17
Carl E. Petty, Director 25,000
250,000 2.17
Mel E. Green, Director and Chief
Executive Officer 25,000
250,000 2.17
Stuart M. Suggs, Vice President and Chief
Financial Officer 15,000
150,000 1.30
-------
- --------- -----
All directors and executive
officers as a group (7 persons) 165,000
1,650,000 14.35%
=======
========= =====
</Table>
- ------------------
(1) Based upon the midpoint of the offering range.
In addition, our employee stock ownership plan currently intends to
purchase 8% of the common stock issued in the conversion for the benefit of
officers and employees. Stock options and stock grants may also be granted in
the future to directors, officers and employees upon the receipt of stockholder
approval of our proposed stock benefit plans. See "Management - New Stock
Benefit Plans" for a description of these plans.
HOW OUR NET PROCEEDS WILL BE USED
Although the actual net proceeds from the sale of our common stock
cannot be determined until the conversion is completed, it is presently
anticipated that the net proceeds from the sale of the common stock will be
between $9.3 million at the minimum of the offering range and $12.8 million
at the maximum of the offering range ($14.7 million assuming an increase in
the offering range by 15%). See "Pro Forma Data" and "The Conversion - How We
Determined the Price Per Share and the Offering Range" as to the assumptions
used to arrive at such amounts.
18
<Page>
We will use the proceeds from the offering as follows:
<Table>
<Caption>
PERCENTAGE OF NET
USE AMOUNT,
AMOUNT, OFFERING PROCEEDS AT
OF PROCEEDS AT THE MINIMUM AT
THE MAXIMUM THE MAXIMUM
- ------------------------------------------ ---------------
- -------------- --------------------
Loan to our employee stock ownership plan $ 782,000
$1,058,000 8.3%
Investment in Peoples Federal $4,657,500
$6,382,500 50.0%
General corporate purposes; possible $3,875,500
$5,324,500 41.7%
dividend payments or stock repurchases
</Table>
The loan to our employee stock ownership plan will be $782,000 and
approximately $1.1 million at the minimum and maximum of the offering range. Our
employee stock ownership plan will distribute the shares it purchases to our
employees as the loan is repaid over 10 years. In addition, if the recognition
plan is adopted by the board of directors and approved by the shareholders, we
intend to contribute sufficient funds to the trust so that it can purchase a
number of shares equal to an aggregate of 4% of the shares sold in the
conversion which would amount to 52,900 shares at the maximum of the range or
$529,000 based on a per share price of $10.00. See "Management - New Stock
Benefit Plans - Employee Stock Ownership Plan and "-Recognition Plan."
The net proceeds we use to purchase the capital stock of Peoples
Federal will be used by Peoples Federal for general corporate purposes,
including increased lending activities. On a short-term basis, Peoples
Federal may purchase investment and mortgage-backed securities. Specifically,
Peoples Federal intends to increase its loan portfolio substantially
consistent with its current portfolio. In addition, Peoples Federal may
leverage its balance sheet by purchasing investment and mortgage-backed
securities funded by net proceeds and advances from the Federal Home Loan
Bank of Indianapolis. The net proceeds received by Peoples Federal will
further strengthen Peoples Federal's capital position, which already exceeds
all regulatory requirements. At March 31, 2000, Peoples Federal's tangible
capital ratio was 11.27%. After the conversion, Peoples Federal's tangible
capital ratio will be 15.42%, based upon the midpoint of the offering range.
As a result, Peoples Federal will continue to be a well-capitalized
institution.
We may initially use the remaining net proceeds retained by us to
invest in mortgage-backed securities issued by U.S. Government agencies and
government-sponsored enterprises, municipal securities, U.S. Government and
federal agency securities of various maturities, deposits in either Peoples
Federal or other financial institutions, or a combination thereof. In
addition, assuming stockholder approval of the recognition plan, we intend to
contribute sufficient funds to the trust so that it can purchase a number of
shares equal to an aggregate of 4% of the common stock sold in the
conversion. The net proceeds retained by us may ultimately be used to:
o support Peoples Federal's lending activities,
o support the future expansion of operations through
establishment of branch offices or other customer facilities,
acquisition of financial institutions, expansion into other
lending markets or diversification into other banking related
businesses, although no such transactions are specifically
being considered at this time, or
o pay regular or special cash dividends, repurchase the common
stock or pay returns of capital.
Applicable conversion regulations require us to sell common stock in
the conversion in an amount equal to our estimated pro forma market value, as
determined by an independent appraisal. See "The Conversion - How We Determined
the Price Per Share and the Offering Range." As a result, we may be required to
sell more shares in the conversion than we may otherwise desire. To the extent
we have excess capital upon completion of the conversion, we intend to consider
stock repurchases, dividends and tax-free returns of capital to the extent
permitted by the Office of Thrift Supervision and deemed appropriate by the
board of directors. However, without nonobjection from the Officer of Thrift
Supervision, we cannot conduct any stock repurchases during the first year after
we complete
19
<Page>
the conversion. A return of capital is similar to a cash dividend, except for
tax purposes it is an adjustment to your tax basis rather than income to you. We
have committed to the Office of Thrift Supervision that we will not take any
action toward paying a tax-free return of capital during the first year after we
complete the conversion.
Stock repurchases will be considered by our board of directors after we
complete the conversion based upon then existing facts and circumstances, as
well as applicable statutory and regulatory requirements. Such facts and
circumstances may include the following:
o market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of
the rate of return and risk involved in the investment, the
ability to increase the book value and/or earnings per share
of the remaining outstanding shares, and an improvement in our
return on equity;
o the avoidance of dilution to stockholders by not having to
issue additional shares to cover the exercise of stock options
or to fund employee stock benefit plans; and
o any other circumstances in which repurchases would be in our
and our stockholders' best interests.
No stock will be repurchased by us unless we continue to exceed all
applicable regulatory requirements after the repurchases. The payment of
dividends or repurchase of stock will be prohibited if our net worth would be
reduced below the amount required for the liquidation account to be established
for the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders. As of March 31, 2001, the initial balance of the liquidation account
would be approximately $13.6 million. See "We Intend to Pay Quarterly Cash
Dividends," "The Conversion - Liquidation Rights of Certain Depositors" and "-
Certain Restrictions on Purchase or Transfer of Shares After the Conversion."
OUR NET PROCEEDS MAY VARY BECAUSE TOTAL EXPENSES OF THE CONVERSION MAY
BE MORE OR LESS THAN THOSE ESTIMATED. The net proceeds also will vary if the
number of shares to be issued in the conversion is adjusted to reflect a change
in the estimated pro forma market value of Peoples Federal. Payments for shares
made through withdrawals from existing deposit accounts at Peoples Federal will
not result in the receipt of new funds for investment by us but will result in a
reduction of our interest expense and liabilities as funds are transferred from
interest-bearing certificates or other deposit accounts. In addition to
generating net proceeds to be used by us and Peoples Federal as set forth
above, we are converting to stock form to facilitate future access to the
capital markets, enhance our ability to diversify and expand into other
markets as well as diversify our business activities through acquisitions or
of mergers with other financial institutions.
WE INTEND TO PAY QUARTERLY CASH DIVIDENDS
After we complete the conversion, our board of directors will have the
authority to declare dividends on the common stock, subject to statutory and
regulatory requirements. We intend to pay quarterly cash dividends on the common
stock at an initial rate of $.20 per share per annum (representing 2% of the $10
per share purchase price), commencing with the period ending March 31, 2002.
However, the rate of such dividends and the initial or continued payment thereof
will depend upon a number of factors, including the amount of net proceeds
retained by us in the conversion, investment opportunities available to us,
capital requirements, our financial condition and results of operations, tax
considerations, statutory and regulatory limitations, and general economic
conditions. No assurances can be given that any dividends will be paid or that,
if paid, will not be reduced or eliminated in future periods. Special cash
dividends, stock dividends or tax-free returns of capital may be paid in
addition to, or in lieu of, regular cash dividends.
Dividends from us may eventually depend, in part, upon receipt of
dividends from Peoples Federal, because we initially will have no source of
income other than dividends from Peoples Federal, earnings from the investment
of proceeds from the sale of common stock retained by us, and interest payments
with respect to our loan to our employee stock ownership plan.
20
<Page>
Any payment of dividends by Peoples Federal to us which would be deemed
to be drawn out of Peoples Federal's bad debt reserves would require a payment
of taxes at the then-current tax rate by Peoples Federal on the amount of
earnings deemed to be removed from the reserves for such distribution. Peoples
Federal does not intend to make any distribution to us that would create such a
federal tax liability. See "Taxation."
Unlike Peoples Federal, we are not subject to the above regulatory
restrictions on the payment of dividends to our stockholders, although the
source of such dividends may eventually depend, in part, upon dividends from
Peoples Federal in addition to the net proceeds retained by us and earnings
thereon. We are, however, subject to the requirements of Indiana law, which
generally limit the payment of dividends to amounts that will not affect the
ability of a corporation, after the dividend has been distributed, to pay its
debts in the ordinary course of business and that will not exceed the difference
between the corporation's total assets and total liabilities plus preferential
amounts payable to shareholders with rights superior to those of the holders of
common stock.
THERE MAY BE A LIMITED MARKET FOR OUR COMMON STOCK
Because this is our initial public offering, there is no market for our
common stock at this time. After we complete the offering, we anticipate that
our common stock will be listed for quotation on the Nasdaq National Market
under the symbol "_____."
Making a market may include the solicitation of potential buyers and
sellers in order to match buy and sell orders. The development of a liquid
public market depends upon the existence of willing buyers and sellers, the
presence of which is not within our control or of any market maker. It is
unlikely that an active and liquid trading market for the common stock will
develop due to the relatively small size of the offering and the small number of
stockholders expected following the conversion. In addition, there may be a wide
spread between the bid and ask price for our common stock after the conversion.
Under such circumstances, you should not view the common stock as a short-term
investment. Furthermore, there can be no assurance that you will be able to sell
your shares at or above the purchase price.
PEOPLES FEDERAL MEETS ALL OF ITS REGULATORY CAPITAL REQUIREMENTS
At March 31, 2001, Peoples Federal exceeded all of its regulatory
capital requirements. The table on the following page sets forth Peoples
Federal's historical capital under accounting principles generally accepted in
the United States of America and regulatory capital at March 31, 2001, and the
pro forma capital of Peoples Federal after giving effect to the conversion,
based upon the sale of the number of shares shown in the table. The pro forma
capital amounts reflect the receipt by Peoples Federal of 50% of the net
conversion proceeds. The pro forma risk-based capital amounts assume the
investment of the net proceeds received by Peoples Federal in assets which have
a risk-weight of 50% under applicable regulations, as if such net proceeds had
been received and so applied at March 31, 2001.
21
<Page>
<Table>
<Caption>
Pro Forma at
March 31, 2001 Based on
- --------------------------------------------------------------------------------
- ---
977,500
1,150,000 1,322,500 1,520,875
Shares Sold Shares
Sold Shares Sold Shares Sold
Historical at at $10.00 at
$10.00 at $10.00 at $10.00
March 31, 2001 Per Share Per
Share Per Share Per Share
-------------------- --------------------
- ------------------- --------------------- --------------------
Percent of Percent
Percent Percent Percent
Amount Assets(1) Amount of Assets(1) Amount of
Assets(1) Amount of Assets(1) Amount of Assets(1)
--------- ---------- ------- ------------ -------
- ----------- -------- ------------ ------- ------------
(Dollars in
Thousands)
GAAP capital $13,551 11.95% $18,209 15.43% $19,071
16.04% $19,934 16.64% $20,925 17.33%
========= ========== ======= ============ =======
=========== ======== ============ ======= ===========
Tangible capital:
Actual $12,678 11.27% $17,336 14.79% $18,198
15.42% $19,061 16.03% $20,052 16.73%
Requirement 1,688 1.50 1,758 1.50 1,771
1.50 1,783 1.50 1,798 1.50
--------- ---------- ------- ------------ -------
- ----------- -------- ------------ ------- ------------
Excess $10,990 9.77% $15,578 13.29% $16,427
13.92% $17,278 14.53% $18,254 15.23%
========= ========== ======= ============ =======
=========== ======== ============ ======= ===========
Core capital(2):
Actual $12,678 11.27% $17,336 14.79% $18,198
15.42% $19,061 16.03% $20,052 16.73%
Requirement 4,501 4.00 4,687 4.00 4,721
4.00 4,756 4.00 4,796 4.00
--------- ---------- ------- ------------ -------
- ----------- -------- ------------ ------- ------------
Excess $ 8,177 7.27% $12,649 10.79% $13,477
11.42% $14,305 12.03% $15,256 12.73%
========= ========== ======= ============ =======
=========== ======== ============ ======= ===========
Risk-based capital(2):
Actual $13,918 19.70% $18,576 25.96% $19,438
27.10% $20,301 28.23% $21,292 29.53%
Requirement 5,651 8.00 5,725 8.00 5,739
8.00 5,753 8.00 5,769 8.00
--------- ---------- ------- ------------ -------
- ----------- -------- ------------ ------- ------------
Excess $ 8,267 11.70% $12,851 17.96% $13,699
19.10% $14,548 20.23% $15,523 21.53%
========= ========== ======= ============ =======
=========== ======== ============ ======= ===========
</Table>
- ------------------------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
(2) Does not reflect the interest rate risk component to be added to the
risk-based capital requirements. See "Regulation - Peoples Federal -
Prompt Corrective Action."
22
<Page>
OUR CAPITALIZATION
The following table presents the historical capitalization of Peoples
Federal at March 31, 2001, and our pro forma consolidated capitalization after
giving effect to the conversion, based upon the sale of the number of shares
shown below and the other assumptions set forth under "Pro Forma Data."
<Table>
<Caption>
PFS
Bancorp, Inc. - Pro Forma
Based
Upon Sale at $10.00 Per Share
- ---------------------------------------------------------------------------
977,500
1,150,000 1,322,500 1,520,875
Shares
Shares Shares Shares(1)
Peoples Federal (Minimum of
(Midpoint of (Maximum of (15% above
- Historical Offering
Offering Offering Maximum of
Capitalization Range)
Range) Range) Offering Range)
------------------ ------------------
- ---------------- ------------------ --------------------
(In
Thousands)
Deposits(2) $95,754 $95,754
$95,754 $95,754 $95,754
FHLB advances 3,000 3,000
3,000 3,000 3,000
------------------ ------------------
- ---------------- ------------------ --------------------
Total deposits and
advances $98,754 $98,754
$98,754 $98,754 $98,754
================== ==================
================ ================== ====================
Stockholders' equity:
Preferred stock, $.01 par
value, 5,000,000 shares
authorized; none to be
issued $ -- $ -- $
- -- $ -- $ --
Common stock, $.01
par value, 10,000,000
shares authorized;
shares to be issued as
reflected(3) -- 10
12 13 16
Additional paid-in
capital(3) 9,305
11,028 12,752 14,733
Retained earnings(4) 12,678 12,678
12,678 12,678 12,678
Net unrealized gain on
securities available
for sale 873 873
873 873 873
Plus:
Contribution to
Foundation -- 196
230 265 304
Less:
Foundation contribution
expense, net (5) -- (118)
(138) (159) (183)
Common stock acquired
by our employee
stock ownership
plan(6) -- (782)
(920) (1,058) (1,217)
Common stock to be
acquired by our
recognition plan(7) -- (391)
(460) (529) (608)
------------------ ------------------
- ---------------- ------------------ --------------------
Total equity $13,551 $21,771
$23,303 $24,835 $ 26,596
================== ==================
================ ================== ====================
</Table>
(FOOTNOTES ON FOLLOWING PAGE)
23
<Page>
- ------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% to
reflect changes in market and financial conditions before we complete
the conversion or to fill the order of our employee stock ownership
plan.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) The sum of the par value and additional paid-in capital accounts equals
the net conversion proceeds. No effect has been given to the issuance
of additional shares of common stock pursuant to our proposed stock
option plan. We intend to adopt a stock option plan and to submit such
plan to stockholders at a meeting of stockholders to be held at least
six months following completion of the conversion. If the plan is
approved by stockholders, an amount equal to 10% of the shares of
common stock sold in the conversion will be reserved for future
issuance under such plan. Your ownership percentage would decrease by
approximately 8.9% if all potential stock options are exercised from
our authorized but unissued stock. See "Pro Forma Data" and "Management
- New Stock Benefit Plans - Stock Option Plan."
(4) The retained earnings of Peoples Federal will be substantially
restricted after the conversion. See "The Conversion - Liquidation
Rights of Certain Depositors."
(5) Represents the expense, net of tax, of the contribution of common stock
to PFS Community Foundation based on an estimated tax rate of 40%. The
realization of the tax benefit is limited annually to 10% of PFS
Bancorp's annual taxable income. However, for federal and state tax
purposes, PFS Bancorp can carry forward any unused portion of the
deduction for five years following the year in which the contribution
is made.
(6) Assumes that 8% of the common stock will be purchased by our employee
stock ownership plan. The common stock acquired by our employee stock
ownership plan is reflected as a reduction of stockholders' equity.
Assumes the funds used to acquire our employee stock ownership plan
shares will be borrowed from us. See Note 1 to the table set forth
under "Pro Forma Data" and "Management - New Stock Benefit Plans -
Employee Stock Ownership Plan."
(7) Gives effect to the recognition plan which we expect to adopt after the
conversion and present to stockholders for approval at a meeting of
stockholders to be held at least six months after we complete the
conversion. No shares will be purchased by the recognition plan in the
conversion, and such plan cannot purchase any shares until stockholder
approval has been obtained. If the recognition plan is approved by our
stockholders, the plan intends to acquire an amount of common stock
equal to 4% of the shares of common stock issued in the conversion, or
39,100, 46,000, 52,900 and 60,835 shares at the minimum, midpoint,
maximum and 15% above the maximum of the offering range, respectively.
The table assumes that stockholder approval has been obtained and that
such shares are purchased in the open market at $10.00 per share. The
common stock so acquired by the recognition plan is reflected as a
reduction in stockholders' equity. If the shares are purchased at
prices higher or lower than the initial purchase price of $10.00 per
share, such purchases would have a greater or lesser impact,
respectively, on stockholders' equity. If the recognition plan
purchases authorized but unissued shares from us, such issuance would
dilute the voting interests of existing stockholders by approximately
3.8%. See "Pro Forma Data" and "Management - New Stock Benefit Plans -
Recognition Plan."
24
<Page>
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of our common
stock until the conversion is completed. However, net proceeds are currently
estimated to be between $9.3 million and $12.8 million (or $14.7 million in the
event the offering range is increased by 15%) based upon the following
assumptions: (1) all shares of common stock will be sold in the subscription
offering; and (2) total expenses, including the marketing fees to be paid to
Prestige, will be $460,000. Actual expenses may vary from those estimated.
We calculated pro forma net earnings and stockholders' equity for the
nine months ended March 31, 2001 and the fiscal year ended June 30, 2000 as if
the common stock to be issued in the offering had been sold at the beginning of
the period. The table assumes that the net proceeds had been invested at 4.15%
and 6.08%, respectively, for the nine months ended March 31, 2001 and the fiscal
year ended June 30, 2000 which represents the one year U.S. Treasury Bill rate
as of the end of those periods. We believe this rate is more reflective of pro
forma reinvestment rates than the arithmetic average of the average yield on our
total interest-earning assets and the average rate paid on our deposits during
the respective periods. We assumed a combined effective federal and state income
tax rate of 40%, resulting in an after-tax yield of 2.49% and 3.65%,
respectively, for the nine months ended March 31, 2001 and the fiscal year ended
June 30, 2000. The effect of withdrawals from deposit accounts for the purchase
of common stock has not been reflected. We calculated historical and pro forma
per share amounts by dividing historical and pro forma amounts by the indicated
number of shares of common stock, as adjusted to give effect to the shares
purchased by our employee stock ownership plan with respect to the net earnings
per share calculations. See Notes 2 and 4 to the Pro Forma Data tables. No
effect has been given in the pro forma stockholders' equity calculations for the
assumed earnings on the net proceeds. As discussed under "How Our Net Proceeds
Will Be Used", we intend to retain 42% of the net conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the conversion at the date on which the conversion actually
occurs and should not be taken as indicative of future results of operations.
Pro forma stockholders' equity represents the difference between the stated
amount of our assets and liabilities computed in accordance with generally
accepted accounting principles. The pro forma stockholders' equity is not
intended to represent the fair market value of the common stock and may be
different than amounts that would be available for distribution to stockholders
in the event of liquidation. We did not reflect in the tables the possible
issuance of additional shares equal to 10% of the common stock to be reserved
for future issuance pursuant to our proposed stock option plan, nor does book
value give any effect to the liquidation account to be established for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders or
to Peoples Federal's bad debt reserve. See "Management - New Stock Benefit
Plans" and "The Conversion - Liquidation Rights of Certain Depositors." The
tables do give effect to the recognition plan, which we expect to adopt
following the conversion and present (together with the stock option plan) to
stockholders for approval at a meeting to be held at least six months after we
complete the conversion. If the recognition plan is approved by stockholders,
the recognition plan intends to acquire an amount of common stock equal to 4% of
the shares of common stock issued in the conversion, either through open market
purchases, if permissible, or from authorized but unissued shares of common
stock. The table assumes that stockholder approval has been obtained and that
the shares acquired by the recognition plan are purchased in the open market at
$10.00 per share. There can be no assurance that stockholder approval of the
recognition plan will be obtained, that the shares will be purchased in the open
market or that the purchase price will be $10.00 per share.
The tables on the following pages summarize historical consolidated
data of Peoples Federal and our pro forma data at or for the date and period
indicated based on the assumptions set forth above and in the table and should
not be used as a basis for projection of the market value of the common stock
following the conversion. In addition , the following tables assume that PFS
Community Foundation is funded as part of the conversion and give effect to the
issuance of authorized but unissued shares of PFS Bancorp to PFS Community
Foundation. The valuation range accounts for the dilutive impact of the issuance
of shares to PFS Community Foundation.
25
<Page>
<Table>
<Caption>
At or For the Nine
Months Ended March 31, 2001
- -------------------------------------------------------------
977,500 1,150,000
1,322,500 1,520,875
Shares Sold Shares Sold
Shares Sold Shares Sold
at $10.00 at $10.00
at $10.00 at $10.00
Per Share Per Share
Per Share Per Share (15%
(Minimum (Midpoint
(Maximum above Maximum
of Range) of Range)
of Range) of Range)(9)
-------------- --------------
- ---------------- --------------
(Dollars in Thousands,
Except Per Share Amounts)
Gross proceeds $9,775 $11,500
$13,225 $15,209
Less offering expenses (460) (460)
(460) (460)
-------------- --------------
- ---------------- --------------
Estimated net conversion proceeds 9,315 11,040
12,765 14,749
Less our employee stock ownership plan(1) (782) (920)
(1,058) (1,217)
Less our recognition plan (391) (460)
(529) (608)
-------------- --------------
- ---------------- --------------
Estimated adjusted net proceeds(2) $8,142 $9,660
$11,178 $12,924
============== ==============
================ ==============
Pro forma net earnings(3):
Historical $505 $505
$505 $505
Pro forma adjustments:
Income on adjusted net proceeds(2) 152 180
209 241
Our employee stock ownership plan(1) (35) (41)
(48) (55)
Our recognition plan(4) (35) (41)
(48) (55)
-------------- --------------
- ---------------- --------------
Pro forma net earnings $ 587 $ 603
$618 $636
============== ==============
================ ==============
Pro forma net earnings per share(5):
Historical $0.55 $0.47
$0.40 $0.35
Pro forma adjustments:
Income on adjusted net proceeds(2) 0.16 0.17
0.17 0.17
Our employee stock ownership plan(1) (0.04) (0.04)
(0.04) (0.04)
Our recognition plan (3) (0.04) (0.04)
(0.04) (0.04)
-------------- --------------
- ---------------- --------------
Pro forma net income per share $0.63 $0.56
$0.49 $ 0.44
============== ==============
================ ==============
Pro forma basic P/E ratio (annualized)(5) 11.90 13.39
15.31 17.05
Number of shares used in calculating net
earnings per share(5) 921,783 1,084,450
1,247,118 1,434,185
Pro forma stockholders' equity:
Historical $13,551 $13,551
$13,551 $13,551
Estimated net conversion proceeds 9,315 11,040
12,765 14,749
Plus shares issued to the foundation 196 230
265 304
Less contribution to the foundation (196) (230)
(265) (304)
Plus tax benefit of the contribution to the
foundation 78 92
106 122
Less our employee stock ownership
plan(1) (782) (920)
(1,058) (1,217)
Less our recognition plan(4) (391) (460)
(529) (608)
-------------- --------------
- ---------------- --------------
Pro forma stockholders' equity(6)(7) $21,771 $23,303
$24,835 $26,597
============== ==============
================ ==============
Pro forma stockholders' equity per share(8):
Historical $13.59 $11.55
$10.05 $8.74
Estimated net conversion proceeds 9.34 9.41
9.46 9.51
Plus shares issued to foundation 0.20 0.20
0.20 0.20
Less contribution to foundation (0.20) (0.20)
(0.20) (0.20)
Plus tax benefit of the contribution to
the foundation 0.08 0.08
0.08 0.08
Less our employee stock ownership
plan(1) (0.78) (0.78)
(0.78) (0.78)
Less our recognition plan(4) (0.39) (0.39)
(0.39) (0.39)
-------------- --------------
- ---------------- --------------
Pro forma stockholders' equity
per share(4)(6)(7) $21.84 $19.87
$18.42 $17.16
============== ==============
================ ==============
Pro forma price to book value(8) 45.79% 50.33%
54.29% 58.28%
Number of shares used in equity per share
calculations(8) 997,050 1,173,000
1,348,950 1,551,293
</Table>
(FOOTNOTES ON FOLLOWING PAGE)
26
<Page>
- -------------------
(1) We assumed that 8% of the shares of common stock issued in the
conversion will be purchased by our employee stock ownership plan. We
also assumed that the funds used to acquire such shares will be
borrowed by our employee stock ownership plan from us. We intend to
make annual contributions to our employee stock ownership plan over a
10 year period in an amount at least equal to the principal and
interest requirement of the debt. The pro forma net earnings assumes
(a) that the loan to our employee stock ownership plan is payable over
10 years, with our employee stock ownership plan shares having an
average fair value of $10.00 per share in accordance with SOP 93-6,
entitled "Employers' Accounting for Employee Stock Ownership Plans," of
the AICPA; (b) that the loan to our employee stock ownership plan bears
an interest rate of 7.0% and Peoples Federal's payment of the employee
stock ownership plan debt is based upon equal installments of principal
over a 10 year period and interest expense is excluded since it is an
intercompany expense; (c) that our employee stock ownership plan
expense for the period is equivalent to the principal payment for the
period and was made at the end of the period; (d) that 5,865, 6,900,
7,935 and 9,125 shares were committed to be released with respect to
the nine months ended March 31, 2001, at the minimum, midpoint, maximum
and 15% above the maximum of the offering range, respectively; (e) in
accordance with SOP 93-6 entitled "Employers' Accounting for Employee
Stock Ownership Plans," only our employee stock ownership plan shares
committed to be released during the period were considered outstanding
for purposes of the net earnings per share calculations; and (f) the
effective tax rate was 40% for the period. See "Risk Factors - Our
Employee Stock Benefit Plans Will Increase Our Costs" and "Management -
New Stock Benefit Plans - Employee Stock Ownership Plan."
(2) Estimated adjusted net proceeds consist of the estimated net conversion
proceeds, minus (i) the proceeds attributable to the purchase by our
employee stock ownership plan and (ii) the value of the shares to be
purchased by our recognition plan after the conversion, subject to
stockholder approval, at an assumed purchase price of $10.00 per share.
(3) Does not give effect to the non-recurring expense that will be
recognized in fiscal 2002 as a result of the contribution of common
stock to PFS Community Foundation. The following table shows the
estimated after-tax expense associated with the contribution of the
foundation, as well as pro forma net earnings and pro forma net
earnings per share assuming the contribution to the foundation was
expensed during the period presented. The pro forma data assumes that
PFS Bancorp will realize 100% of the income tax benefit as a result of
the contribution to the foundation based on a 40% tax rate. The
realization of the tax benefit is limited annually to 10% of PFS
Bancorp's annual taxable income. However, for federal and state tax
purposes, PFS Bancorp can carry forward any unused portion of the
deduction for five years following the year in which the contribution
is made.
<Table>
<Caption>
15% Above
Minimum of
Maximum of Maximum of
Estimated
Estimated Estimated
Valuation Range
Valuation Range Valuation Range
----------------
- ------------------- -------------------
977,500
1,322,500 Shares 1,520,875 Shares
Shares at $10.00 at
$10.00 Per at $10.00 Per
Per Share
Share Share
----------------
- ------------------- -------------------
(Dollars in
thousands, except per share amounts)
After-tax expense of contribution to foundation:
Nine months ended March 31, 2001.............. $ 118
$ 159 $ 182
Pro forma net earnings:
Nine months ended March 31, 2001.............. $ 469
$ 459 $ 454
Pro forma net earnings per share:
Nine Months ended March 31, 2001.............. $0.51
$0.37 $0.32
</Table>
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
27
<Page>
(4) We assumed that the recognition plan purchases 39,100, 46,000, 52,900
and 60,835 shares at the minimum, midpoint, maximum and 15% above the
maximum of the offering range, respectively, assuming that: (a)
stockholder approval of the recognition plan is received; (b) the
shares were acquired by the recognition plan at the beginning of the
period presented in open market purchases at $10.00 per share; (c) the
amortized expense for the nine months ended March 31, 2001 was 20% of
the amount contributed; and (d) the effective tax rate applicable to
such employee compensation expense was 40%. We assumed that 20% of the
recognition plan shares vested at the beginning of the period. If the
recognition plan purchases authorized but unissued shares instead of
making open market purchases, then (a) the voting interests of existing
stockholders would be diluted by approximately 3.8%, and (b) the pro
forma net income per share for the nine months ended March 31, 2001
would be $0.61, $0.53, $0.48 and $0.43, and pro forma stockholders'
equity per share at the nine months ended March 31, 2001 would be
$21.39, $19.49, $18.09 and $16.87, in each case at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively. See "Management - New Stock Benefit Plans - Recognition
Plan."
(5) Pro forma net earnings per share calculations are determined by (a)
starting with the number of shares assumed to be sold in the conversion
and (b) in accordance with SOP 93-6, subtracting our employee stock
ownership plan shares which have not been committed for release.
Set forth below is a reconciliation of the number of shares used in
making the net income per share calculations:
<Table>
<Caption>
MINIMUM MIDPOINT
MAXIMUM MAXIMUM, AS ADJUSTED
------- ---------
- --------- --------------------
Total shares issued 997,050 1,173,000
1,348,950 1,551,293
Less shares sold to ESOP (78,200) (92,000)
(105,800) (121,670)
------- ---------
- --------- --------------------
Subtotal 918,850 1,081,000
1,243,150 1,429,623
Plus ESOP shares assumed committed to be
released 2,933 3,450
3,968 4,562
------- ---------
- --------- --------------------
Number of shares used in calculating basic and
diluted net income per share 921,783 1,084,450
1,247,118 1,434,185
======= =========
========= ====================
</Table>
(6) We did not give any effect to the issuance of additional shares of
common stock pursuant to our proposed stock option plan, which we
expect to adopt after the conversion and present to stockholders for
approval at a meeting of stockholders to be held at least six months
after we complete the conversion. If the stock option plan is approved
by stockholders, an amount equal to 10% of the common stock issued in
the conversion, or 97,750, 115,000, 132,250 and 152,088 shares at the
minimum, midpoint, maximum and 15% above the maximum of the offering
range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the stock option plan. The
issuance of authorized but previously unissued shares of common stock
pursuant to the exercise of options under such plan would dilute
existing stockholders' interests by approximately 8.9% if all potential
stock options are exercised from our authorized but unissued stock.
Assuming stockholder approval of the plan, that all the options were
exercised at the beginning of the period at an exercise price of $10.00
per share, and that the shares to fund the recognition plan are
acquired through open market purchases at $10.00 per share, (a) pro
forma net income per share for the nine months ended March 31, 2001,
would be $0.59, $0.52, $0.47 and $0.42, and (b) pro forma stockholders'
equity per share at the nine months ended March 31, 2001, would be
$20.78, $18.99, $17.66 and $16.51, in each case at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
28
<Page>
(7) The retained earnings of Peoples Federal will be substantially
restricted after the conversion. See "We Intend to Pay Quarterly Cash
Dividends" and "The Conversion - Liquidation Rights of Certain
Depositors."
(8) Based on the number of shares sold in the conversion and the issuance
of shares to the PFS Community Foundation.
(9) Assumes an increase in the number of shares due to a 15% increase in
the maximum of the offering range to reflect changes in market and
financial conditions before we complete the conversion or to fill the
order of our employee stock ownership plan.
29
<Page>
<Table>
<Caption>
At or For the
Year Ended June 30, 2000
- -----------------------------------------------------------------
977,500 1,150,000
1,322,500 1,520,875
Shares Sold Shares Sold
Shares Sold Shares Sold
at $10.00 at $10.00
at $10.00 at $10.00
Per Share Per Share
Per Share Per Share (15%
(Minimum (Midpoint
(Maximum above Maximum
of Range) of Range)
of Range) of Range)(9)
-------------- --------------
- ---------------- ----------------
(Dollars in Thousands,
Except Per Share Amounts)
Gross proceeds $9,775 $11,500
$13,225 $15,209
Less offering expenses (460) (460)
(460) (460)
-------------- --------------
- ---------------- ----------------
Estimated net conversion proceeds 9,315 11,040
12,765 14,749
Less our employee stock ownership plan(1) (782) (920)
(1,058) (1,217)
Less our recognition plan (391) (460)
(529) (608)
-------------- --------------
- ---------------- ----------------
Estimated adjusted net proceeds(2) $8,142 $9,660
$11,178 $ 12,924
============== ==============
================ ================
Pro forma net earnings(3):
Historical $ 810 $ 810
$ 810 $ 810
Pro forma adjustments:
Income on adjusted net proceeds(2) 297 352
408 471
Our employee stock ownership plan(1) (47) (55)
(63) (73)
Our recognition plan(4) (47) (55)
(63) (73)
-------------- --------------
- ---------------- ----------------
Pro forma net earnings $1,013 $1,052
$ 1,092 $ 1,135
============== ==============
================ ================
Pro forma net earnings per share(5):
Historical $0.88 $0.75
$0.65 $0.56
Pro forma adjustments:
Income on adjusted net proceeds(2) 0.32 0.32
0.33 0.33
Our employee stock ownership plan(1) (0.05) (0.05)
(0.05) (0.05)
Our recognition plan (4) (0.05) (0.05)
(0.05) (0.05)
-------------- --------------
- ---------------- ----------------
Pro forma net income per share $1.10 $0.97
$ 0.88 $0.79
============== ==============
================ ================
Pro forma basic P/E ratio(5) 9.09 10.31
11.36 12.66
Number of shares used in calculating net
earnings per share(5) 922,760 1,085,600
1,248,440 1,435,706
Pro forma stockholders' equity:
Historical $12,852 $12,852
$12,852 $12,852
Estimated net conversion proceeds 9,315 11,040
12,765 14,749
Plus shares issued to the foundation 196 230
265 304
Less contribution to foundation (196) (230)
(265) (304)
Plus tax benefit of the contribution to
the foundation 78 92
106 122
Less our employee stock ownership
plan(1) (782) (920)
(1,058) (1,217)
Less our recognition plan(4) (391) (460)
(529) (608)
-------------- --------------
- ---------------- ----------------
Pro forma stockholders' equity(6)(7) $21,072 $22,604
$24,136 $25,898
============== ==============
================ ================
Pro forma stockholders' equity per share(8):
Historical $12.89 $10.96
$9.53 $8.28
Estimated net conversion proceeds 9.34 9.41
9.46 9.51
Plus shares issued to foundation 0.20 0.20
0.20 0.20
Less contribution to foundation (0.20) (0.20)
(0.20) (0.20)
Plus tax benefit of the contribution to
the foundation 0.08 0.08
0.08 0.08
Less our employee stock ownership
plan(1) (0.78) (0.78)
(0.78) (0.78)
Less our recognition plan(4) (0.39) (0.39)
(0.39) (0.39)
-------------- --------------
- ---------------- ----------------
Pro forma stockholders' equity
per share(4)(6)(7) $21.14 $ 19.28
$17.90 $16.70
============== ==============
================ ================
Pro forma price to book value(8) 47.30% 51.87%
55.87% 59.88%
Number of shares used in equity
per share calculations(8) 997,050 1,173,000
1,348,950 1,551,293
</Table>
(FOOTNOTES ON FOLLOWING PAGE)
30
<Page>
- --------------------
(1) We assumed that 8% of the shares of common stock issued in the
conversion will be purchased by our employee stock ownership plan. We
also assumed that the funds used to acquire such shares will be
borrowed by our employee stock ownership plan from us. We intend to
make annual contributions to our employee stock ownership plan over a
10 year period in an amount at least equal to the principal and
interest requirement of the debt. The pro forma net income assumes (a)
that the loan to our employee stock ownership plan is payable over 10
years, with our employee stock ownership plan shares having an average
fair value of $10.00 per share in accordance with SOP 93-6, entitled
"Employers' Accounting for Employee Stock Ownership Plans," of the
AICPA; (b) that the loan to our employee stock ownership plan bears an
interest rate of 7.0% and Peoples Federal's payment of the employee
stock ownership plan debt is based upon equal installments of principal
over a 10 year period and interest expense is excluded since it is an
intercompany expense; (c) that our employee stock ownership plan
expense for the period is equivalent to the principal payment for the
period and was made at the end of the period; (d) that 7,820, 9,200,
10,580 and 12,167 shares were committed to be released with respect to
the year ended June 30, 2000, at the minimum, midpoint, maximum and 15%
above the maximum of the offering range, respectively; (e) in
accordance with SOP 93-6 entitled "Employers' Accounting for Employee
Stock Ownership Plans," only our employee stock ownership plan shares
committed to be released during the period were considered outstanding
for purposes of the net earnings per share calculations; and (f) the
effective tax rate was 40% for the period. See "Risk Factors - Our
Employee Stock Benefit Plans Will Increase Our Costs" and "Management -
New Stock Benefit Plans - Employee Stock Ownership Plan."
(2) Estimated adjusted net proceeds consist of the estimated net conversion
proceeds, minus (i) the proceeds attributable to the purchase by our
employee stock ownership plan and (ii) the value of the shares to be
purchased by our recognition plan after the conversion, subject to
stockholder approval, at an assumed purchase price of $10.00 per share.
(3) Does not give effect to the non-recurring expense that will be
recognized in fiscal 2002 as a result of the contribution of common
stock to PFS Community Foundation. The following table shows the
estimated after-tax expense associated with the contribution to the
foundation, as well as pro forma net earnings and pro forma net
earnings per share assuming the contribution to the foundation was
expensed during the period presented. The pro forma data assumes that
PFS Bancorp will realize 100% of the income tax benefit as a result of
the contribution to the foundation based on a 40% tax rate. The
realization of the tax benefit is limited annually to 10% of PFS
Bancorp's annual taxable income. However, for federal and state tax
purposes, PFS Bancorp can carry forward any unused portion of the
deduction for five years following the year in which the contribution
is made.
<Table>
<Caption>
15% Above
Minimum of
Maximum of Maximum of
Estimated
Estimated Estimated
Valuation Range
Valuation Range Valuation Range
-------------------
- ------------------- -------------------
977,500
1,322,500 Shares 1,520,875 Shares
Shares at $10.00 at
$10.00 Per at $10.00 Per
Per Share
Share Share
-------------------
- ------------------- -------------------
(Dollars in
thousands, except per share amounts)
After-tax expense of contribution to foundation:
Year ended June 30, 2000...................... $ 118
$159 $ 182
Pro forma net earnings:
Year ended June 30, 2000...................... $ 895
$933 $ 953
Pro forma net earnings per share:
Year ended June 30, 2000...................... $0.97
$0.75 $0.66
</Table>
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
31
<Page>
(4) We assumed that the recognition plan purchases 39,100, 46,000, 52,900
and 60,835 shares at the minimum, midpoint, maximum and 15% above the
maximum of the offering range, respectively, assuming that: (a)
stockholder approval of the recognition plan is received; (b) the
shares were acquired by the recognition plan at the beginning of the
period presented in open market purchases at $10.00 per share; (c) the
amortized expense for the year ended June 30, 2000 was 20% of the
amount contributed; and (d) the effective tax rate applicable to such
employee compensation expense was 40%. We assumed that 20% of the
recognition plan shares vested at the beginning of the period. If the
recognition plan purchases authorized but unissued shares instead of
making open market purchases, then (a) the voting interests of existing
stockholders would be diluted by approximately 3.8%, and (b) the pro
forma net income per share for the year ended June 30, 2000 would be
$1.05, $0.93, $0.84 and $0.76, and pro forma stockholders' equity per
share at June 30, 2000 would be $20.71, $18.92, $17.59 and $16.44, in
each case at the minimum, midpoint, maximum and 15% above the maximum
of the offering range, respectively. See "Management - New Stock
Benefit Plans - Recognition Plan."
(5) Pro forma net earnings per share calculations are determined by (a)
starting with the number of shares assumed to be sold in the conversion
as well as contributed to the PFS Community Foundation and (b) in
accordance with SOP 93-6, subtracting our employee stock ownership plan
shares which have not been committed for release.
Set forth below is a reconciliation of the number of shares used in
making the net income per share calculations:
<Table>
<Caption>
MINIMUM MIDPOINT
MAXIMUM MAXIMUM, AS ADJUSTED
------- ---------
- --------- --------------------
Total shares issued 997,050 1,173,000
1,348,950 1,551,293
Less shares sold to ESOP (78,200) (92,000)
(105,800) (121,670)
------- ---------
- --------- --------------------
Subtotal 918,850 1,081,000
1,243,150 1,429,623
Plus ESOP shares assumed committed to be
released 3,910 4,600
5,290 6,083
------- ---------
- --------- --------------------
Number of shares used in calculating basic and
diluted net income per share 922,760 1,085,600
1,248,440 1,435,760
======= =========
========= ====================
</Table>
(6) We did not give any effect to the issuance of additional shares of
common stock pursuant to our proposed stock option plan, which we
expect to adopt after the conversion and present to stockholders for
approval at a meeting of stockholders to be held at least six months
after we complete the conversion. If the stock option plan is approved
by stockholders, an amount equal to 10% of the common stock issued in
the conversion, or 97,750, 115,000, 132,250 and 152,088 shares at the
minimum, midpoint, maximum and 15% above the maximum of the offering
range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the stock option plan. The
issuance of authorized but previously unissued shares of common stock
pursuant to the exercise of options under such plan would dilute
existing stockholders' interests by approximately 8.9% if all potential
stock options are exercised from our authorized but unissued stock.
Assuming stockholder approval of the plan, that all the options were
exercised at the beginning of the period at an exercise price of $10.00
per share, and that the shares to fund the recognition plan are
acquired through open market purchases at $10.00 per share, (a) pro
forma net income per share for the year ended June 30, 2000, would be
$1.03, $0.91, $0.83 and $0.75, and (b) pro forma stockholders' equity
per share at June 30, 2000, would be $20.14, $18.44, $17.19 and $16.10,
in each case at the minimum, midpoint, maximum and 15% above the
maximum of the offering range, respectively.
32
<Page>
(7) The retained earnings of Peoples Federal will be substantially
restricted after the conversion. See "We Intend to Pay Quarterly Cash
Dividends" and "The Conversion - Liquidation Rights of Certain
Depositors."
(8) Based on the number of shares sold in the conversion and the issuance
of shares to the PFS Community Foundation.
(9) Assumes an increase in the number of shares due to a 15% increase in
the maximum of the offering range to reflect changes in market and
financial conditions before we complete the conversion or to fill the
order of our employee stock ownership plan.
33
<Page>
COMPARISON OF INDEPENDENT VALUATION AND
PRO FORMA FINANCIAL INFORMATION WITH AND WITHOUT THE FOUNDATION
As set forth in the following table, if the PFS Community Foundation
was not established and funded as part of the conversion, RP Financial estimates
that at the maximum of the offering range the pro forma market capitalization of
PFS Bancorp and Peoples Federal would be approximately $23,000 greater than if
the foundation is included. This would result in an increase in the amount of
common stock offered for sale in the conversion at the maximum of the offering
range of approximately $288,000. If the foundation were not established, there
is no assurance that the appraisal prepared at the time of conversion would
conclude that the pro forma market value of PFS Bancorp and People's Federal
would be the same as the estimate set forth in the table below. Any appraisal
prepared at the time of conversion would be based on the facts and circumstances
existing at that time, including, among other things, market and economic
conditions.
The information presented in the following table is for comparative
purposes only. It assumes that the conversion was completed at March 31, 2001,
based on the assumptions set forth under "Pro Forma Data."
<Table>
<Caption>
At the Minimum of At the
Maximum of At the Maximum, as Adjusted,
Offering Range
Offering Range of Offering Range
------------------------
- ------------------------- ------------------------
With No With
No With No
Foundation Foundation Foundation
Foundation Foundation Foundation
---------- ---------- ----------
---------- ---------- ----------
(Dollars in thousands,
except per share amounts)
Estimated pro forma
valuation........................... $ 9,775 $ 9,988 $ 13,225
$ 13,513 $ 15,209 $ 15,539
Pro forma market capitalization(1).. 9,971 9,988 13,490
13,513 15,513 15,539
Pro forma total assets(2)........... 121,607 121,716 124,671
124,818 126,432 126,602
Pro forma total liabilities(3)...... 99,836 99,836 99,836
99,836 99,836 99,836
Pro forma stockholders' equity...... 21,771 21,880 24,835
24,982 26,596 26,766
Pro forma net earnings.............. 587 589 618
620 636 640
Pro forma stockholders' equity
per share........................... 21.84 21.91 18.42
18.49 17.16 17.22
Pro forma net earnings per share.... 0.63 0.64 0.49
0.49 0.44 0.44
Pro Forma Pricing Ratios:
Offering price as a
percentage of pro forma
stockholders' equity............ 45.79% 45.64% 54.29%
54.08% 58.28% 58.07%
Offering price as a multiple
of pro forma net earnings
per share (annualized)(4)....... 11.90 11.72 15.31
15.31 17.05 17.05
Offering price to assets(5)........ 8.20% 8.21% 10.82%
10.83% 12.27% 12.27%
Pro Forma Financial Ratios:
Return on assets
(annualized)(6) .................. 0.64% 0.65% 0.66%
0.06% 0.67% 0.67%
Return on stockholders' equity
(annualized)(7) .................. 3.59% 3.59% 3.32%
3.31% 3.19% 3.19%
Stockholders' equity to total
assets ........................... 17.90% 17.98% 19.92%
20.01% 21.04% 21.14%
</Table>
34
<Page>
- --------------------------
(1) Pro forma market capitalization is equal to the amount of the gross
proceeds plus the value of the common stock issued to the PFS Community
Foundation.
(2) Pro forma assets are equal to Peoples Federal's total assets at
March 31, 2001 plus estimated net proceeds and the tax benefit created
by the PFS Community Foundation.
(3) Pro forma total liabilities are equal to Peoples Federal's total
liabilities at March 31, 2001.
(4) If the contribution to the foundation had been expensed during the nine
months ended March 31, 2001, the offering price to pro forma net
earnings per share would have been 15.00x, 20.83x and 24.19x at the
minimum, maximum and maximum, as adjusted, respectively.
(5) Offering price to assets is equal to pro forma market capitalization
as a percent of total assets.
(6) If the contribution to the foundation had been expensed during the nine
months ended March 31, 2001, pro forma return on assets would have been
0.51%, 0.49% and 0.48% at the minium, maximum and maximum, as adjusted,
respectively.
(7) If the contribution to the foundation had been expensed during the nine
months ended March 31, 2001, return on stockholders' equity would have
been 2.87%, 2.46% and 2.28% at the minimum, maximum and maximum, as
adjusted, respectively.
35
<Page>
Peoples Federal Savings Bank
STATEMENTS OF EARNINGS
(In thousands)
<Table>
<Caption>
Nine months
ended Year ended
March
31, June 30,
2001
2000 2000 1999 1998
(unaudited)
Interest income
Loans $5,853
$5,460 $7,349 $7,161 $7,591
Investment and mortgage-backed securities 21
24 21 25 28
Interest-bearing deposits and other 429
217 333 337 322
------
- ------- ------- ------- -------
Total interest income 6,303
5,701 7,703 7,523 7,941
Interest expense
Deposits 3,568
2,981 4,051 4,111 4,259
Borrowings 157
195 258 237 305
------
- ------- ------- ------- -------
Total interest expense 3,725
3,176 4,309 4,348 4,564
------
- ------- ------- ------- -------
Net interest income 2,578
2,525 3,394 3,175 3,377
Provision for losses on loans 132
64 88 84 80
------
- ------- ------- ------- -------
Net interest income after provision for
losses on loans 2,446
2,461 3,306 3,091 3,297
Other income
Gain on sale of real estate acquired through foreclosure 2
- 3 - 7
Gain on sale of investment securities 344
- - - -
Gain on sale of equipment -
- - - 12
Service fee income on deposits 148
124 176 144 121
Other operating 99
77 112 130 110
------
- ------- ------- ------- -------
Total other income 593
201 291 274 250
General, administrative and other expense
Employee compensation and benefits 1,390
756 1,004 952 895
Occupancy and equipment 189
268 333 268 202
Data processing 168
190 245 246 205
Federal deposit insurance premiums 37
52 64 49 49
Advertising 60
68 90 73 58
Other operating 308
406 473 530 403
------
- ------- ------- ------- -------
Total general, administrative and other expense 2,152
1,740 2,209 2,118 1,812
------
- ------- ------- ------- -------
Earnings before income taxes 887
922 1,388 1,247 1,735
Income taxes
Current 611
412 628 525 698
Deferred (229)
(38) (50) (32) (25)
------
- ------- ------- ------- -------
Total income taxes 382
374 578 493 673
------
- ------- ------- ------- -------
NET EARNINGS $ 505 $
548 $ 810 $ 754 $1,062
======
======= ======= ======= =======
</Table>
36
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL
GENERAL
Our profitability depends primarily on our net interest income, which
is the difference between interest and dividend income on interest-earning
assets, principally loans and interest-earning deposits in other institutions,
and interest expense on interest-bearing deposits and borrowings from the
Federal Home Loan Bank of Indianapolis. Net interest income is dependent upon
the level of interest rates and the extent to which such rates are changing. Our
profitability also depends, to a lesser extent, on other income, provision for
losses on loans, general, administrative and other expense and income taxes.
Historically, Peoples Federal's business has consisted primarily of
originating single-family real estate loans secured by property in its market
area. Peoples Federal's loans are primarily funded by deposits. Typically,
single-family loans involve a lower degree of risk and carry a lower yield than
commercial real estate, construction and consumer loans. To a significantly
lesser extent, Peoples Federal also offers non-residential and consumer and
other loans.
Our operations and profitability are subject to changes in interest
rates, applicable statutes and regulations and general economic conditions, as
well as other factors beyond our control.
OUR FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CHANGE
We make certain statements in this document as to what we expect may
happen in the future. These statements usually contain the words "believe,"
"estimate," "project," "expect," "anticipate," "intend" or similar expressions.
Because these statements look to the future, they are based on our current
expectations and beliefs. Actual results or events may differ materially from
those reflected in the forward-looking statements. You should be aware that our
current expectations and beliefs as to future events are subject to change at
any time, and we can give you no assurances that the future events will actually
occur.
OUR EXPOSURE TO CHANGES IN INTEREST RATES
Our ability to maintain net interest income depends upon our ability to
earn a higher yield on assets than the rates we pay on our deposits and
borrowings. Our interest-earning assets consist primarily of long-term
residential mortgage loans which have adjustable rates of interest. Our ability
to maintain a positive spread between the interest earned on assets and the
interest paid on deposits and borrowings can be adversely affected when market
rates of interest rise since our adjustable rate loans typically do not adjust
as rapidly as our liabilities.
QUANTITATIVE ANALYSIS. The Office of Thrift Supervision provides a
quarterly report on the potential impact of interest rate changes upon the
market value of portfolio equity. Management reviews the quarterly reports
from the Office of Thrift Supervision which show the impact of changing
interest rates on net portfolio value. The report is based on financial data
provided by management of Peoples Federal. Net portfolio value is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts. An institution has greater than
"normal" interest rate risk if it would suffer a loss of net portfolio value
exceeding 2.0% of the estimated market value of its assets in the event of a
200 basis point increase or decrease in interest rates. A resulting change in
net portfolio value of more than 2.0% of the estimated market value of an
institution's assets will require the institution to deduct from its
risk-based capital 50% of that excess change, if and when a rule adopted by
the Office of Thrift Supervision takes effect. Under the rule, an institution
with greater than "normal" interest rate risk will be subject to a deduction
of its interest rate risk component from total capital for purposes of
calculating the risk-based capital requirement. However, the Office of
37
<Page>
Thrift Supervision has indicated that no institution will be required to deduct
capital for interest rate risk until further notice.
QUALITATIVE ANALYSIS. Our ability to maintain a positive "spread"
between the interest earned on assets and the interest paid on deposits and
borrowings is affected by changes in interest rates. Peoples Federal's
fixed-rate loans help our profitability if interest rates are stable or
declining since these loans have yields that exceed its cost of funds. At March
31, 2001, $24.3 million or 25.1% of the total loan portfolio consisted of fixed
rate loans. If interest rates increase, however, Peoples Federal would have to
pay more on its deposits and new borrowings, which would adversely affect its
interest rate spread. In order to counter the potential effects of dramatic
increases in market rates of interest, Peoples Federal has focused primarily on
marketing adjustable-rate mortgage loans as well as shorter term commercial real
estate and consumer loans. At March 31, 2001, $72.9 million or 74.9% of the
total loan portfolio consisted of adjustable rate loans.
Although the interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, management also regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest income and net
portfolio value, which is defined as the net present value of a savings
institution's existing assets, liabilities and off-balance sheet instruments,
and evaluating such impacts against the maximum potential changes in net
interest income and net portfolio value. The following table presents Peoples
Federal's net portfolio value as of March 31, 2001.
<Table>
<Caption>
Net Portfolio Value
- --------------------------------------------------------------------------------
- ---------------------------
Estimated
Change in NPV as a
Change as a
Interest Rates Estimated Percentage Amount
Percentage
(basis points) NPV of Assets of Change
of Assets
- ----------------------- -------------------- --------------------
- -------------------- --------------------
(Dollars In Thousands)
+300 $15,567 13.56% (1,626)
(9)%
+200 16,384 14.10 (810)
(5)
+100 16,869 14.38 (325)
(2)
+ 0 17,193 14.54 --
--
-100 17,244 14.49 51
0
-200 17,268 14.43 74
0
-300 17,473 14.49 280
2
</Table>
38
<Page>
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID.
The following tables present for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the total dollar amount of interest expense on average
interest-bearing liabilities and the resultant rates, and the net interest
margin. The tables do not reflect any effect of income taxes. All average
balances are based on average monthly balances during the periods. Peoples
Federal does not believe that the monthly averages differ significantly from
what the daily averages would be.
<Table>
<Caption>
Nine Months Ended March 31,
- ---------------------------------------------------------------
At March 31, 2001
2001 2000
---------------------
- ------------------------------- -------------------------------
Average
Average Average Average
Balance Yield/Rate Balance
Interest Yield/Rate(1) Balance Interest Yield/Rate(1)
---------- ---------- --------
- -------- ------------- -------- -------- -------------
(Dollars In Thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net(2)................. $ 96,141 8.08% $ 95,950
$5,853 8.13% $94,619 $5,460 7.69%
Investment and mortgage-backed
securities............................ 1,512 1.32 1,562
21 1.79 1,491 24 2.15
Deposits in other financial
institutions (3)...................... 12,556 5.17 9,648
429 5.93 5,059 217 5.72
---------- --------
- -------- -------- --------
Total interest-earning assets.......... 110,209 7.66 107,160
6,303 7.84 101,169 5,701 7.51
- -------- --------
Non-interest-earning assets.............. 3,178 2,860
3,083
---------- --------
--------
Total assets........................... $ 113,387 $110,020
$104,252
========== ========
========
INTEREST-BEARING LIABILITIES:
Deposits................................. $95,754 5.15 $ 92,466
3,568 5.14 $86,460 2,981 4.60
FHLB advances............................ 3,000 6.42 3,143
157 6.66 4,441 195 5.85
---------- --------
- -------- -------- -------- -------------
Total interest-bearing liabilities....... 98,754 5.19 95,609
3,725 5.19 90,901 3,176 4.66
----------
- -------- ------------- -------- -------------
Non-interest-bearing liabilities......... 1,082 1,126
893
---------- --------
--------
Total liabilities...................... 98,836 96,735
91,794
Total equity(4).......................... 13,551 13,285
12,458
---------- --------
--------
Total liabilities and equity........... $ 113,387 $110,020
$104,252
========== ========
========
Net interest-earning assets............. $ 11,455 $ 10,425
% 10,268
========== ========
========
Net interest income......................
$2,578 $2,525
======== ========
Interest rate spread(5).................. 2.47%
2.65% 2.85%
==========
============= =============
Net interest margin(6)...................
3.21% 3.33%
============= =============
Average interest-earning assets
to average interest-bearing
liabilities............................. 112.08%
111.30%
========
========
</Table>
39
<Page>
<Table>
<Caption>
Year Ended June 30,
- --------------------------------------------------------------------
2000
1999
- ----------------------------------- --------------------------------
Average
Average Average Average
Balance Interest
Yield/Rate Balance Interest Yield/Rate
--------- ----------
- ---------- --------- -------- ----------
(Dollars In Thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net(2)....................... $94,848 $7,349
7.75% $90,339 $7,161 7.93%
Investment and mortgage-backed securities...... 1,448 21
1.45 1,642 25 1.52
Deposits in other financial institutions(3).... 5,506 333
6.05 6,640 337 5.08
--------- ----------
--------- --------
Total interest-earning assets................ 101,802 7,703
7.57 98,621 7,523 7.63
----------
--------
Non-interest-earning assets.................... 3,038
2,453
---------
---------
Total assets................................. $104,840
$101,074
=========
=========
INTEREST-BEARING LIABILITIES:
Deposits....................................... $87,114 4,051
4.65 $84,055 4,111 4.89
FHLB advances.................................. 4,321 258
5.97 4,115 237 5.76
--------- ----------
--------- --------
Total interest-bearing liabilities............. 91,435 4,309
4.71 88,170 4,348 4.93
----------
--------
Non-interest-bearing liabilities............... 876
993
---------
---------
Total liabilities............................ 92,311
89,163
---------
---------
Total equity(4)................................ 12,529
11,911
---------
---------
Total liabilities and equity................. $104,840
$101,074
=========
=========
Net interest-earning assets.................... $ 10,367
10,451
=========
=========
Net interest income............................ $3,394
$3,175
==========
========
Interest rate spread(5)........................
2.86% 2.70%
========== ==========
Net interest margin(6).........................
3.33 3.22%
========== ==========
Average interest-earning assets to average
interest-bearing liabilities.................. 111.34%
111.85%
=========
=========
</Table>
(1) Yields and rates have been annualized where appropriate.
(2) Includes nonaccruing loans. Interest income on loans receivable, net
includes amortized loan fees.
(3) Includes interest bearing demand deposits, other interest bearing
deposits and FHLB stock
(4) Includes retained earnings and accumulated other comprehensive income.
(5) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate
on interest-bearing liabilities.
(6) Net interest margin is net interest income divided by average
interest-earning assets.
40
<Page>
RATE/VOLUME ANALYSIS. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related
assets and liabilities have affected Peoples Federal's interest income
and interest expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information
is provided on changes attributable to (i) changes in volume (change in
volume multiplied by prior year rate), (ii) changes in rate (change in
rate multiplied by prior year volume), and (iii) total change in rate
and volume. The combined effect of changes in both rate and volume has
been allocated proportionately to the change due to rate and the change
due to volume. In calculating this table, out of period items and
adjustments have been excluded. The types and amounts are disclosed in
the note following the table.
<Table>
<Caption>
Year Ended June 30,
- -----------------------------------------------------------
Nine Months Ended March 31,
2001 vs. 2000 2000
vs. 1999 1999 vs.1998
----------------------------
- ----------------------------- -----------------------------
Increase Increase
Increase
(Decrease)
(Decrease) (Decrease)
Due To Due To
Due To
------------------ Total
- ------------------ Total ----------------- Total
Increase
Increase Increase
Yield/Rate Volume (Decrease) Yield/Rate
Volume (Decrease) Yield/Rate Volume (Decrease)
---------- ------ ---------- ----------
- ------ ---------- ---------- ------ ----------
(In
Thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net............ $ 295 $98 $393 $ (162)
$350 $188 $(499) $69 $ (430)
Investment securities............ (5) 2 (3) (1)
(3) (4) (8) 5 (3)
Deposits in other financial
institutions................... 13 199 212 59
(63) (4) (21) 36 15
---------- ------ ---------- ----------
- ------ ---------- ---------- ------ ----------
Total.......................... 303 299 602 (104)
284 180 (528) 110 (418)
---------- ------ ---------- ----------
- ------ ---------- ---------- ------ ----------
INTEREST-BEARING LIABILITIES:
Deposits......................... 370 217 587 (212)
152 (60) (238) 90 (148)
Borrowings....................... 47 (85) (38) 9
12 21 (5) (63) (68)
---------- ------ ---------- ----------
- ------ ---------- ---------- ------ ----------
Total........................ 417 132 549 (203)
164 (39) (243) 27 (216)
---------- ------ ---------- ----------
- ------ ---------- ---------- ------ ----------
Increase (decrease) in
net interest income............ $(114) $167 $ 53 $ 99
$120 $219 $(285) $ 83 $(202)
========== ====== ========== ==========
====== ========== ========== ====== ==========
</Table>
41
<Page>
CHANGES IN FINANCIAL CONDITION FROM JUNE 30, 2000 TO MARCH 31, 2001
Peoples Federal's total assets amounted to $113.4 million at March 31,
2001, an increase of $5.4 million, or 5.0%, over June 30, 2000 levels. The
increase in total assets was funded primarily by a $4.9 million increase in
deposits.
Cash and interest-bearing deposits totaled $13.3 million at March
31, 2001, an increase of $4.5 million, or 50.9%, over June 30, 2000 levels.
Such increase was due to the temporary investment in interest-bearing
deposits of excess liquidity. Investment securities totaled $1.5 million at
March 31, 2001, an increase of $280,000, or 22.7%, over the balance at June
30, 2000. This increase was due solely to the change in market value of
available for sale securities during the nine-month period.
Loans receivable increased by $649,000, or .7%, to a total of $96.1
million at March 31, 2001, compared to $95.5 million at June 30, 2000. Loan
disbursements of $24.6 million exceeded principal repayments of $23.6 million
during the nine months ended March 31, 2001. The residential real estate
portfolio increased by $1.2 million, or 3.4%, and loans secured by
nonresidential real estate increased by $1.8 million, or 13.3%, while the
commercial loan portfolio decreased by $2.0 million, or 41.7%. Nonresidential
real estate increased primarily due to two new large loans and commercial
loans decreased primarily due to paydowns and payoffs.
At March 31, 2001, Peoples Federal's allowance for loan losses totaled
$677,000, representing .70% of total loans and 217.7% of nonperforming loans. At
June 30, 2000, the allowance for loan losses totaled $627,000, or .65% of total
loans and 98.9% of nonperforming loans. Nonperforming loans amounted to $311,000
and $634,000 at March 31, 2001 and June 30, 2000, respectively.
Deposits increased by $4.9 million, or 5.4%, during the nine months
ended March 31, 2001 to a total of $95.8 million. The increase resulted
primarily from management's continuing efforts to maintain growth in deposits
through marketing and pricing strategies. Advances from the FHLB decreased by
$750,000, or 20.0%, to a total of $3.0 million at March 31, 2001. Proceeds from
the growth in deposits were generally used to fund new loan originations, repay
advances and increase liquidity.
Retained earnings totaled $13.6 million at March 31, 2001, an increase
of $699,000, or 5.4%, over June 30, 2000 levels, due to current period earnings
of $505,000 and an increase of $194,000 in unrealized gains on available for
sale securities.
CHANGES IN FINANCIAL CONDITION FROM JUNE 30, 1999 TO JUNE 30, 2000
Peoples Federal's total assets amounted to $108.0 million at June 30,
2000, an increase of $5.6 million, or 5.5%, over June 30, 1999 levels. The
increase in total assets was funded primarily through a $5.3 million increase in
deposits.
Cash and interest-bearing deposits totaled $8.8 million at June 30,
2000, an increase of $3.4 million, or 63.6%, over June 30, 1999 levels. Such
increase was due to the temporary investment in interest-bearing deposits of
excess liquidity. Investment securities totaled $1.2 million at June 30,
2000, a decrease of $462,000, or 27.3%, from the balance at June 30, 1999.
The decrease was due primarily to a $300,000 decline in the unrealized gain
on available for sale securities.
Loans receivable increased by $2.7 million, or 2.9%, to a total of
$95.5 million at June 30, 2000, compared to $92.8 million at June 30, 1999. Loan
disbursements of $32.9 million exceeded principal repayments of $30.0 million
during fiscal 2000. Loans secured by nonresidential real estate increased by
$1.4 million, or 11.9%, and the
42
<Page>
commercial loan portfolio increased by $3.3 million, or 202.6%, while loans
secured by residential real estate decreased by $2.6 million, or 3.6%. The
nonresidential real estate and commercial loan portfolios increased due to
increased loan demand and competitively priced products. One-to four-family
loan originations decreased from $27.2 million in fiscal 1999 to $15.1
million in fiscal 2000 primarily as a result of decreased refinancings in
fiscal 2000.
At June 30, 2000, Peoples Federal's allowance for loan losses totaled
$627,000, representing .65% of total loans and 98.9% of nonperforming loans. At
June 30, 1999, the allowance for loan losses totaled $568,000 or .60% of total
loans and 88.6% of nonperforming loans. Nonperforming loans amounted to $634,000
and $641,000 at June 30, 2000 and 1999, respectively.
Deposits increased by $5.3 million, or 6.1%, during fiscal 2000 to a
total of $90.8 million at June 30, 2000. The increase resulted primarily from
management's continuing efforts to maintain growth in deposits through marketing
and pricing strategies. Proceeds from the growth in deposits were generally used
to fund new loan originations.
Retained earnings totaled $12.9 million at June 30, 2000, an increase
of $510,000, or 4.1%, over June 30, 1999 levels, due primarily to current year
earnings totaling $810,000, which were partially offset by a $300,000 decrease
in unrealized gains on available for sale securities.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND
2000
GENERAL. Net earnings amounted to $505,000 for the nine months ended
March 31, 2001, a decrease of $43,000, or 7.8%, from the nine months ended March
31, 2000. The decrease in earnings resulted primarily from a $412,000 increase
in general, administrative and other expense, a $68,000 increase in the
provision for losses on loans and an $8,000 increase in income taxes, which were
partially offset by a $53,000 increase in net interest income and a $392,000
increase in other income.
NET INTEREST INCOME. Total interest income amounted to $6.3 million for
the nine months ended March 31, 2001, an increase of $602,000, or 10.6%, over
the nine months ended March 31, 2000. Interest income on loans totaled $5.9
million for the nine months ended March 31, 2001, an increase of $393,000, or
7.2%. This increase was due primarily to a $1.3 million, or 1.4%, increase in
the weighted-average balance of loans outstanding, coupled with a 44 basis point
increase in the average yield period to period. Interest income on investment
and mortgage-backed securities decreased by $3,000, or 12.5%, due primarily to a
36 basis point decline in yield period to period, which was partially offset by
a $71,000, or 4.8%, increase in the weighted-average balance outstanding.
Interest income on interest-bearing deposits increased by $212,000, or 97.7%,
due primarily to a $4.6 million, or 90.7%, increase in the weighted-average
balance outstanding period to period and a 21 basis point increase in the
weighted-average yield.
Interest expense totaled $3.7 million for the nine months ended March
31, 2001, an increase of $549,000, or 17.3%, over the $3.2 million total
recorded for the nine months ended March 31, 2000. Interest expense on deposits
increased by $587,000, or 19.7%, due primarily to a $6.0 million, or 6.9%,
increase in the weighted-average balance outstanding, and a 54 basis point
increase in the weighted-average cost of deposits period to period. Interest
expense on borrowings decreased by $38,000, or 19.5%, due primarily to a $1.3
million, or 29.2%, decrease in the weighted-average balance outstanding, which
was partially offset by an 81 basis point increase in the average cost of
borrowings, to 6.66% for the nine months ended March 31, 2001.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $53,000, or 2.1%, to a total of $2.6
million for the nine months ended March 31, 2001, compared to $2.5 million for
the nine months ended March 31, 2000. The interest rate spread decreased by 20
basis points to 2.65% in the fiscal 2001 period, from 2.85% in the fiscal 2000
period, and the net interest margin decreased to 2.41% for the nine months ended
March 31, 2001, from 2.50% for the nine months ended March 31, 2000.
43
<Page>
PROVISION FOR LOSSES ON LOANS. Peoples Federal charges a provision for
losses on loans to earnings to bring the total allowance for loan losses to a
level considered appropriate by management based on historical experience, the
volume and type of lending conducted by Peoples Federal, the status of past due
principal and interest payments, general economic conditions, particularly as
such conditions relate to Peoples Federal's market area, and other factors
related to the collectibility of Peoples Federal's loan portfolio. Specifically,
our methodology for assessing the appropriateness of the allowance consists of a
formula allowance, a specific allowance and an unallocated allowance. The
formula allowance is based on loss factors applied to the categories of Peoples
Federal's loan portfolio based on historical experience. The specific allowance
relates to specific categories of loans based on recent loss experience, charge
offs and current economic conditions related to specific borrowers. The
unallocated allowance is based upon management's evaluation of various
conditions, including general economic and business conditions and credit
quality trends, the effects of which are not directly measured in the
determination of the formula and specific allowances. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific credits.
As a result of such analysis, management recorded a provision of
$132,000 and $64,000 for the nine months ended March 31, 2001 and March 31,
2000, respectively. The current period provision was based on Peoples
Federal's formula allowance, impacted by the growth in the loan portfolio of
$1.3 million, and Peoples Federal's specific allowance, impacted by the
increased level of net charge-offs totaling $82,000 recorded during the
nine-month period ended March 31, 2001. The increased net charge-offs were
due primarily to increased defaults on unsecured consumer loans of
approximately $40,000, automobile loans totaling $26,000 and one loan secured
by business equipment totaling $24,000. Management believes such charge-offs
were related to financial difficulties experienced by the respective
borrowers due to job loss, divorce and other factors adversely affecting the
individual's financial stability. For the nine months ended March 31, 2001,
the $132,000 provision consisted of a formula provision of $72,000 and a
specific provision of $60,000. The provision for the nine months ended March
31, 2000 was due solely to a formula provision. There can be no assurance
that the allowance for loan losses will be sufficient to absorb losses on
known nonperforming assets or that the allowance will be sufficient to cover
losses on nonperforming assets in the future.
OTHER INCOME. Other income totaled $593,000 for the nine months
ended March 31, 2001, an increase of $392,000, or 195.0%, over the $201,000
recorded for the nine months ended March 31, 2000. The increase resulted
primarily from a $344,000 gain recorded on the sale of investment securities
during the nine months ended March 31, 2001, and an increase of $46,000, or
22.9%, in other operating income. During the nine-month period ended March
31, 2001, Peoples Federal sold shares of Federal Home Loan Mortgage
Corporation common stock which resulted in a realized gain of $344,000. Such
sale was due to favorable market conditions for the common stock. The
increase in other operating income was due primarily to a $25,000 increase in
service charges on automated teller machine or ATM transactions and a $21,000
increase in service charges on checking accounts.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $2.2 million for the nine months ended March 31, 2001, an
increase of $412,000, or 23.7%, over the total recorded during the nine months
ended March 31, 2000. The increase resulted primarily from a $634,000, or 83.9%,
increase in employee compensation and benefits, which was partially offset by a
$79,000, or 29.5%, decrease in occupancy and equipment expense, a $22,000, or
11.6%, decrease in data processing expense, a $15,000, or 28.8%, decrease in
federal deposit insurance premiums and a $106,000, or 22.4%, decrease in other
operating expense. The increase in employee compensation and benefits resulted
primarily from expense related to the establishment in 2001 of a deferred
compensation plan totaling $611,000, coupled with a $15,000, or 12.4%, increase
in the cost of medical benefits and a $13,000 increase in profit sharing
expense. The deferred compensation plan will provide retirement benefits to
directors and certain officers of Peoples Federal and is expected to result in
future annual compensation expense of approximately $45,000. The decrease in
occupancy and equipment was due primarily to nonrecurring office maintenance and
other costs incurred in the fiscal 2000 period. The decrease in data processing
was due primarily to costs associated with a change in the provider of ATM
processing and Year 2000 related costs, both of which increased expense during
the nine months ended March 31, 2000. The decrease in federal deposit insurance
premiums was due to a decline in premium rates year to year. The decrease in
other operating expense was due primarily to a decline in advertising costs, a
reduction in training costs and decreases in various operating expenses due to
management's efforts to control costs during the fiscal 2001 period.
INCOME TAXES. The provision for income taxes totaled $382,000 for the
nine months ended March 31, 2001, an increase of $8,000, or 2.1%, over the
$374,000 recorded for the nine months ended March 31, 2000. Peoples Federal's
effective tax rates were 43.1% and 40.6% for the nine months ended March 31,
2001 and 2000, respectively.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 2000 AND
1999
GENERAL. Net earnings amounted to $810,000 for the fiscal year ended
June 30, 2000, an increase of $56,000, or 7.4%, over net earnings recorded for
the fiscal year ended June 30, 1999. The increase in earnings resulted primarily
from a $219,000 increase in net interest income and a $17,000 increase in other
income, which
44
<Page>
were partially offset by a $91,000 increase in general, administrative and other
expense and an $85,000 increase in the provision for income taxes.
NET INTEREST INCOME. Total interest income amounted to $7.7 million
for the fiscal year ended June 30, 2000, an increase of $180,000, or 2.4%, over
fiscal 1999. Interest income on loans totaled $7.3 million in fiscal 2000, an
increase of $188,000, or 2.6%, over fiscal 1999. This increase was due primarily
to a $4.5 million, or 5.0%, increase in the weighted-average balance of loans
outstanding, which was partially offset by an 18 basis point decrease in the
average yield year to year. Interest income on investment and mortgage-backed
securities decreased by $4,000, or 16.0%, as a result of a $194,000, or 11.8%,
decrease in the weighted-average balance outstanding and a 7 basis point decline
in yield year to year. Interest income on interest-bearing deposits decreased by
$4,000, or 1.2%, due primarily to a $1.1 million, or 17.1%, decrease in the
weighted-average balance outstanding, which was partially offset by a 97 basis
point increase in the weighted-average yield year to year.
Interest expense totaled $4.3 million for the fiscal year ended June
30, 2000, a decrease of $39,000, or .9%, from the amount recorded in fiscal
1999. Interest expense on deposits decreased by $60,000, or 1.5%, due primarily
to a 24 basis point decrease in the weighted-average cost of deposits year to
year, which was partially offset by a $3.1 million, or 3.6%, increase in the
weighted-average balance outstanding. Interest expense on borrowings increased
by $21,000, or 8.9%, due primarily to a $206,000, or 5.0%, increase in the
weighted-average balance outstanding and a 21 basis point increase in the
average cost of borrowings, to 5.97% in fiscal 2000.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $219,000, or 6.9%, to a total of $3.4
million for the fiscal year ended June 30, 2000, compared to $3.2 million in
fiscal 1999. The interest rate spread increased by 16 basis points to 2.86% in
fiscal 2000 from 2.70% in fiscal 1999, and the net interest margin increased to
3.33% in fiscal 2000 from 3.22% in fiscal 1999.
PROVISION FOR LOSSES ON LOANS. Peoples Federal records a provision for
losses on loans to earnings to bring the total allowance for loan losses to a
level considered appropriate by management based on historical experience, the
volume and type of lending conducted by Peoples Federal, the status of past due
principal and interest payments, general economic conditions, particularly as
such conditions relate to Peoples Federal's market area, and other factors
related to the collectibility of Peoples Federal's loan portfolio. Specifically,
our methodology for assessing the appropriateness of the allowance consists of a
formula allowance, a specific allowance and an unallocated allowance. The
formula allowance is based on loss factors applied to the categories of Peoples
Federal's loan portfolio based on historical experience. The specific allowance
relates to specific categories of loans based on recent loss experience, charge
offs and current economic conditions related to specific borrowers. The
unallocated allowance is based upon management's evaluation of various
conditions, including general economic and business conditions and credit
quality trends, the effects of which are not directly measured in the
determination of the formula and specific allowances. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific credits.
As a result of such analysis, management recorded an $88,000 provision
for losses on loans for the fiscal year ended June 30, 2000, an increase of
$4,000, or 4.8%, over fiscal 1999. The provisions during fiscal 2000 and 1999
were based on the formula methodology.
OTHER INCOME. Other income totaled $291,000 for the fiscal year ended
June 30, 2000, an increase of $17,000, or 6.2%, over the $274,000 recorded in
fiscal 1999. The increase resulted primarily from an increase in other operating
income of $14,000, or 5.1%, and a $3,000 gain on sale of real estate acquired
through foreclosure.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $2.2 million for the fiscal year ended June 30, 2000, an
increase of $91,000, or 4.3%, over the total recorded in fiscal 1999. The
increase resulted primarily from a $52,000, or 5.5%, increase in employee
compensation and benefits, a $65,000, or 24.3%, increase in occupancy and
equipment and a $15,000, or 30.6%, increase in federal deposit insurance
premiums, which were partially offset by a $40,000, or 6.6%, decrease in other
operating expense. The increase in employee compensation and benefits was
primarily attributable to normal merit increases, while the increase in
occupancy and equipment expense related to an increase in depreciation expense
associated with the main office remodeling and the Vevay branch addition.
INCOME TAXES. The provision for income taxes totaled $578,000 for the
fiscal year ended June 30, 2000, an increase of $85,000, or 17.2%, over the
$493,000 recorded in fiscal 1999. Peoples Federal's effective tax rates were
41.6% and 39.5% for the fiscal years ended June 30, 2000 and 1999, respectively.
45
<Page>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, Peoples Federal had outstanding commitments to
originate $1.2 million of loans (excluding undisbursed portions of loans). In
addition, as of March 31, 2001, the total amount of certificates of deposit
which were scheduled to mature over the following twelve months was $45.7
million. Peoples Federal believes that it has adequate resources to fund all
of its commitments and that it can adjust the rate on certificates of deposit
to retain deposits in changed interest rate environments. If Peoples Federal
requires funds beyond its internal funding capabilities, advances from the
Federal Home Loan Bank of Indianapolis are available as an additional source
of funds. At March 31, 2001, Peoples Federal could obtain additional
advances from the Federal Home Loan Bank totaling an additional $40.3 million
under their blanket borrowing agreement.
Peoples Federal is required to maintain regulatory capital sufficient
to meet tangible, core and risk-based capital ratios of at least 1.5%, 4.0% and
8.0%, respectively. At March 31, 2001, Peoples Federal exceeded each of its
capital requirements with ratios of 11.27%, 11.27% and 19.70%, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
regarding Peoples Federal have been prepared in accordance with generally
accepted accounting principles, which generally require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of Peoples Federal's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on Peoples Federal's performance than does the effect of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services, since such prices are
affected by inflation to a larger extent than interest rates.
RECENT ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued in June 1998. This
statement requires that all derivatives be recognized as either assets or
liabilities in the statement of financial condition and that those instruments
be measured at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. This statement, as amended by
Statement of Financial Accounting Standards No. 137, is effective for fiscal
years beginning after June 15, 2000, although earlier adoption was permitted.
The adoption of this statement did not have any material impact on Peoples
Federal's financial position or result of operations.
In October 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 134, ACCOUNTING FOR
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS
HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE, WHICH AMENDS STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 65, ACCOUNTING FOR CERTAIN MORTGAGE BANKING
ACTIVITIES. This statement conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the accounting for such securities by a non-mortgage banking
enterprise. This statement was effective for the first quarter beginning after
December 15, 1998, and did not have any impact on Peoples Federal's financial
position or results of operations.
In June 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, effective as of January
1, 2001. This statement provides a comprehensive and consistent standard for the
recognition and measurement of certain derivatives and certain hedging
activities. Peoples Federal does not presently participate in
46
<Page>
these activities. The adoption of this accounting standard did not have a
material effect on Peoples Federal's financial condition or results of
operations.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES". This
statement replaces Statement of Financial Accounting Standards No. 125. This
statement also is effective for the recognition and reclassification of
collateral and for disclosures relating to securitization transactions. The
statement is effective for fiscal years ending after December 15, 2000. The
adoption of this statement did not have any material impact on Peoples Federal's
financial position or results of operations.
BUSINESS OF PFS BANCORP
GENERAL
PFS Bancorp was organized as an Indiana corporation at the direction
of Peoples Federal in June 2001 to become the holding company for Peoples
Federal upon completion of the conversion. As a result of the conversion,
Peoples Federal will be a wholly owned subsidiary of PFS Bancorp and all the
issued and outstanding capital stock of Peoples Federal will be owned by PFS
Bancorp.
Before the completion of the conversion, PFS Bancorp will not engage
in any significant activities other than those of an organizational nature.
Following completion of the conversion, PFS Bancorp's business activity will be
the ownership of the outstanding capital stock of Peoples Federal and management
of the investment of proceeds retained from the conversion. In the future, PFS
Bancorp may acquire or organize other operating subsidiaries. There are no
current plans, arrangements, agreements or understandings, written or oral, to
do so.
Initially, PFS Bancorp will neither own nor lease any property but
will instead use the premises, equipment and furniture of Peoples Federal with
the payment of appropriate rental fees, as required by applicable law and
regulations.
BUSINESS OF PEOPLES FEDERAL
GENERAL
Peoples Federal is a federally chartered savings bank that was
originally organized in 1887. Peoples Federal's business consists primarily of
attracting deposits from the general public and using those funds to make loans.
Peoples Federal operates out of its main office in Aurora, Indiana and branch
offices in the southeast Indiana towns of Rising Sun and Vevay.
PEOPLES FEDERAL'S LENDING ACTIVITIES
GENERAL. At March 31, 2001, the net loan portfolio of Peoples Federal
totaled $96.1 million, representing approximately 84.8% of total assets at that
date. The principal lending activity of Peoples Federal is the origination of
one- to four-family (which are also known as single-family) residential loans.
At March 31, 2001, single-family residential loans amounted to $70.1 million or
72.1% of the total loan portfolio. In addition to single-family residential
loans, Peoples Federal also offers:
47
<Page>
o Multi-family (more than four units) residential loans, which
amounted to 0.3% of the total loan portfolio at March 31,
2001,
o Non-residential loans which amounted to 15.4% of the total
loan portfolio at March 31, 2001,
o Commercial loans, which amounted to 2.9% of the total loan
portfolio at March 31, 2001, and
o Consumer and other loans, which amounted to 6.6% of the total
loan portfolio at March 31, 2001.
The types of loans that Peoples Federal may originate are subject to
federal and state laws and regulations. Interest rates charged on loans are
affected principally by the demand for such loans and the supply of money
available for lending purposes and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, the monetary
policy of the federal government, including the Federal Reserve Board,
legislative and tax policies, and governmental budgetary matters.
A savings institution such as Peoples Federal generally may not make
loans to one borrower and related entities in an amount which exceeds the
greater of (i) 15% of its unimpaired capital and surplus, although loans in an
amount equal to an additional 10% of unimpaired capital and surplus may be made
to a borrower if the loans are fully secured by readily marketable securities,
and (ii) $500,000. At March 31,2001, Peoples Federal's regulatory limit on
loans-to-one borrower was $2.0 million and its five largest loans or groups of
loans-to-one borrower, including related entities, aggregated $1.0 million,
$948,000, $912,000, $897,000 and $759,000. Each of Peoples Federal's five
largest loans or groups of loans were performing in accordance with its
contracual terms at March 31, 2001.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of Peoples Federal's loan portfolio by type of loan at the dates
indicated.
<Table>
<Caption>
June 30,
At March 31,
- --------------------------------------------------
2001
2000 1999
----------------------
- ---------------------------------------------------
Amount Percent
Amount Percent Amount Percent
------ -------
- ------ ------- ------ -------
(Dollars In Thousands)
Real estate loans:
One-to four-family.................... $70,110 72.1%
$68,875 71.0% $71,454 75.3%
Multi-family.......................... 314 .3
945 1.0 929 1.0
Construction.......................... 2,606 2.7
1,888 1.9 2,211 2.3
Non-residential(1).................... 14,952 15.4
13,194 13.6 11,786 12.4
Commercial................................ 2,846 2.9
4,887 5.1 1,615 1.7
Consumer and other loans(2)............... 6,439 6.6
7,164 7.4 6,935 7.3
-------- -----
- ------ ----- ------ -----
Total loans receivable............ 97,267 100.0%
96,953 100.0% 94,930 100.0%
=====
===== =====
Less:
Undisbursed loans in process.............. 319
678 1,345
Deferred loan origination fees............ 130
156 190
Allowance for loan losses.....,,.......... 677
627 568
-------
- ------- -------
Loans receivable, net............. $96,141
$95,492 $92,827
=======
======= =======
</Table>
- --------------
(1) Includes land loans.
(2) Includes home equity loans.
ORIGINATION OF LOANS. The lending activities of Peoples Federal are
subject to the written underwriting standards and loan origination procedures
established by the board of directors and management. Loan originations are
obtained through a variety of sources, primarily consisting of referrals from
real estate brokers and existing customers. Written loan applications are taken
by Peoples Federal's loan officers. The loan officers also supervise the
procurement of credit reports, appraisals and other documentation involved with
a loan. For real estate loans in excess of $250,000, property valuations are
performed by an independent outside appraiser approved by the board of directors
of Peoples Federal.
48
<Page>
Under the real estate lending policy of Peoples Federal, a title
insurance policy must be obtained for each real estate loan. Peoples Federal
also requires fire and extended coverage casualty insurance, in order to protect
the properties securing its real estate loans. Borrowers must also obtain flood
insurance policies when the property is in a flood hazard area as designated by
the Department of Housing and Urban Development.
Peoples Federal's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan and the adequacy
of the value of the property that will secure the loan. Generally, all real
estate loans as well as all non-real estate loans in excess of $50,000 (or
$10,000 if unsecured) require board of directors approval.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated. Peoples Federal did not sell any loans
during the periods presented.
<Table>
<Caption>
Nine Months
Ended March 31, Year Ended June 30,
- --------------------------------------------------------------------
2001
2000 2000 1999
----
---- ---- ----
(In Thousands)
LOAN ORIGINATIONS:
Real estate loans:
One-to four-family.............................. $11,747
$11,670 $16,263 $25,993
Multi-family.................................... --
-- -- --
Construction.................................... 2,818
3,128 3,498 3,755
Non-residential................................. 4,116
1,715 2,359 2,249
Commercial........................................ 2,019
3,911 4,853 4,419
Consumer and other loans (1)...................... 3,882
4,693 5,898 5,789
--------
-------- ------ ------
Total loans originated.......................... 24,578
25,117 32,871 42,205
--------
-------- ------ ------
LOAN PRINCIPAL REDUCTIONS:
Loan principal reductions......................... 23,607
23,423 30,040 38,492
--------
-------- ------ ------
Decrease due to other items, net(2)............... (322)
(132) (166) (114)
--------
-------- ------ ------
Net increase in loan portfolio...................... $ 649
$ 1,562 $ 2,665 $ 3,599
========
======== ======= =======
</Table>
- ------------------------------------------
(1) Includes home equity loans.
(2) Other items consist of loans in process, deferred loan origination
fees, unearned interest and allowance for loan losses.
Although federal laws and regulations permit savings institutions to
originate and purchase loans secured by real estate located throughout the
United States, Peoples Federal concentrates its lending activity on its primary
market area in Dearborn, Ohio and Switzerland Counties, Indiana. Subject to its
loans-to-one borrower limitation, Peoples Federal is permitted to invest without
limitation in residential mortgage loans and up to 400% of its capital in loans
secured by non-residential or commercial real estate. Peoples Federal also may
invest in secured and unsecured consumer loans in an amount not exceeding 35% of
total assets. This 35% limitation may be exceeded for certain types of consumer
loans, such as home equity and property improvement loans secured by residential
real property. In addition, Peoples Federal may invest up to 10% of its total
assets in secured and unsecured loans for commercial, corporate, business or
agricultural purposes. At March 31, 2001, Peoples Federal was within each of the
above lending limits.
MATURITY OF LOAN PORTFOLIO. The following table presents certain
information at March 31, 2001, regarding the dollar amount of loans maturing in
Peoples Federal's portfolio based on their contractual terms to maturity or
scheduled amortization, but does not include potential prepayments. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as becoming due within one year. Loan balances do not
include undisbursed loan proceeds, net deferred loan origination costs and
allowance for loan losses.
49
<Page>
<Table>
<Caption>
At March
31, 2001
- ------------------------------------------------------------------------
Consumer and Total
Real Estate Commercial
Other Loans
----------- ----------
----- -----
(In
Thousands)
AMOUNTS DUE IN:
One year or less.................... $ 2,951 $2,134
$1,732 $ 6,817
More than one year to five years.... 12,445 712
4,707 17,864
More than five years................ 72,586 --
-- 72,586
-------- ------
------- ---------
Total amount due.................. $ 87,982 $2,846
$6,439 $ 97,267
======== ======
======= =========
</Table>
Of the $90.5 million of loans due after March 31, 2002, $19.1 million have
fixed-rates of interest and $71.4 million have floating or adjustable interest
rates.
The following table sets forth the dollar amount of all loans, before
net items, as of March 31, 2001 which have fixed interest rates or which have
floating or adjustable interest rates.
<Table>
<Caption>
Fixed-Rates
Floating or Adjustable-Rates Total
-----------
- ---------------------------- -----
(In Thousands)
Real estate loans:
One-to-four family.................... $15,575
$54,535 $70,110
Multi-family.......................... 80
234 314
Construction.......................... 2,122
484 2,606
Non-residential....................... 2,392
12,560 14,952
Commercial.............................. 204
2,642 2,846
Consumer and other loans................ 3,969
2,470 6,439
-------
---------- --------
Total loans........................ $24,342
$72,925 $97,267
=======
======= ========
</Table>
Scheduled contractual maturities of loans do not necessarily reflect
the actual expected term of the loan portfolio. The average life of mortgage
loans is substantially less than their average contractual terms because of
prepayments. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on current mortgage loans are lower than
existing mortgage loan rates (due to refinancing of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher yielding loans are repaid or
refinanced at lower rates.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of Peoples Federal is the origination of loans secured by single-family
residences. At March 31, 2001, $70.1 million or 72.1% of the total loan
portfolio, before net items, consisted of single-family residential loans.
The loan-to-value ratio, maturity and other provisions of the loans
made by Peoples Federal generally have reflected the policy of making less
than the maximum loan permissible under applicable regulations, in accordance
with sound lending practices, market conditions and underwriting standards
established by Peoples Federal. Peoples Federal's present lending policies on
one- to four-family residential mortgage loans typically limits the maximum
loan-to-value ratio to 80% or less of the appraised value of the property,
but in some cases Peoples Federal may lend up to a 90% loan-to-value ratio
with private mortgage insurance. Residential mortgage loans are amortized on
a monthly basis with principal and interest due each month.
Peoples Federal's residential mortgage loans have either fixed rates of
interest or interest rates which adjust periodically during the term of the
loan. Fixed-rate loans generally have a term of 10 years with a 30 year
50
<Page>
amortization schedule. Peoples Federal's fixed-rate loans generally are
originated under terms, conditions and documentation which permit them to be
sold to U.S. Government-sponsored agencies, such as the Federal Home Loan
Mortgage Corporation, and other investors in the secondary market for mortgages.
At March 31, 2001, $15.6 million, or 22.2%, of Peoples Federal's single-family
residential mortgage loans were fixed-rate loans.
The adjustable-rate single-family residential mortgage loans currently
offered by Peoples Federal have interest rates which adjust on an annual basis.
Peoples Federal's adjustable-rate single-family residential real estate loans
generally have a cap of 1% on any increase or decrease in the interest rate at
any adjustment date, and include a specified cap on the maximum interest rate
over the life of the loan, which cap generally is 3% to 6% above or below the
initial rate. Such loans are underwritten based on the initial rate. Peoples
Federal's adjustable-rate loans require that any payment adjustment resulting
from a change in the interest rate of an adjustable-rate loan be sufficient to
result in full amortization of the loan by the end of the loan term and, thus,
do not permit any of the increased payment to be added to the principal amount
of the loan, or so-called negative amortization. At March 31, 2001, $54.5
million, or 77.8%, of Peoples Federal's single-family residential mortgage loans
were adjustable-rate loans.
Adjustable-rate mortgage loans help reduce Peoples Federal's exposure
to changes in interest rates. There are, however, unquantifiable credit risks
resulting from the potential of increased costs due to changed rates to be paid
by the borrower. During periods of rising interest rates the risk of default on
adjustable-rate mortgage loans may increase as a result of repricing and the
increased payments required by the borrower. In addition, although
adjustable-rate mortgage loans help make Peoples Federal's asset base more
responsive to changes in interest rates, the extent of this interest sensitivity
is limited by the annual and lifetime interest rate adjustment limits. Because
of these considerations, yields on adjustable-rate mortgage loans may not be
sufficient to offset increases in Peoples Federal's cost of funds during periods
of rising interest rates.
CONSTRUCTION LOANS. Peoples Federal also originates loans for the
construction of one- to four-family residences. At March 31, 2001, Peoples
Federal had $2.6 million in single-family residential construction loans.
Peoples Federal's residential construction loans generally provide for the
payment of interest only during the construction phase, which is usually up
to nine months. Loans can be made with a maximum loan to value ratio of 80%.
On occasion, Peoples Federal will also originate residential construction
loans to builders with which Peoples Federal has an established relationship.
Before making a commitment to fund a construction loan, Peoples Federal
requires an appraisal of the property by an appraiser. Peoples Federal also
reviews and inspects each property before disbursement of funds during the term
of the construction loan. Loan proceeds are disbursed after each stage of work
is completed.
Construction lending generally involves a higher degree of risk than
single-family permanent mortgage lending because of the greater potential for
disagreements between borrowers and builders and the failure of builders to pay
subcontractors. Additional risk often exists because of the inherent difficulty
in estimating both a property's value and the estimated cost of the property. If
the estimate of the value upon completion proves to be inaccurate, Peoples
Federal may be confronted with a property whose value is insufficient to assure
full repayment.
NON-RESIDENTIAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL REAL ESTATE
LOANS. Peoples Federal's non-residential loans primarily consist of loans
secured by land, storefront retail and office buildings, churches and warehouses
located in Peoples Federal's market area. At March 31, 2001, Peoples Federal's
non-residential real estate loans amounted to $15.0 million or 15.4% of the
total loan portfolio. Peoples Federal's non-residential real estate loans
include construction loans for properties other than singe-family residential
units, which construction
51
<Page>
loans amounted to $61,000 at March 31, 2001. In addition, at March 31, 2001,
Peoples Federal had $314,000 in loans secured by multi-family, five or more
units, residential properties. Peoples Federal's multi-family residential loans
are underwritten and subject to review and oversight procedures on a
substantially similar basis as its commercial real estate loans.
Peoples Federal's non-residential real estate loans have a maximum
loan-to-value ratio of 75% or less and generally have interest rates which are
higher than interest rates on its single-family residential mortgage loans.
Peoples Federal's non-residential real estate loans generally have floating
interest rates tied to the prime rate. The term of Peoples Federal's
non-residential real estate loans is generally 10 to 15 years, with a maximum of
20 years, based on a 15 or 25 year amortization schedule. In reaching its
decision on whether to make a non-residential or multi-family real estate loan,
Peoples Federal considers the net operating income of the property, the
borrower's expertise, credit history and profitability and the value of the
underlying property. In addition, with respect to non-residential real estate
rental properties, Peoples Federal will also consider the term of the lease and
the quality of the tenants. Peoples Federal has generally required that the
properties securing these real estate loans have debt service coverage ratios
(the ratio of earnings before debt service to debt service) of between 1.2x and
1.5x. Peoples Federal requires written appraisals prepared by a certified
independent appraiser of all properties securing non-residential or multi-family
real estate loans greater than $250,000. At March 31, 2001, the average balance
of the loans in Peoples Federal's non-residential real estate portfolio was
$82,000 and its largest non-residential real estate loan at such date was
$527,000 secured by land. This loan was current at March 31, 2001.
Peoples Federal's non-residential real estate loan portfolio also
includes land loans. These are loans secured primarily by single-family
residential lots being held for development. Peoples Federal's land loans
typically have floating rates of interest tied to the prime rate, have maximum
loan-to-value ratios of 75%, and are interest only loans which are subject to
renewal by Peoples Federal on an annual basis. At March 31, 2001, Peoples
Federal had $4.9 million in land loans which loans had an average balance of
$57,000. Peoples Federal's largest land loan at March 31, 2001 amounted to
$527,000.
Commercial and multi-family real estate lending is generally considered
to involve a higher degree of risk than one- to four-family residential lending.
Such lending typically involves large loan balances concentrated in a single
borrower or groups of related borrowers for rental or business properties. In
addition, the payment experience on loans secured by income-producing properties
is typically dependent on the success of the operation of the related project
and thus is typically affected by adverse conditions in the real estate market
and in the economy. Peoples Federal generally attempts to mitigate the risks
associated with its commercial real estate lending by, among other things,
lending primarily in its market area and using low loan-to-value ratios in the
underwriting process.
CONSUMER LOANS. Peoples Federal is authorized to make loans
for a wide variety of personal or consumer purposes. Peoples Federal originates
consumer loans in order to accommodate its customers and because such loans
generally have shorter terms and higher interest rates than residential mortgage
loans. The consumer loans offered by Peoples Federal consist of home equity
loans, automobile loans, and loans secured by deposit accounts in Peoples
Federal and other miscellaneous loans. At March 31, 2001, $6.4 million or 6.6%
of Peoples Federal's total loan portfolio consisted of consumer and other loans.
At March 31, 2001, Peoples Federal's home equity loans amounted to $1.9
million or 2.0% of the total loan portfolio. These loans are secured by the
underlying equity in the borrower's residence. As a result, Peoples Federal
generally requires loan-to-value ratios of 80% or less after taking into
consideration the first mortgage loan. These loans have a term of up to 12 years
and the interest rate adjusts monthly based on the prime rate. Peoples
52
<Page>
Federal also offers loans for both new and used automobiles, mobile homes and
recreational vehicles. Such loans have terms of up to five years. At March 31,
2001, Peoples Federal's automobile, mobile home and recreational vehicle loans
amounted to $3.4 million or 3.4% of the total loan portfolio.
Peoples Federal offers loans secured by deposit accounts in Peoples
Federal, which loans amounted to $800,000 or 0.8% of Peoples Federal's total
loan portfolio at March 31, 2001. Such loans are originated for up to 90% of the
account balance, with a hold placed on the account restricting the withdrawal of
the account balance. The interest rate on the loan is equal to the interest rate
paid on the account plus 2%. These loans mature on or before the maturity date
of the underlying certificate of deposit.
COMMERCIAL LOANS. Peoples Federal also originates commercial
business loans and other unsecured consumer loans. At March 31, 2001, Peoples
Federal's commercial business loans amounted to $2.8 million or 2.9% of Peoples
Federal's total loan portfolio. Such loans generally are made to small
businesses located in Peoples Federal's market area. Approximately 82% or
$2.3 million of these loans are subject to Uniform Commercial Code filings
but are not secured by real estate or other assets. The remaining commercial
business loans are secured by commercial real estate or other assets of the
borrowers. The loans generally are structured as lines of credit with
floating rates of interest ties to the prime rate and which are subject to
review and renewal on an annual basis.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, Peoples Federal receives loan origination fees or "points" for
originating fixed-rate loans. Loan points are a percentage of the principal
amount of the mortgage loan and are charged to the borrower in connection with
the origination of the loan.
ASSET QUALITY
GENERAL. Peoples Federal mails late notices to borrowers when a
borrower fails to make a required payment within 15 days of the date due. In
addition, a personal letter is mailed when a loan becomes 30 days delinquent and
a phone call is placed when a loan becomes 60 days delinquent. If a loan becomes
90 days past due, Peoples Federal mails a notice indicating that Peoples Federal
will refer it to an attorney within 30 days to commence foreclosure. In most
cases, deficiencies are cured promptly. While Peoples Federal generally prefers
to work with borrowers to resolve such problems, Peoples Federal will institute
foreclosure or other collection proceedings when necessary to minimize any
potential loss.
Loans are placed on non-accrual status when management believes the
probability of collection of interest is insufficient to warrant further
accrual. When a loan is placed on non-accrual status, previously accrued but
unpaid interest is deducted from interest income. Peoples Federal generally
discontinues the accrual of interest income when the loan becomes 90 days past
due as to principal or interest.
Real estate and other assets acquired by Peoples Federal as a result of
foreclosure or by deed-in-lieu of foreclosure are classified as real estate
owned until sold. Peoples Federal had $102,000 and $6,000 in real estate owned
at March 31, 2001 and at June 30, 2000, respectively.
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at March 31, 2001, in dollar amounts and as a percentage of
Peoples Federal's total loan portfolio. The amounts presented represent the
total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.
53
<Page>
<Table>
<Caption>
March 31,
2001
- -------------------------------------------------------------------------------
30-59
90 or More Days
Days Overdue 60-89 Days
Overdue Overdue
--------------------------
- -------------------------- -------------------------
Percent
Percent Percent
of Total of
Total of Total
Amount Loans Amount
Loans Amount Loans
----------- -------------- -----------
- -------------- ---------- --------------
(Dollars In
Thousands)
Real estate loans:
One-to four-family............ $266 .28% $1,242
1.29% $152 .16%
Non-residential............... 15 .02 87
.09 82 .08
Commercial...................... -- -- 41
.04 17 .6
Consumer and other loans........ 120 .12 127
.13 77 .08
----------- -------------- -----------
- -------------- ---------- --------------
Total loans................... $401 .42% $ 1,456
1.51% $ 311 .32%
=========== ============== ===========
============== ========== ==============
</Table>
NON-PERFORMING ASSETS. The following table presents information with
respect to Peoples Federal's nonperforming assets at the dates indicated.
Peoples Federal did not have any troubled debt restructurings or accruing
loans 90 or more days past due at any of the dates shown.
<Table>
<Caption>
At
June 30,
At March 31,
- -------------------------
2001 2000
1999
----------
- ----------- ----------
(Dollars In
Thousands)
Nonaccruing loans:
Real estate loans:
One-to-four family.......................... $ 152 $472
$ 581
Non-residential............................. 82 1
1
Commercial.................................... 17 100
--
Consumer and other loans...................... 60 61
59
----------
- ----------- ----------
Total nonaccruing loans................... 311 634
641
----------
- ----------- ----------
Real estate owned(1)............................ 102 6
121
----------
- ----------- ----------
Total nonperforming assets(2)............. 413 640
762
----------
- ----------- ----------
Total nonperforming assets...................... $ 413 $640
$ 762
==========
=========== ==========
Total nonperforming assets and troubled debt
restructurings as a percentage of total
assets.......................................... .36% .59%
.74%
</Table>
- -----------------------
(1) Real estate owned includes other repossessed assets and the balances
are shown net of related loss allowances.
(2) Nonperforming assets consist of nonaccruing loans and real estate
owned.
If the $634,000 of nonaccruing loans of Peoples Federal at June 30,
2000 had been current in accordance with their terms during fiscal 2000, the
gross income on such loans would have been approximately $24,000. No interest
income was actually recorded by Peoples Federal on such loans in fiscal 2000.
CLASSIFIED ASSETS. Federal regulations require that each insured
savings institution classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a higher
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge-off such amount. General loss
allowances established to
54
<Page>
cover possible losses related to assets classified substandard or doubtful may
be included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses do not qualify as regulatory capital.
Federal examiners may disagree with an insured institution's classifications and
amounts reserved.
Peoples Federal's total classified assets at March 31, 2001 amounted
to $1.6 million, all of which was classified as substandard. The largest
classified asset at March 31, 2001 consisted of a multi-family residential
mortgage loan with an outstanding balance of $795,000 as of such date. This
loan represents a 50% participation interest acquired by Peoples Federal in
October 1997. This loan was advanced for the acquisition of land and the
construction of 20 townhouse units, 12 condominiums, parking garages and a
clubhouse and swimming pool. Presently, 14 of the 20 townhouse units and all
of the condominiums are complete. The loan is repaid as the townhouses or
condominiums are sold. While such loan has performed in accordance with its
terms, it was classified substandard due to relatively limited demand for the
project. Additionally, $432,000 of the classified assets are non-residential
real estate loans, $152,000 are one-to four-family real estate loans and
$170,000 consists of consumer loans. All of the nonperforming assets at
March 31, 2001 are included in Peoples Federal's classified assets.
ALLOWANCE FOR LOAN LOSSES. At March 31, 2001, Peoples Federal's
allowance for loan losses amounted to $677,000, or 0.7%, of the total loan
portfolio. The loan loss allowance is based on prior loan loss experience,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, current economic conditions,
and known, probable and reasonably estimable losses inherent in the loan
portfolio. In determining the amount of the allowance for loan losses,
management considers its lower risk exposure as a result of its predominant
single-family lending and the correspondingly low historical charge-off
experience. Specifically, our methodology for assessing the appropriateness of
the allowance consists of a formula allowance, a specific allowance and an
unallocated allowance. The formula allowance is based on loss factors applied
to the categories of Peoples Federal's loan portfolio based on historical
experience. The specific allowance relates to specific categories of loans
based on recent loss experience, charge offs and current economic conditions
related to specific borrowers. The unallocated allowance is based upon
management's evaluation of various conditions, including general economic and
business conditions and credit quality trends, the effects of which are not
directly measured in the determination of the formula and specific
allowances. The evaluation of the inherent loss with respect to these
conditions is subject to a higher degree of uncertainty because they are not
identified with specific credits.
While management believes that it determines the size of the allowance
based on the best information available at the time, the allowance will need to
be adjusted as circumstances change and assumptions are updated. Future
adjustments to the allowance could significantly affect net earnings.
The following table sets forth information concerning the allocation of
Peoples Federal's allowance for loan losses by loan categories at the dates
indicated.
<Table>
<Caption>
June 30,
March 31,
- -------------------------------------------------------
2001 2000
1999
-------------------------
- ------------------------- --------------------------
Percent of
Percent of Percent of
Loans in
Loans in Loans in
Each
Each Each
Category to
Category to Category to
Amount Total Loans Amount
Total Loans Amount Total Loans
------ ----------- ------
- ----------- ------ -----------
(Dollars In
Thousands)
Allocated:
Real estate loans:
One-to four-family........ $360 72.1% $326
71.0% $327 75.3%
Multi-family.............. -- .3 --
1.0 -- 1.0
Construction.............. -- 2.7 --
1.9 -- 2.3
Non-residential........... 78 15.4 67
13.6 41 12.4
Commercial.................. 45 2.9 55
5.1 20 1.7
Consumer and other loans.... 138 6.6 116
7.4 106 7.3
Unallocated................. 56 -- 63
-- 74 --
---- ----- ----
----- ---- -----
Total................... $677 100.0% $627
100.0% $568 100.0%
==== ===== ====
===== ==== =====
</Table>
55
<Page>
The following table sets forth an analysis of Peoples Federal's
allowance for loan losses during the periods indicated.
<Table>
<Caption>
Nine Months Ended
March 31, Year Ended
June 30,
-----------------------
- --------------------
2001 2000 2000
1999
---------- ---------- ---------
- ---------
(Dollars In Thousands)
Total loans outstanding.............. $96,141 $94,389 $95,492
$92,827
Average loans outstanding, net....... 95,950 94,619 94,848
90,339
Balance at beginning of period....... 627 568 568
519
CHARGE-OFFS:
Real estate loans:
One-to four-family................. -- (1) (1)
--
Multi-family....................... -- -- (7)
--
Non-residential.................... -- (7) --
--
Consumer and other loans............. (101) (17) (34)
(64)
---------- ---------- ---------
- ---------
Total charge-offs.............. (101) (25) (42)
(64)
---------- ---------- ---------
- ---------
RECOVERIES:
Real estate loans:
One-to four-family................. -- -- --
--
Multi-family....................... -- -- --
--
Non-residential.................... -- -- 4
--
Consumer and other loans............. 19 7 9
29
---------- ---------- ---------
- ---------
Total recoveries............... 19 7 13
29
---------- ---------- ---------
- ---------
Net charge-offs...................... (82) (18) (29)
(35)
Provision for losses on loans........ 132 64 88
84
---------- ---------- ---------
- ---------
Balance at end of period............. $ 677 $ 614 $ 627 $
568
========== ========== =========
=========
Allowance for loan losses as a
percent of total loans outstanding. .70% .65% .66%
.61%
========== ========== =========
=========
Allowance for loan losses as a
percent of total non-performing loans 217.68% 123.15% 201.61%
88.61%
========== ========== =========
=========
Ratio of net charge-offs to
average loans outstanding.......... .09% .02% .03%
.04%
========== ========== =========
=========
</Table>
INVESTMENT SECURITIES
Peoples Federal has authority to invest in various types of securities,
including mortgage-backed securities, U.S. Treasury obligations, securities of
various federal agencies and of state and municipal governments, certificates of
deposit at federally-insured banks and savings institutions, certain bankers'
acceptances and federal funds. Peoples Federal's investment strategy is
established by the board of directors. In recent periods, Peoples Federal has
maintained a limited portfolio of investment securities.
The following table sets forth information relating to the amortized
cost and fair value of Peoples Federal's securities.
56
<Page>
<Table>
<Caption>
June
30,
March 31,
- ----------------------------------------------------
2001 2000
1999
------------------------- --------------------------
- --------------------------
Amortized Amortized
Amortized
Cost Fair Value Cost Fair Value
Cost Fair Value
------------ ------------ -------------- -----------
- ------------- ------------
(In Thousands)
Held to maturity:
State and municipal. $169 $ 169 $178 $ 178
$185 $ 185
Mortgage-backed
securities........ -- -- 1 1
5 5
Available for sale:
FHLMC stock......... 20 1,343 25 1,054
25 1,509
------------ ------------ -------------- -----------
- ------------- ------------
Total............. $189 $1,512 $204 $1,233
$215 $1,699
============ ============ ============== ===========
============= ============
</Table>
The following table sets forth the amount of Peoples Federal's
securities which mature during each of the periods indicated and the weighted
average yields for each range of maturities at March 31, 2001. The amounts
reflect fair value of Peoples Federal's securities at March 31, 2001.
<Table>
<Caption>
Contractually Maturing
- --------------------------------------------------------------------------------
- ----------------
Weighted Weighted
Weighted Weighted
Under 1 Average 1-5 Average 6-10
Average Over 10 Average
Year Yield Years Yield Years
Yield Years Yield Total
---------- -------- --------- ---------- ---------
- ---------- --------- ------------ -----------
(Dollars In
Thousands)
State and municipal $ 10 4.40% $40 4.40% $50
4.4% $69 4.4% $ 169
FHLMC Stock.. 1,343 1.14 -- -- --
-- -- -- 1,343
---------- ---------- ---------
--------- -----------
Total ..... $1,353 $40 $50
$69 $1,512
========== ---------- =========
========= ===========
</Table>
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of Peoples Federal's funds for
lending and other investment purposes. In addition to deposits, principal and
interest payments on loans and investment securities are a source of funds. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions. Borrowings may also be used on a short-term basis to compensate for
reductions in the availability of funds from other sources and on a longer-term
basis for general business purposes.
DEPOSITS. Deposits are attracted by Peoples Federal principally from
within its primary market area. Deposit account terms vary, with the principal
differences being the minimum balance required, the time periods the funds must
remain on deposit and the interest rate.
Peoples Federal obtains deposits primarily from residents of Indiana.
Peoples Federal has not solicited deposits from outside Indiana or paid fees to
brokers to solicit funds for deposit.
At March 31, 2001, $12.8 million or 13.4% of total deposits consisted
of public deposits from local municipalities or local government agencies. At
June 30, 1999, such public deposits amounted to $7.3 million.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established on a periodic basis. Management determines the rates
and terms based on rates paid by competitors, the need for funds or
57
<Page>
liquidity, growth goals and federal regulations. Peoples Federal attempts to
control the flow of deposits by pricing its accounts to remain generally
competitive with other financial institutions in its market area.
The following table shows the distribution of and certain other
information relating to Peoples Federal's deposits by type as of the dates
indicated.
<Table>
<Caption>
June 30,
March 31,
- ------------------------------------------------
2001
2000 1999
-----------------------
- ----------------------- ------------------------
Percent Average
Percent Average Percent Average
of Rate
of Rate of Rate
Amount Deposits Paid Amount
Deposits Paid Amount Deposits Paid
-------- ---------- ------- --------
- ---------- ------- -------- ---------- --------
(Dollars In Thousands)
Transaction accounts:
Demand deposits...................... $ 12,125 12.7% 2.84% $ 9,716
10.7% 2.34% $ 7,092 8.3% 2.12%
Savings and money market deposits.... 14,773 15.4 3.87 15,028
16.5 2.41 15,479 18.7 2.55
-------- ---------- -------
- ---------- -------- ----------
Total transaction accounts......... 26,898 28.1 3.41 24,744
27.2 2.36 23,071 27.0 2.38
-------- ---------- -------
- ---------- -------- ----------
Certificate accounts:
0.00% - 3.99%........................ 348 0.4 3.86 40
-- 3.40 22 -- 3.20
4.00% - 5.99%........................ 31,752 33.1 5.41 38,407
42.3 5.21 54,661 63.8 5.34
6.00% - 7.99%........................ 36,756 38.4 6.14 27,631
30.5 6.03 7,867 9.2 6.11
-------- ---------- -------
- ---------- -------- ----------
Total certificate accounts......... 68,856 71.9 5.62 66,078
72.8 5.58 62,490 73.0 5.66
-------- ---------- --------
- ---------- -------- ----------
Total deposits................... $ 95,754 100.0% $90,822
100.0% $85,561 100.0%
======== ========== ========
========== ======== ==========
</Table>
The following table sets forth the savings activities of Peoples
Federal during the periods indicated.
<Table>
<Caption>
Nine Months
Ended Year
Ended June 30,
March 31,
- --------------------------
2001 2000
1999
------------ ----------
-----------
(In
Thousands)
Total deposits at beginning of period......... $90,822 $85,561
$82,766
Net deposits (withdrawals).................... 1,386 1,214
(1,315)
Interest credited............................. 3,546 4,047
4,110
------------ ----------
-----------
Total deposits at end of period............. $95,754 $90,822
$85,561
============ ==========
===========
</Table>
The following table shows the interest rate and maturity information
for Peoples Federal's certificates of deposit at March 31, 2001.
<Table>
<Caption>
Maturity Date
- --------------------------------------------------------------------------------
- --------------
Interest Rate One Year or Less Over 1-2 Years Over 2-3 Years
Over 3 Years Total
- --------------------- --------------------- ------------------
- ------------------ ------------------ ---------------
(In Thousands)
0.00% - 3.99% $ 280 $ -- $ 45
$ 23 $ 348
4.00% - 5.99% 21,249 6,300 2,962
1,241 31,752
6.00% - 7.99% 24,121 10,475 1,686
474 36,756
--------------------- ------------------
- ------------------ ------------------ ---------------
Total $45,650 $16,775 $4,693
$1,738 $68,856
===================== ==================
================== ================== ===============
</Table>
58
<Page>
As of March 31, 2001, the aggregate amount of outstanding time
certificates of deposit at Peoples Federal in amounts greater than or equal to
$100,000, was approximately $26.1 million. The following table presents the
maturity of these time certificates of deposit at such dates.
<Table>
<Caption>
March 31, 2001
- --------------------
(In Thousands)
3 months or less........................................................
$ 9,753
Over 3 months through 6 months..........................................
5,075
Over 6 months through 12 months.........................................
5,989
Over 12 months..........................................................
5,310
--------
Total
$26,127
========
</Table>
BORROWINGS. Peoples Federal may obtain advances from the Federal Home
Loan Bank of Indianapolis upon the security of the common stock it owns in that
bank and certain of its residential mortgage loans and mortgage-backed and other
investment securities, provided certain standards related to creditworthiness
have been met. These advances are made pursuant to several credit programs, each
of which has its own interest rate and range of maturities. Federal Home Loan
Bank advances are generally available to meet seasonal and other withdrawals of
deposit accounts and to permit increased lending.
As of March 31, 2001, Peoples Federal was permitted to borrow up to an
aggregate total of $43.2 million from the Federal Home Loan Bank of
Indianapolis. Peoples Federal had $3.0 million of Federal Home Loan Bank
advances outstanding at March 31, 2001.
The following table shows certain information regarding the short-term
borrowings of Peoples Federal at or for the dates indicated:
<Table>
<Caption>
At or for the Nine Months Ended
At or for the Year Ended
March 31,
June 30,
- --------------------------------- ---------------------------------
2001 2000
2000 1999
---------------
- ----------------- ---------------- ----------------
(Dollars
In Thousands)
Federal Home Loan Bank open line of credit:
Average balance outstanding............... $3,143
$4,441 $4,321 $4,115
Maximum amount outstanding at any
month-end during the period............. 3,750
5,250 5,250 5,000
Balance outstanding at end of period...... $3,000
$4,250 $3,750 $3,750
Average interest rate during the period... 6.66%
5.85% 5.97% 5.76%
Weighted average interest rate at end of
period.................................. 6.42%
6.00% 6.45% 5.52%
</Table>
NO SUBSIDIARIES
At March 31, 2001, Peoples Federal had no subsidiaries.
TOTAL EMPLOYEES
Peoples Federal had 31 full-time employees and six part-time employees
at March 31, 2001. None of these employees are represented by a collective
bargaining agent, and Peoples Federal believes that it enjoys good relations
with its personnel.
59
<Page>
MARKET AREA
Peoples Federal's main office is in Aurora, Indiana in Dearborn County.
Peoples Federal's primary market area consists of the three southwestern Indiana
Counties in which it has offices, Dearborn, Ohio and Switzerland Counties, as
well as surrounding areas. On occasion, Peoples Federal originates loans to
borrowers outside of its primary market area.
Aurora, Indiana is located approximately 25 miles from downtown
Cincinnati, Ohio, and is included in the Cincinnati MSA. To a certain
limited, but growing, extent, Dearborn County serves as a "bedroom community"
for the growing greater Cincinnati area since certain residents who live in
Dearborn County also commute to Cincinnati for work. Peoples Federal's
primary market area is mostly rural in nature, with relatively low population
density. Dearborn County's 2000 population was 49,000 while both Ohio and
Switzerland had populations of less than 10,000. The economy in Peoples
Federal's primary market area is fairly diversified, with services, wholesale
and retail trade, manufacturing and local government serving as cornerstones.
Major employers in the area include a distillery for a worldwide spirits
company, three riverfront hotels/casinos, local hospitals and school
districts and miscellaneous manufacturing and retail concerns.
The February 2001 unemployment rate in Dearborn County was 3.0%
compared to 4.6% for the United States as a whole and 3.5% for the state of
Indiana. The February 2001 unemployment rate in Ohio and Switzerland Counties
was 3.3% and 6.1%, respectively. The higher unemployment rate in Switzerland
County may reflect its more rural nature and certain attendant seasonal
fluctuations in employment. Based on recent trends, we expect that the primary
market area served by Peoples Federal is likely to continue to grow,
particularly Dearborn County.
COMPETITION
Peoples Federal faces significant competition both in attracting
deposits and in making loans. Its most direct competition for deposits has come
historically from commercial banks, credit unions and other savings institutions
located in its primary market area, including many large financial institutions
which have greater financial and marketing resources available to them. In
addition, Peoples Federal faces significant competition for investors' funds
from short-term money market securities, mutual funds and other corporate and
government securities. Peoples Federal does not rely upon any individual group
or entity for a material portion of its deposits. The ability of Peoples Federal
to attract and retain deposits depends on its ability to generally provide a
rate of return, liquidity and risk comparable to that offered by competing
investment opportunities.
Peoples Federal's competition for real estate loans comes principally
from mortgage banking companies, commercial banks, other savings institutions
and credit unions. Peoples Federal competes for loan originations primarily
through the interest rates and loan fees it charges, and the efficiency and
quality of services it provides borrowers. Factors which affect competition
include general and local economic conditions, current interest rate levels and
volatility in the mortgage markets. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
60
<Page>
PROPERTIES
At December 31, 2000, Peoples Federal conducted its business from its
headquarters office located in Aurora, Indiana and two branch offices.
The following table sets forth certain information relating to Peoples'
offices at March 31, 2001.
<Table>
<Caption>
Net Book
Value of
Property and
Lease
Leasehold
Owned or Expiration
Improvements at Deposits at
Location Leased Date March
31, 2001 March 31, 2001
- ---------------------------------- ---------- --------------
- --------------------- ----------------
(In Thousands)
Second and Bridgeway Streets Owned N/A $
643 $ 75,103
Aurora, Indiana
330 Industrial Access Road Owned N/A
420 12,721
Rising Sun, Indiana
705 E. Main Street Leased August 2004
64 7,930
Vevay, Indiana
</Table>
NO MATERIAL LEGAL PROCEEDINGS
Peoples Federal is involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition and results of operations
of Peoples Federal.
61
<Page>
REGULATION
THE FOLLOWING DISCUSSION OF CERTAIN LAWS AND REGULATIONS WHICH ARE
APPLICABLE TO US AND PEOPLES FEDERAL, AS WELL AS DESCRIPTIONS OF LAWS AND
REGULATIONS CONTAINED ELSEWHERE HEREIN, SUMMARIZES THE ASPECTS OF SUCH LAWS AND
REGULATIONS WHICH ARE DEEMED TO BE MATERIAL TO US AND PEOPLES FEDERAL. HOWEVER,
THE SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO APPLICABLE LAWS AND REGULATIONS.
PFS BANCORP, INC.
HOLDING COMPANY ACQUISITIONS. Upon completion of the conversion, we
will become a savings and loan holding company within the meaning of the Home
Owners' Loan Act, as amended ("HOLA"), and will be required to register with the
Office of Thrift Supervision. Federal law generally prohibits a savings and loan
holding company, without prior Office of Thrift Supervision approval, from
acquiring the ownership or control of any other savings institution or savings
and loan holding company, or all, or substantially all, of the assets or more
than 5% of the voting shares thereof. These provisions also prohibit, among
other things, any director or officer of a savings and loan holding company, or
any individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings institution not a
subsidiary of such savings and loan holding company, unless the acquisition is
approved by the Office of Thrift Supervision.
The Office of Thrift Supervision may not approve any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
HOLDING COMPANY ACTIVITIES. We will operate as a unitary savings and
loan holding company. Under prior law, a unitary savings and loan holding
company was not generally restricted as to the types of business activities in
which it may engage, provided its savings association subsidiary continued to be
a qualified thrift lender. See " - Peoples Federal - Qualified Thrift Lender
Test." The Gramm-Leach-Bliley Act of 1999, however, restricts unitary savings
and loan holding companies not existing or applied for before May 4, 1999 to
activities permissible for financial holding companies under the law or for
multiple savings and loan holding companies. We will not qualify for the
grandfather-clause exemption and will be limited to the activities permissible
for financial holding companies or multiple savings and loan holding companies.
A financial holding company may engage in activities that are financial in
nature, incidental to financial activities or complementary to a financial
activity. A multiple savings and loan holding company is generally limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the Office of Thrift
Supervision, and certain activities authorized by Office of Thrift Supervision
regulation.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions, as described below. Peoples Federal must
notify or, in some cases, obtain approval from the Office of Thrift Supervision
30 days before declaring any dividend to us. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the Office of Thrift Supervision and the agency has authority to order
cessation of activities or divestiture of subsidiaries deemed to pose a threat
to the safety and soundness of the institution. See "- Peoples Federal - Capital
Distributions."
62
<Page>
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between a
savings institution and its "affiliates" are subject to quantitative and
qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act
and Office of Thrift Supervision regulations. Affiliates of a savings
institution include, among other entities, the savings institution's holding
company and companies that are controlled by or under common control with the
savings institution.
In general, the extent to which a savings institution or its
subsidiaries may engage in certain "covered transactions" with affiliates is
limited to an amount equal to 10% of the institution's capital and surplus, in
the case of covered transactions with any one affiliate, and to an amount equal
to 20% of such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings institution and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings institution or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, a savings institution may not:
o make a loan or extension of credit to an affiliate unless the
affiliate is engaged only in activities permissible for bank
holding companies;
o purchase or invest in securities of an affiliate other than
shares of a subsidiary;
o purchase a low-quality asset from an affiliate; or
o engage in covered transactions and certain other transactions
between a savings institution or its subsidiaries and an
affiliate except on terms and conditions that are consistent
with safe and sound banking practices.
With certain exceptions, each loan or extension of credit by a savings
institution to an affiliate must be secured by collateral with a market value
ranging from 100% to 130% (depending on the type of collateral) of the amount of
the loan or extension of credit.
Office of Thrift Supervision regulations generally exclude all non-bank
and non-savings institution subsidiaries of savings institutions from treatment
as affiliates, except to the extent that the Office of Thrift Supervision or the
Federal Reserve Board decides to treat such subsidiaries as affiliates. Office
of Thrift Supervision regulations also provide that certain classes of savings
institutions may be required to give the Office of Thrift Supervision prior
notice of affiliate transactions.
FEDERAL SECURITIES LAWS. We have filed with the SEC a registration
statement under the Securities Act of 1933 (the "Securities Act") for the
registration of our common stock to be issued pursuant to the conversion. Upon
consummation of the conversion, we intend to register our common stock with the
SEC under Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange
Act"). We will then be subject to the proxy and tender offer rules, insider
trading reporting requirements and restrictions, and certain other requirements
under the Exchange Act. Pursuant to Office of Thrift Supervision regulations and
the plan of conversion, we have agreed to maintain such registration for a
minimum of three years following the conversion.
63
<Page>
The registration under the Securities Act of the shares of common stock
to be issued in the conversion does not cover the resale of such shares. Shares
of common stock purchased by persons who are not our affiliates may be sold
without registration. Shares purchased by our affiliates will be subject to the
resale restrictions of Rule 144 under the Securities Act. If we meet the current
public information requirements of Rule 144 under the Securities Act, each of
our affiliates who complies with the other conditions of Rule 144 would be able
to sell in the public market, without registration, a number of shares not to
exceed, in any three-month period, the greater of (a) 1% of our outstanding
shares or (b) the average weekly volume of trading in such shares during the
preceding four calendar weeks.
PEOPLES FEDERAL
GENERAL. As part of the conversion, Peoples Federal will convert from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. The Office of Thrift Supervision will remain as Peoples Federal's
chartering authority and primary federal regulator. The Office of Thrift
Supervision has extensive authority over the operations of federally chartered
savings institutions. As part of this authority, federally chartered savings
institutions are required to file periodic reports with the Office of Thrift
Supervision and are subject to periodic examinations by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation ("FDIC "). Peoples
Federal also is subject to regulation by the FDIC and to requirements
established by the Federal Reserve Board. The investment and lending authority
of savings institutions are prescribed by federal laws and regulations, and such
institutions are prohibited from engaging in any activities not permitted by
such laws and regulations. Such regulation and supervision is primarily intended
for the protection of depositors and the Savings Association Insurance Fund
("SAIF") which is administered by the FDIC.
The Office of Thrift Supervision's enforcement authority over all
savings institutions and their holding companies includes, among other things,
the ability to assess civil money penalties, to issue cease and desist or
removal orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
Office of Thrift Supervision.
INSURANCE OF ACCOUNTS. The deposits of Peoples Federal are insured to
the maximum extent permitted by applicable FDIC regulations and are backed by
the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the Office of Thrift Supervision an
opportunity to take such action.
SAIF-insured institutions are assigned to one of three capital groups
which are based solely on the level of an institution's capital-"well
capitalized," "adequately capitalized," and "undercapitalized." These capital
levels are defined in the same manner as under the prompt corrective action
system discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. Assessment rates for insured institutions are determined
semi-annually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation, a federal agency established to recapitalize the predecessor to the
SAIF. During 1999, payments for SAIF members approximated 6.1 basis points,
while Bank Insurance Fund members paid 1.2 basis points. Since January 1, 2000,
there has been equal sharing of Financing Corporation payments between members
of both insurance funds.
64
<Page>
The FDIC may terminate the deposit insurance of any insured depository
institution, including Peoples Federal, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of Peoples Federal's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions
are required to maintain minimum levels of regulatory capital. The Office of
Thrift Supervision has established capital standards applicable to all savings
institutions. These standards generally must be as stringent as the comparable
capital requirements imposed on national banks. The Office of Thrift Supervision
also is authorized to impose capital requirements in excess of these standards
on individual institutions on a case-by-case basis.
Current Office of Thrift Supervision capital standards require savings
institutions to satisfy three different capital requirements:
o "tangible" capital equal to at least 1.5% of adjusted total
assets,
o "core" capital equal to at least 3.0% of adjusted total assets
for savings associations with the highest rating for safety
and soundness, and 4% to 5% for all other savings
associations, and
o "total" capital (a combination of core and "supplementary"
capital) equal to at least 8.0% of "risk-weighted" assets.
Core capital generally consists of common stockholders' equity
(including retained earnings). Tangible capital generally equals core capital
minus intangible assets, with only a limited exception for purchased mortgage
servicing rights. Peoples Federal had no intangible assets at March 31, 2001.
Both core and tangible capital are further reduced by an amount equal to a
savings institution's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks (other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies). These
adjustments do not affect Peoples Federal's regulatory capital.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital generally consists of general allowances for loan losses up to a maximum
of 1.25% of risk-weighted assets, together with certain other items. In
determining the required amount of risk-based capital, total assets, including
certain off-balance sheet items, are multiplied by a risk weight based on the
risks inherent in the type of assets. The risk weights range from 0% for cash
and securities issued by the U.S. Government or unconditionally backed by the
full faith and credit of the U.S. Government to 100% for loans (other than
qualifying residential loans weighted at 80%) and repossessed assets.
Office of Thrift Supervision rules require that an institution with
greater than "normal" interest rate risk will be subject to a deduction of its
interest rate risk component from total capital for purposes of calculating its
risk-based capital. As a result, such an institution will be required to
maintain additional capital in order to comply with the risk-based capital
requirement. An institution has greater than "normal" interest rate risk if it
would suffer a loss of net portfolio value exceeding 2.0% of the estimated
market value of its assets in the event of a 200 basis
65
<Page>
point increase or decrease in interest rates. The interest rate risk component
will be calculated, on a quarterly basis, as one-half of the difference between
an institution's measured interest rate risk and 2.0% multiplied by the market
value of its assets. The rule also authorizes the Office of Thrift Supervision
to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject however to a two quarter "lag" time between the reporting date of
the data used to calculate an institution's interest rate risk and the effective
date of each quarter's interest rate risk component. However, in October 1994
the Office of Thrift Supervision indicated that it would waive the capital
deductions for institutions with greater than "normal" risk until the Office of
Thrift Supervision published an appeals process. On August 21, 1995, the Office
of Thrift Supervision established (1) an appeals process to handle "requests for
adjustments" to the interest rate risk component and (2) a process by which
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to determine their interest rate risk component. The
Office of Thrift Supervision also indicated that it would continue to delay the
implementation of the capital deduction for interest rate risk pending the
testing of the appeals process.
Savings institutions must value securities available for sale at
amortized cost for regulatory capital purposes. This means that in computing
regulatory capital, savings institutions should add back any unrealized losses
and deduct any unrealized gains, net of income taxes, on debt securities
reported as a separate component of GAAP capital.
At March 31, 2001, Peoples Federal exceeded all of its regulatory
capital requirements, with tangible, core and risk-based capital ratios of
11.27%, 11.27% and 19.70%, respectively.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the Office of Thrift Supervision or
the FDIC. Such actions could include a capital directive, a cease and desist
order, civil money penalties, the establishment of restrictions on the
institution's operations, termination of federal deposit insurance and the
appointment of a conservator or receiver. The Office of Thrift Supervision's
capital regulation provides that such actions, through enforcement proceedings
or otherwise, could require one or more of a variety of corrective actions.
PROMPT CORRECTIVE ACTION. The following table shows the amount of
capital associated with the different capital categories set forth in the prompt
corrective action regulations.
<Table>
<Caption>
Total
Tier 1 Tier 1
Capital Category Risk-Based Capital
Risk-Based Capital Leverage Capital
- ---------------------------------------- ------------------
- ------------------ ----------------
Well capitalized 10% or more 6%
or more 5% or more
Adequately capitalized 8% or more 4%
or more 4% or more
Undercapitalized Less than 8% Less
than 4% Less than 4%
Significantly undercapitalized Less than 6% Less
than 3% Less than 3%
</Table>
In addition, an institution is "critically undercapitalized" if it has
a ratio of tangible equity to total assets that is equal to or less than 2.0%.
Under specified circumstances, a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized).
66
<Page>
An institution generally must file a written capital restoration plan
which meets specified requirements within 45 days of the date that the
institution receives notice or is deemed to have notice that it is
undercapitalized, significantly undercapitalized or critically undercapitalized.
A federal banking agency must provide the institution with written notice of
approval or disapproval within 60 days after receiving a capital restoration
plan, subject to extensions by the agency. An institution which is required to
submit a capital restoration plan must concurrently submit a performance
guaranty by each company that controls the institution. In addition,
undercapitalized institutions are subject to various regulatory restrictions,
and the appropriate federal banking agency also may take any number of
discretionary supervisory actions.
At March 31, 2001, Peoples Federal was deemed a well capitalized
institution for purposes of the above regulations and as such is not subject to
the above mentioned restrictions.
SAFETY AND SOUNDNESS GUIDELINES. The Office of Thrift Supervision and
the other federal banking agencies have established guidelines for safety and
soundness, addressing operational and managerial standards, as well as
compensation matters for insured financial institutions. Institutions failing to
meet these standards are required to submit compliance plans to their
appropriate federal regulators. The Office of Thrift Supervision and the other
agencies have also established guidelines regarding asset quality and earnings
standards for insured institutions. Peoples Federal believes that it is in
compliance with these guidelines and standards.
LIQUIDITY REQUIREMENTS. All savings institutions were required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. This requirement has been terminated by
the Office of Thrift Supervision effective in 2001. Liquidity for Federally
chartered savings associations will now be assessed in light of general safety
and soundness standards.
CAPITAL DISTRIBUTIONS. Office of Thrift Supervision regulations govern
capital distributions by savings institutions, which include cash dividends,
stock repurchases and other transactions charged to the capital account of a
savings institution to make capital distributions. A savings institution must
file an application for Office of Thrift Supervision approval of the capital
distribution if either (1) the total capital distributions for the applicable
calendar year exceed the sum of the institution's net income for that year to
date plus the institution's retained net income for the preceding two years, (2)
the institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or Office of Thrift Supervision-imposed condition, or (4)
the institution is not eligible for expedited treatment of its filings. If an
application is not required to be filed, savings institutions which are a
subsidiary of a holding company (as well as certain other institutions) must
still file a notice with the Office of Thrift Supervision at least 30 days
before the board of directors declares a dividend or approves a capital
distribution.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings
institutions have a responsibility under the Community Reinvestment Act of 1977
("CRA") and related regulations of the Office of Thrift Supervision to help meet
the credit needs of their communities, including low- and moderate-income
neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair
Housing Act (together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of CRA could, at a minimum, result in regulatory restrictions on its
activities. Failure to comply with the Fair Lending Laws could result in
enforcement actions by the Office of Thrift Supervision, as well as other
federal regulatory agencies and the Department of Justice.
67
<Page>
QUALIFIED THRIFT LENDER TEST. All savings institutions are required to
meet a qualified thrift lender or QTL test to avoid certain restrictions on
their operations. A savings institution can comply with the QTL test by either
qualifying as a domestic building and loan association as defined in the
Internal Revenue Code or meeting the second prong of the QTL test set forth in
the HOLA, as described below. A savings institution that does not meet the QTL
test must either convert to a bank charter or comply with the following
restrictions on its operations:
o the institution may not engage in any new activity or make any
new investment, unless such activity or investment is
permissible for a national bank;
o the branching powers of the institution shall be restricted to
those of a national bank;
o the institution shall not be eligible to obtain any new
advances from its FHLB, other than special liquidity advances
with the approval of the Office of Thrift Supervision; and
o payment of dividends by the institution shall be subject to
the rules regarding payment of dividends by a national bank.
Upon the expiration of three years from the date the savings institution ceases
to be a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
Currently, the prong of the QTL test that is not based on the Internal
Revenue Code requires that 65% of an institution's "portfolio assets" (as
defined) consist of certain housing and consumer-related assets on a monthly
average basis in nine out of every 12 months. Assets that qualify without limit
for inclusion as part of the 65% requirement include:
o loans made to purchase, refinance, construct, improve or
repair domestic residential housing;
o home equity loans;
o most mortgage-backed securities;
o stock issued by the FHLB of Indianapolis; and
o direct or indirect obligations of the FDIC.
In addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer loans (limited to 10% of total portfolio assets);
and stock issued by the FHLMC or the FNMA. Portfolio assets consist of total
assets minus the sum of (1) goodwill and other intangible assets, (2) property
used by the savings institution to conduct its business, and (3) liquid assets
up to 20% of the institution's total assets. At March 31, 2001, the qualified
thrift investments of Peoples Federal were approximately 82% of its portfolio
assets.
FEDERAL HOME LOAN BANK SYSTEM. Peoples Federal is a member of the FHLB
of Indianapolis, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB. At
March 31, 2001, Peoples Federal had $3.0 million of FHLB advances.
68
<Page>
As a member, Peoples Federal is required to purchase and maintain stock
in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans or similar obligations at the beginning of
each year. At March 31, 2001, Peoples Federal had $694,000 in FHLB stock, which
was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. For the nine months ended March 31, 2001 and
the year ended June 30, 2000, dividends to Peoples Federal amounted to $___ and
$___, respectively.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets.
TAXATION
FEDERAL TAXATION
GENERAL. We and Peoples Federal are subject to the corporate tax
provisions of the Internal Revenue Code, and Peoples Federal is subject to
certain additional provisions which apply to thrift and other types of financial
institutions. The following discussion of federal taxation is intended only to
summarize certain pertinent federal income tax matters relevant to the taxation
of us and Peoples Federal and is not a comprehensive discussion of the tax rules
applicable to us and Peoples Federal.
FISCAL YEAR. Peoples Federal currently reports its income and expenses
on the accrual method of accounting and uses a tax year ending June 30 for
filing its federal income tax returns.
BAD DEBT RESERVES. In August 1997, legislation was enacted that
repealed the reserve method of accounting (including the percentage of taxable
income method) previously used by many savings institutions to calculate their
bad debt reserve for federal income tax purposes. Savings institutions with $500
million or less in assets may, however, continue to use the experience method.
Peoples Federal must recapture that portion of its reserve which exceeds the
amount that could have been taken under the experience method for post-1987 tax
years. The legislation also requires savings institutions to account for bad
debts for federal income tax purposes on the same basis as commercial banks for
tax years beginning after December 31, 1995. This change in accounting method
and recapture of excess bad debt reserves is adequately provided for in Peoples
Federal's deferred tax liability.
At March 31, 2001, the federal income tax reserves of Peoples Federal
included $1.5 million for which no federal income tax has been provided. Because
of these federal income tax reserves and the liquidation account to be
established for the benefit of certain depositors of Peoples Federal in
connection with the conversion, the retained earnings of Peoples Federal are
substantially restricted.
DISTRIBUTIONS. If Peoples Federal were to distribute cash or property
to its stockholders, and the distribution was treated as being from its
accumulated bad debt reserves, the distribution would cause Peoples Federal to
have additional taxable income. A distribution is from accumulated bad debt
reserves if (a) the reserves exceed the amount that would have been accumulated
on the basis of actual loss experience, and (b) the distribution
69
<Page>
is a "non-qualified distribution." A distribution with respect to stock is a
non-qualified distribution to the extent that, for federal income tax purposes,
o it is in redemption of shares,
o it is pursuant to a liquidation of the institution, or
o in the case of a current distribution, together with all other
such distributions during the taxable year, it exceeds the
institution's current and post-1951 accumulated earnings and
profits.
The amount of additional taxable income created by a non-qualified distribution
is an amount that when reduced by the tax attributable to it is equal to the
amount of the distribution.
MINIMUM TAX. The Internal Revenue Code imposes an alternative minimum
tax at a rate of 20%. The alternative minimum tax generally applies to a base of
regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or "AMTI") and is payable to the extent such AMTI is in excess
of an exemption amount. Tax preference items include the following:
o depreciation, and
o 75% of the excess (if any) of
(1) adjusted current earnings as defined in the Internal
Revenue Code, over
(2) AMTI determined without regard to this preference and
prior to reduction by net operating losses.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate net
capital gains are taxed at a maximum rate of 35%. Corporations which own 20% or
more of the stock of a corporation distributing a dividend may deduct 80% of the
dividends received. Corporations which own less than 20% of the stock of a
corporation distributing a dividend may deduct 70% of the dividends received.
However, a corporation that receives dividends from a member of the same
affiliated group of corporations may deduct 100% of the dividends received.
OTHER MATTERS. Federal legislation is introduced from time to time that
would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on consumer
loans. Significant increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect Peoples Federal.
Peoples Federal's federal income tax returns for the tax years ended
June 30, 2000, 1999 and 1998 are open under the statute of limitations and are
subject to review by the Internal Revenue Service. Peoples Federal has not been
audited by the Internal Revenue Service since 1998.
70
<Page>
STATE TAXATION
Peoples Federal is subject to Indiana's Financial Institutions Tax
("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income."
"Adjusted gross income," for purposes of FIT, begins with taxable income as
defined by Section 63 of the Internal Revenue Code and, thus, incorporates
federal tax law to the extent that it affects the computation of taxable income.
Federal taxable income is then adjusted by several Indiana modifications. Other
applicable state taxes include generally applicable sales and use taxes plus
real and personal property taxes.
Peoples Federal's state income tax returns have not been audited in
recent years.
71
<Page>
MANAGEMENT
MANAGEMENT OF PFS BANCORP, INC.
Our board of directors is divided into three classes, each of which
contains one-third of the board. Our directors will be elected by stockholders
for staggered three-year terms, or until their successors are elected and
qualified. None of our directors are related to any of Peoples Federal's other
directors or executive officers by first cousin or closer. The following table
sets forth certain information regarding our directors, all of whom are also
directors of Peoples Federal.
<Table>
<Caption>
Director of
Position with Peoples Federal and
Peoples Year
Principal Occupation During the
Federal Term
Name Age(1) Past Five Years
Since Expires
- ----------------------------- ----------
- -------------------------------------------- --------------- --------------
Mel E. Green 51 Director. Managing Officer and Chief
2001 2002
Executive Officer of Peoples Federal
since
May 1993.
Gilbert L. Houze 72 Director and President. Previously,
1965 2003
Managing Officer and President of
Peoples Federal
Robert L. Laker 70 Director and Chairman of the Board.
1972 2002
Retired. Previously, President of
Robert
L. Johnson Co., Inc., a retail
furniture
and appliance store in Aurora, Indiana.
Dale R. Moeller 64 Director. Insurance agent with the
Moeller 1987 2004
Insurance Company, Aurora, Indiana.
Carl E. Petty 63 Director. Owner and President of Aurora
1984 2004
Lumber Company, Inc., Aurora, Indiana,
a
retail lumber and building materials
facility.
Jack D. Tandy 69 Director, Vice President and
Assistant 1986 2003
Secretary. Owner of Tandy's Men's
Warehouse, a retail clothing store in
Aurora, Indiana.
</Table>
- -------------------
(1) Age as of March 31, 2001.
Initially, our directors will not be compensated by us but will serve
with and be compensated by Peoples Federal. It is not anticipated that separate
compensation will be paid to our directors until such time as such persons
devote significant time to the separate management of our affairs, which is not
expected to occur until we become actively engaged in additional businesses
other than holding the stock of Peoples Federal. We may determine that such
compensation is appropriate in the future.
72
<Page>
Our executive officers are elected annually and holds office until
their respective successor has been elected and qualified or until death,
resignation or removal by the board of directors. At present, our only executive
officers are Mel E. Green, Managing Officer and Chief Executive Officer, and
Stuart M. Suggs, Vice President and Chief Financial Officer.
MANAGEMENT OF PEOPLES FEDERAL
The directors of Peoples Federal are the same as our directors. Mel
E. Green serves as Chief Executive Officer and as a director of both us and
Peoples Federal. Stuart M. Suggs serves as Peoples Federal's Vice President
and Chief Financial Officer. Mr. Suggs is 44 years old and has served as Vice
President and Chief Financial Officer since July 1999. Between June 1998 and
July 1999, Mr. Suggs was the Chief Financial Officer of Sycamore National
Bank, Cincinnati, Ohio. Between June 1980 and February 1998, Mr. Suggs was an
Assistant Vice President of Accounting Systems & Analysis with PNC Bank
Cincinnati, Ohio. Information concerning the names, ages, principal
occupations during the past five years and term of office of the directors of
Peoples Federal is set forth under "- Management of PFS Bancorp, Inc."
Peoples Federal's mutual charter requires the board of directors to be
divided into three classes as nearly equal in number as possible. Peoples
Federal's stock charter will contain the same requirement. The members of
each class will be elected for a term of three years or until their
successors are elected and qualified, with one class of directors elected
annually.
DIRECTORS' COMPENSATION
Each director of Peoples Federal except Mr. Green receives annual fees
of $14,950 and payment of 80% their health insurance premiums. Messrs. Laker,
Houze, Tandy, Petty and Moeller also receive a fee of $50 for inspecting
properties securing real estate loans made by Peoples Federal due to their
extensive knowledge about local values and trends. Each outside director has
lived in the community for at least sixty years. In addition, Messrs. Laker,
Houze and Tandy receive a fee of $2,040, $1,440 and $720, respectively, for
serving as Chairman of the Board, President and Vice President/Assistant
Secretary, respectively, of Peoples Federal. In addition, in December 2000,
Peoples Federal established an Executive Officers and Directors Deferred
Compensation Plan pursuant to which participants will be entitled to annual
payments of $17,800 for 10 years upon their retirement, provided they have
served as a director or executive officer for at least 10 years. In addition to
the current directors, Mr. Stuart M. Suggs, Vice President and Chief Financial
Officer of Peoples Federal, participates in this plan. Benefits under the
deferred compensation plan will become immediately vested upon a
change-in-control of Peoples Federal.
EXECUTIVE COMPENSATION
The following table shows the compensation paid by Peoples Federal to
its Managing Officer and Chief Executive Officer for the year ending June 30,
2000. No executive officer of Peoples Federal received a salary and bonus of
$100,000 or more during 2000.
<Table>
<Caption>
Annual
Compensation
- ----------------------------------------------
Name and Principal Fiscal
Position Year Salary Bonus
Other(1)
- -------------------------------------- ---------- ---------------
- ------------------ -----------
Mel E. Green 2000 $66,715 $700
$972
Managing Officer and
Chief Executive Officer
</Table>
- ---------------------
(1) Annual compensation does not include amounts attributable to other
miscellaneous benefits received by Mr. Green. [THE COSTS TO PEOPLES
FEDERAL OF PROVIDING SUCH BENEFITS DURING FISCAL 2000 DID NOT EXCEED
10% OF THE TOTAL SALARY AND BONUS PAID TO OR ACCRUED FOR THE BENEFIT OF
SUCH INDIVIDUAL EXECUTIVE OFFICER.] The amount of other compensation
consists of contributions by Peoples Federal to its 401(k) profit
sharing plan to Mr. Green's account.
73
<Page>
NEW STOCK BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. We have established an employee stock
ownership plan for our employees to become effective upon the conversion. Our
full-time employees who have been credited with at least 1,000 hours of service
during a 12-month period and who have attained age 21 are eligible to
participate in our employee stock ownership plan.
As part of the conversion, in order to fund the purchase of up to 8% of
the common stock sold in the offering (105,800 shares or 121,670 shares based on
the maximum and 15% above the maximum of the offering range, respectively), we
anticipate that our employee stock ownership plan will borrow funds from us. It
is anticipated that such loan will equal 100% of the aggregate purchase price of
the common stock acquired by our employee stock ownership plan. The loan to our
employee stock ownership plan will be repaid principally from our contributions
to our employee stock ownership plan over a period of 10 years, and the
collateral for the loan will be the common stock purchased by our employee stock
ownership plan. The interest rate for our employee stock ownership plan loan is
expected to be 7%. We may, in any plan year, make additional discretionary
contributions for the benefit of plan participants in either cash or shares of
common stock, which may be acquired through the purchase of outstanding shares
in the market or from individual stockholders, upon the original issuance of
additional shares by us or upon the sale of treasury shares by us. Such
purchases, if made, would be funded through additional borrowings by our
employee stock ownership plan or additional contributions from us. The timing,
amount and manner of future contributions to our employee stock ownership plan
will be affected by various factors, including prevailing regulatory policies,
the requirements of applicable laws and regulations and market conditions.
Shares purchased by our employee stock ownership plan with the loan
proceeds will be held in a suspense account and released to participants on a
pro rata basis as debt service payments are made. Shares released from our
employee stock ownership plan will be allocated to each eligible participant's
employee stock ownership plan account based on the ratio of each such
participant's base compensation to the total base compensation of all eligible
employee stock ownership plan participants. Forfeitures will be reallocated
among remaining participating employees and may reduce any amount we might
otherwise have contributed to our employee stock ownership plan. Upon the
completion of three years of service, the account balances of participants
within our employee stock ownership plan will become 20% vested and will
continue to vest at the rate of 20% for each additional year of service
completed by the participant, such that a participant will become 100% vested
upon the completion of seven years of service. Credit is given for years of
service with Peoples Federal prior to adoption of our employee stock ownership
plan. In the case of a "change in control," as defined, however, participants
will become immediately fully vested in their account balances. Benefits may be
payable upon retirement or separation from service. Our contributions to our
employee stock ownership plan are not fixed, so benefits payable under our
employee stock ownership plan cannot be estimated.
Messrs. Laker, Green and Suggs will serve as trustees of our employee
stock ownership plan. Under our employee stock ownership plan, the trustees must
generally vote all allocated shares held in our employee stock ownership plan in
accordance with the instructions of the participating employees, and unallocated
shares will generally be voted in the same ratio on any matter as those
allocated shares for which instructions are given, in each case subject to the
requirements of applicable law and the fiduciary duties of the trustees.
Generally accepted accounting principles require that any third party
borrowing by our employee stock ownership plan be reflected as a liability on
our statement of financial condition. Since our employee stock ownership plan is
borrowing from us, the loan will not be treated as a liability but rather will
be excluded from
74
<Page>
stockholders' equity. If our employee stock ownership plan purchases newly
issued shares from us, total stockholders' equity would neither increase nor
decrease, but per share stockholders' equity and per share net earnings would
decrease as the newly issued shares are allocated to our employee stock
ownership plan participants.
Our employee stock ownership plan will be subject to the requirements
of the Employee Retirement Income Security Act of 1974, and the related
regulations of the IRS and the Department of Labor.
STOCK OPTION PLAN. Following consummation of the conversion, we intend
to adopt a stock option plan, which will be designed to attract and retain
qualified personnel in key positions, provide directors, officers and key
employees with a proprietary interest in us as an incentive to contribute to our
success and reward key employees for outstanding performance. The stock option
plan will provide for the grant of incentive stock options intended to comply
with the requirements of Section 422 of the Internal Revenue Code, non-incentive
or compensatory stock options and stock appreciation rights (collectively
"Awards"). Awards may be granted to our directors and key employees. The stock
option plan will be administered and interpreted by a committee of the board of
directors and the Chief Financial Officer. Unless sooner terminated, the stock
option plan shall continue in effect for a period of 10 years from the date the
stock option plan is adopted by the board of directors.
Under the stock option plan, the committee will determine which
directors, officers and key employees will be granted Awards, whether options
will be incentive or compensatory options, the number of shares subject to each
Award, the exercise price of each option, whether options may be exercised by
delivering other shares of common stock and when such options become
exercisable. The per share exercise price of an incentive stock option must at
least equal the fair market value of a share of common stock on the date the
option is granted (110% of fair market value in the case of incentive stock
options granted to employees who are 5% stockholders).
At a meeting of our stockholders after the conversion, which under
applicable Office of Thrift Supervision policies may be held no earlier than six
months after the completion of the conversion, we intend to present the stock
option plan to stockholders for approval and to reserve an amount equal to 10%
of the shares of common stock sold in the conversion (132,250 shares or 152,088
shares based on the maximum and 15% above the maximum of the offering range,
respectively), for issuance under the stock option plan. Office of Thrift
Supervision regulations provide that, in the event such plan is implemented
within one year after the conversion, no individual officer or employee of
Peoples Federal may receive more than 25% of the options granted under the stock
option plan and non-employee directors may not receive more than 5%
individually, or 30% in the aggregate of the options granted under the stock
option plan. Office of Thrift Supervision regulations also provide that the
exercise price of any options granted under any such plan must be at least equal
to the fair market value of the common stock as of the date of grant.
Further, options under such plan are required to vest over a five year period
at 20% per year. Each stock option or portion thereof will be exercisable at
any time on or after it vests and will be exercisable until 10 years after
its date of grant or for periods of up to five years following the death,
disability or other termination of the optionee's employment or service as a
director. However, failure to exercise incentive stock options within three
months after the date on which the optionee's employment terminates may
result in the loss of incentive stock option treatment.
At the time an Award is granted pursuant to the stock option plan, the
recipient will not be required to make any payment in consideration for such
grant. With respect to incentive or compensatory stock options, the optionee
will be required to pay the applicable exercise price at the time of exercise in
order to receive the underlying shares of common stock. The shares reserved for
issuance under the stock option plan may be authorized but previously unissued
shares, treasury shares, or shares purchased by us on the open market or from
private sources. In the event of a stock split, reverse stock split or stock
dividend, the number of shares of common
75
<Page>
stock under the stock option plan, the number of shares to which any Award
relates and the exercise price per share under any option or stock appreciation
right shall be adjusted to reflect such increase or decrease in the total number
of shares of common stock outstanding. If we declare a special cash dividend or
return of capital after we implement the stock option plan in an amount per
share which exceeds 10% of the fair market value of a share of common stock as
of the date of declaration, the per share exercise price of all previously
granted options which remain unexercised as of the date of such declaration
shall, subject to certain limitations, be proportionately adjusted to give
effect to the special cash dividend or return of capital as of the date of
payment of such special cash dividend or return of capital.
Under current provisions of the Internal Revenue Code, the federal
income tax treatment of incentive stock options and compensatory stock options
is different. A holder of incentive stock options who meets certain holding
period requirements will not recognize income at the time the option is granted
or at the time the option is exercised, and a federal income tax deduction
generally will not be available to us at any time as a result of such grant or
exercise. With respect to compensatory stock options, the difference between the
fair market value on the date of exercise and the option exercise price
generally will be treated as compensation income upon exercise, and we will be
entitled to a deduction in the amount of income so recognized by the optionee.
Upon the exercise of a stock appreciation right, the holder will realize income
for federal income tax purposes equal to the amount received by him, whether in
cash, shares of stock or both, and we will be entitled to a deduction for
federal income tax purposes in the same amount.
RECOGNITION PLAN. After the conversion, we intend to adopt a
recognition plan for our directors, officers and employees. The objective of the
recognition plan will be to enable us to provide directors, officers and
employees with a proprietary interest in us as an incentive to contribute to our
success. We intend to present the recognition plan to our stockholders for their
approval at a meeting of stockholders which, pursuant to applicable Office of
Thrift Supervision regulations, may be held no earlier than six months after the
conversion. Office of Thrift Supervision Regulations provide that, in the event
such plan is implemented within one year after the conversion, shares granted
under the plan are required to vest over a five year period at 20% per year.
The recognition plan will be administered by a committee of our board
of directors, which will have the responsibility to invest all funds contributed
to the trust created for the recognition plan. We will contribute sufficient
funds to the trust so that it can purchase, following the receipt of stockholder
approval, a number of shares equal to an aggregate of 4% of the common stock
sold in the conversion (52,900 shares or 60,835 shares based on the maximum and
15% above the maximum of the offering range, respectively). Shares of common
stock granted pursuant to the recognition plan generally will be in the form of
restricted stock vesting at a rate to be determined by our board of directors or
a board committee. For accounting purposes, compensation expense in the amount
of the fair market value of the common stock at the date of the grant to the
recipient will be recognized pro rata over the period during which the shares
are payable. A recipient will be entitled to all voting and other stockholder
rights, except that the shares, while restricted, may not be sold, pledged or
otherwise disposed of and are required to be held in the trust. Under the terms
of the recognition plan, recipients of awards will be entitled to instruct the
trustees of the recognition plan as to how the underlying shares should be
voted, and the trustees will be entitled to vote all unallocated shares in their
discretion. If a recipient's employment is terminated as a result of death or
disability, all restrictions will expire and all allocated shares will become
unrestricted. We can terminate the recognition plan at any time, and if we do
so, any shares not allocated will revert to us. Recipients of grants under the
recognition plan will not be required to make any payment at the time of grant
or when the underlying shares of common stock become vested, other than payment
of withholding taxes.
76
<Page>
INDEBTEDNESS OF MANAGEMENT AND RELATED PARTY TRANSACTIONS
In the ordinary course of business, Peoples Federal makes loans
available to its directors, officers and employees. It is the belief of
management that these loans neither involve more than the normal risk of
collectibility nor present other unfavorable features. At March 31, 2001,
Peoples Federal had five loans outstanding to directors and executive officers
of Peoples Federal, or members of their immediate families. These loans totaled
approximately $124,000 or approximately 0.9% of Peoples Federal's total equity
at March 31, 2001. All of such loans, except for two loans to Mr. Green, were
made on substantially the same terms as those prevailing at the time for
comparable transactions to third parties. Pursuant to a program available to all
employees of Peoples Federal, Mr. Green has a mortgage loan and a home equity
line of credit with Peoples Federal which have a discounted rate of interest
equal to Peoples Federal's average cost of funds plus 1% as adjusted every six
months. At June 30, 2000 such loans had an interest rate of 5.75%. The highest
aggregate principal balance of such loans during fiscal 2000 was $66,786 and the
aggregate principal balance of such loans at June 30, 2000 was $66,534.
THE CONVERSION
OUR AND PEOPLES FEDERAL'S BOARDS OF DIRECTORS HAVE APPROVED THE PLAN OF
CONVERSION, AS HAS THE OFFICE OF THRIFT SUPERVISION, SUBJECT TO APPROVAL BY THE
MEMBERS OF PEOPLES FEDERAL ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION
OF CERTAIN OTHER CONDITIONS. OFFICE OF THRIFT SUPERVISION APPROVAL, HOWEVER,
DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION BY
THE OFFICE OF THRIFT SUPERVISION.
GENERAL
On May 11, 2001, Peoples Federal's board of directors unanimously
adopted the plan of conversion, pursuant to which it will be converted from a
federally chartered mutual savings bank to a federally chartered stock savings
bank to be known as "Peoples Federal Savings Bank," and we will offer and sell
our common stock. We will hold all of the common stock of Peoples Federal
following the conversion. We will be incorporated under Indiana law. The plan of
conversion has been approved by the Office of Thrift Supervision, subject to,
among other things, approval of the plan by the members of Peoples Federal. A
special meeting has been called for this purpose to be held on ______ __, 2001.
In adopting the plan of conversion, Peoples Federal's board of
directors determined that the conversion was advisable and in the best interests
of its members and Peoples Federal. The board further determined that the
interests of certain depositors in the net worth of Peoples Federal would be
equitably provided for and that the conversion would not have any adverse impact
on the reserves and net worth of Peoples Federal.
We have received approval from the Office of Thrift Supervision to
become a savings and loan holding company and to acquire all of the common stock
of Peoples Federal to be issued in connection with the conversion. We intend to
retain 50% of the net proceeds from the sale of the common stock, and to use the
remaining proceeds to purchase all of the then to be issued and outstanding
capital stock of Peoples Federal. Based on the minimum and maximum of the
offering range, we intend to use approximately $782,000 and approximately $1.1
million, respectively, of the net proceeds retained by us to loan funds to our
employee stock ownership plan to enable it to purchase up to 8% of the common
stock. The conversion will not be completed unless we sell shares of common
stock equal to our appraised value.
77
<Page>
The plan of conversion provides generally that we will offer shares of
common stock for sale in the Subscription Offering to Peoples Federal's Eligible
Account Holders, our employee stock ownership plan, Supplemental Eligible
Account Holders, Other Members and officers, directors and employees of Peoples
Federal. In addition, subject to the prior rights of holders of subscription
rights, we may elect to offer the shares of common stock not subscribed for in
the Subscription Offering, if any, for sale in a Community Offering commencing
prior to or upon completion of the Subscription Offering. See "- Subscription
Offering and Subscription Rights" and "- Community Offering." We have the right
to accept or reject, in whole or in part, any orders to purchase shares of
common stock received in the Community Offering.
The aggregate price of the shares of common stock to be issued in the
conversion will be within the offering range, which was determined based upon an
independent appraisal of the estimated pro forma market value of the common
stock. The offering range is currently $9,775,000 to $13,225,000. All shares of
common stock to be issued and sold in the conversion will be sold at the same
price. The independent appraisal will be affirmed or, if necessary, updated
before we complete the conversion. The appraisal has been performed by RP
Financial, a consulting firm experienced in the valuation and appraisal of
savings institutions. See "- How We Determined the Price Per Share and the
Offering Range" for more information as to how the estimated pro forma market
value of the common stock was determined.
The following discussion of the conversion summarizes the material
aspects of the plan of conversion. The summary is qualified in its entirety by
reference to the provisions of the plan of conversion. A copy of the plan of
conversion is available for inspection at the offices of Peoples Federal and at
the offices of the Office of Thrift Supervision. The plan of conversion is also
filed as an exhibit to the Registration Statement of which this document is a
part, copies of which may be obtained from the SEC. See "Additional
Information."
78
<Page>
PURPOSES OF CONVERSION
As a mutual savings association, Peoples Federal does not have
stockholders and has no authority to issue capital stock. By converting to the
capital stock form of organization, Peoples Federal will be structured in the
form used by commercial banks, most business entities and a growing number of
savings institutions. The conversion will result in an increase in our and
Peoples Federal's capital base, which will support our and Peoples Federal's
operations.
The conversion will permit Peoples Federal's customers and possibly
other members of the local community and of the general public to become equity
owners and to share in our future. The conversion also will provide additional
funds for lending and investment activities, facilitate future access to the
capital markets, enhance our ability to diversify and expand into other markets.
The holding company form of organization will provide additional
flexibility to diversify our business activities through existing or newly
formed subsidiaries, or through acquisition of or mergers with other financial
institutions, as well as other companies. Although there are no current
arrangements, understandings or agreements regarding any such opportunities, we
will be in a position after the conversion, subject to regulatory limitations
and our financial position, to take advantage of any such opportunities that may
arise.
After the conversion, the unissued common and preferred stock
authorized by our articles of incorporation will permit us, subject to market
conditions and applicable regulatory approvals, to raise additional equity
capital through further sales of securities, and to issue securities in
connection with possible acquisitions. At the present time, we have no plans
with respect to additional offerings of securities, other than the possible
issuance of additional shares to the recognition plan or upon exercise of stock
options. After the conversion, we also will be able to use stock-related
incentive programs to attract and retain executive and other personnel for
itself and its subsidiaries. See "Management - New Stock Benefit Plans."
EFFECTS OF CONVERSION
GENERAL. Before the conversion, each depositor in Peoples Federal has
both a deposit account in the institution and a pro rata ownership interest in
the net worth of Peoples Federal, which interest may only be realized in the
event of a liquidation of Peoples Federal. However, this ownership interest is
tied to the depositor's account and has no tangible market value separate from
such deposit account. A depositor who reduces or closes his account receives
nothing for his ownership interest in the net worth of Peoples Federal, which is
lost to the extent that the balance in the account is reduced.
Consequently, Peoples Federal depositors normally cannot realize the
value of their ownership interest, which has realizable value only in the
unlikely event that Peoples Federal is liquidated. In such event, the depositors
of record at that time, as owners, would share pro rata in any residual surplus
and reserves of Peoples Federal after other claims, including claims of
depositors to the amount of their deposits, are paid.
When Peoples Federal converts to stock form, permanent nonwithdrawable
capital stock will be created to represent the ownership of the net worth of
Peoples Federal, and Peoples Federal will become our wholly owned subsidiary.
Our common stock and the common stock of Peoples Federal are separate and apart
from deposit accounts of Peoples Federal and cannot be and are not insured by
the FDIC or any other governmental agency. Certificates will be issued to
evidence ownership of our and Peoples Federal's common stock. Our stock
79
<Page>
certificates will be transferable, and therefore the stock may be sold or traded
if a purchaser is available with no effect on any account the seller may hold in
Peoples Federal.
CONTINUITY. While the conversion is being accomplished, the normal
business of Peoples Federal of accepting deposits and making loans will continue
without interruption. Peoples Federal will continue to be subject to regulation
by the Office of Thrift Supervision and the FDIC. After the conversion, Peoples
Federal will continue to provide services for depositors and borrowers under
current policies by its present management and staff.
The directors and officers of Peoples Federal at the time of the
conversion will continue to serve as directors and officers of Peoples Federal
after the conversion. Our directors and officers consist of individuals
currently serving as directors and officers of Peoples Federal, and they will
retain their positions in Peoples Federal after the conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the plan of conversion, each
depositor in Peoples Federal at the time of the conversion will automatically
continue as a depositor after the conversion, and each such deposit account will
remain the same with respect to deposit balance, interest rate and other terms,
except to the extent that funds in the account are withdrawn to purchase the
common stock with respect to those depositors who authorize such a withdrawal
and except with respect to voting and liquidation rights. Each such account
will be insured by the FDIC to the same extent as before the conversion.
Depositors will continue to hold their existing certificates, passbooks and
other evidences of their accounts.
EFFECT ON LOANS. No loan outstanding from Peoples Federal will be
affected by the conversion, and the amount, interest rate, maturity and security
for each loan will remain as they were contractually fixed prior to the
conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors and
borrowers of Peoples Federal are members of, and have voting rights in, Peoples
Federal as to all matters requiring membership action. When we complete the
conversion, depositors and borrowers will cease to be members and will no longer
be entitled to vote at meetings of Peoples Federal. After the conversion, we
will have all of the voting rights in Peoples Federal since we will be the sole
stockholder of Peoples Federal. Exclusive voting rights with respect to us will
be vested in the holders of our common stock. Depositors and borrowers of
Peoples Federal will not have voting rights in us after the conversion, except
to the extent that they become our stockholders.
TAX EFFECTS. To complete the conversion, we must receive rulings or
opinions with regard to federal and Indiana income taxation which indicate that
the conversion will not be taxable for federal or Indiana income tax purposes to
us or the Eligible Account Holders or Supplemental Eligible Account Holders,
except as discussed below. We have received favorable opinions regarding the
federal and Indiana income tax consequences of the conversion. See "- Tax
Aspects."
EFFECT ON LIQUIDATION RIGHTS. If Peoples Federal were to liquidate, all
claims of Peoples Federal's creditors (including those of depositors, to the
extent of their deposit balances) would be paid first. Thereafter, if there were
any assets remaining, members of Peoples Federal would receive such remaining
assets, pro rata, based upon the deposit balances in their deposit accounts at
Peoples Federal immediately prior to liquidation. In the unlikely event that
Peoples Federal were to liquidate after the conversion, all claims of creditors
(including those of depositors, to the extent of their deposit balances) would
also be paid first, followed by distribution of the "liquidation account" to
certain depositors (see "- Liquidation Rights of Certain Depositors"), with any
assets remaining thereafter distributed to us as the sole stockholder of Peoples
Federal. Pursuant to the rules and regulations of the Office of Thrift
Supervision, a post-conversion merger, consolidation, sale of bulk assets or
80
<Page>
similar combination or transaction with another insured savings institution
would not be considered a liquidation and, in such a transaction, the
liquidation account would be required to be assumed by the surviving
institution.
HOW WE DETERMINED THE PRICE PER SHARE AND THE OFFERING RANGE
The plan of conversion requires that the purchase price of the common
stock must be based on the appraised pro forma market value of the common stock,
as determined on the basis of an independent valuation. Peoples Federal has
retained RP Financial, LC to make such valuation. For its services in making
such appraisal and assistance in preparing a business plan, RP Financial's fees
and out-of-pocket expenses are estimated to be $35,000. Peoples Federal has
agreed to indemnify RP Financial and any employees of RP Financial who act for
or on behalf of RP Financial in connection with the appraisal and the business
plan against any and all loss, cost, damage, claim, liability or expense of any
kind (including claims under federal and state securities laws) arising out of
any misstatement or untrue statement of a material fact or an omission to state
a material fact in the information supplied by Peoples Federal to RP Financial,
unless RP Financial is determined to be negligent or otherwise at fault.
An appraisal has been made by RP Financial in reliance upon the
information contained in this document, including the financial statements. RP
Financial also considered the following factors, among others:
o the present and projected operating results and financial
condition of us and Peoples Federal and the economic and
demographic conditions in Peoples Federal's existing marketing
area;
o certain historical, financial and other information relating
to Peoples Federal;
o a comparative evaluation of the operating and financial
statistics of Peoples Federal with those of other similarly
situated publicly traded savings institutions located in
Indiana and other regions of the United States;
o the aggregate size of the offering of the common stock;
o the impact of the conversion on Peoples Federal's net worth
and earnings potential;
o the proposed dividend policy of us and Peoples Federal; and
o the trading market for securities of comparable institutions
and general conditions in the market for such securities.
In determining the amount of the appraisal, RP Financial reviewed
Peoples Federal's price/earnings ("P/E"), price/book ("P/B") and price/assets
("P/A") ratios on a pro forma basis giving effect to the net conversion proceeds
to the comparable ratios for a peer group consisting of 11 thrift holding
companies. The peer group included companies with:
o assets averaging $202 million,
o non-performing assets averaging 0.89% of total assets,
o loans receivable equal to at least 53% of total assets,
81
<Page>
o equity equal to more than 8% of assets,
o price/earnings ratios equal to an average of 15.4x and ranging
from 9.0x to 26.0x, and
o positive core earnings for the most recent 12 months.
At the midpoint of the appraisal, Peoples Federal's pro forma P/E and
P/A ratios as of or for the trailing twelve months ended March 31, 2001 were
13.1x and 9.5%, respectively, compared to ratios for the peer group of 15.4x and
11.7%, respectively. Also at the midpoint of the appraisal, Peoples Federal's
pro forma P/B ratio at March 31, 2001 was 50.3%, compared to 96.1% for recently
completed conversions listed on major stock exchanges.
On the basis of the foregoing, RP Financial gave us an opinion, dated
June 8, 2001, that the estimated pro forma market value of the common stock
ranged from a minimum of $9,775,000 to a maximum of $13,225,000, with a midpoint
of $11,500,000. The offering range may be amended with the approval of the
Office of Thrift Supervision, if required, or if necessitated by subsequent
developments in our financial condition or market conditions generally, or to
fill the order of our employee stock ownership plan. In the event the offering
range is updated to amend the value of Peoples Federal below $9,775,000 or above
$15,208,750 (the maximum of the offering range, as adjusted by 15%), the new
appraisal will be filed with the SEC by post-effective amendment.
In the event we receive orders for common stock in excess of
$13,225,000 (the maximum of the offering range) and up to $15,208,750 (the
maximum of the offering range, as adjusted by 15%), we may be required by the
Office of Thrift Supervision to accept all such orders. No assurances, however,
can be made that we will receive orders for common stock in excess of the
maximum of the offering range or that, if such orders are received, that all
such orders will be accepted because the final valuation and number of shares to
be issued are subject to the receipt of an updated appraisal from RP Financial
which reflects the increase in the valuation and the approval of such increase
by the Office of Thrift Supervision. In addition, an increase in the number of
shares above 1,322,500 shares will first be used, if necessary, to fill the
order of our employee stock ownership plan. There is no obligation or
understanding on the part of management to take and/or pay for any shares in
order to complete the conversion.
RP FINANCIAL'S VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES.
RP FINANCIAL DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER
INFORMATION PROVIDED BY PEOPLES FEDERAL, NOR DID RP FINANCIAL VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF PEOPLES FEDERAL. THE VALUATION
CONSIDERS PEOPLES FEDERAL AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF PEOPLES FEDERAL. MOREOVER, BECAUSE SUCH
VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN
BE GIVEN THAT PERSONS PURCHASING COMMON STOCK IN THE CONVERSION WILL THEREAFTER
BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE INITIAL PURCHASE PRICE OF
$10.00 PER SHARE.
Before we complete the conversion, the maximum of the offering range
may be increased up to 15% and the number of shares of common stock may be
increased to up to 1,520,875 shares to reflect changes in market and financial
conditions or to fill the order of our employee stock ownership plan, without
the resolicitation of subscribers. See "- Limitations on Common Stock Purchases"
as to the method of distribution and allocation of additional shares that may be
issued in the event of an increase in the offering range to fill unfilled orders
in the Subscription Offering.
82
<Page>
No sale of shares of common stock in the conversion may be completed
unless RP Financial first confirms that nothing of a material nature has
occurred which, taking into account all relevant factors, would cause it to
conclude that the purchase price of $10.00 per share is materially incompatible
with the estimate of the pro forma market value of a share of common stock upon
completion of the conversion. If such is not the case, a new offering range may
be set and a new Subscription and Community Offering may be held or such other
action may be taken as we determine and the Office of Thrift Supervision may
permit or require.
Depending upon market or financial conditions, the total number of
shares of common stock may be increased or decreased without a resolicitation of
subscribers, provided that the aggregate gross proceeds are not below the
minimum or more than 15% above the maximum of the offering range. In the event
market or financial conditions change so as to cause the aggregate purchase
price of the shares to be below the minimum of the offering range or more than
15% above the maximum of such range, purchasers will be resolicited. In any
resolicitation, purchasers will be permitted to continue, modify or rescind
their orders. If no election is made by a purchaser prior to the expiration of
the resolicitation offering, the purchaser's order will be rescinded and any
funds paid will be promptly refunded with interest at Peoples Federal's passbook
rate of interest, and withdrawal authorizations will be canceled. Any change in
the offering range must be approved by the Office of Thrift Supervision. If the
number of shares of common stock issued in the conversion is increased due to an
increase of up to 15% in the offering range to reflect changes in market or
financial conditions or to fill the order of our employee stock ownership plan,
persons who subscribed for the maximum number of shares will be given the
opportunity to subscribe for the adjusted maximum number of shares. See
"-Limitations on Common Stock Purchases."
An increase in the number of shares of common stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and our pro forma net income and stockholders'
equity on a per share basis while increasing pro forma net income and
stockholders' equity on an aggregate basis. A decrease in the number of shares
of common stock would increase both a subscriber's ownership interest and our
pro forma net income and stockholders' equity on a per share basis while
decreasing pro forma net income and stockholders' equity on an aggregate basis.
See "Risk Factors - An Increase in the Offering Range Would Be Dilutive" and
"Pro Forma Data."
The appraisal report of RP Financial has been filed as an exhibit to
our Registration Statement and Peoples Federal's Application for Conversion,
both of which this prospectus is a part, and is available for inspection in the
manner set forth under "Additional Information."
WE PLAN TO ESTABLISH THE PFS COMMUNITY FOUNDATION
GENERAL. To continue Peoples Federal's commitment to the communities
that it serves, the plan of conversion provides that Peoples Federal and we will
establish the PFS Community Foundation, as a non-stock Delaware corporation. The
foundation will be funded with our common stock. By increasing Peoples Federal's
visibility and reputation in the communities that it serves, Peoples Federal
believes that the foundation will enhance the long-term value of its community
banking franchise. The foundation will be dedicated to charitable purposes
within the communities served by Peoples Federal, including community
development activities.
PURPOSE OF THE FOUNDATION. The purpose of the foundation is to provide
funding to support charitable causes and community development activities.
Traditionally, Peoples Federal has emphasized community lending and community
development activities within the communities that it serves. The foundation is
being formed as a complement to Peoples Federal's existing community activities.
While Peoples Federal intends to continue to
83
<Page>
emphasize community lending and community development activities following the
conversion, such activities are not Peoples Federal's sole corporate purpose.
PFS Community Foundation, conversely, will be completely dedicated to community
activities and the promotion of charitable causes, and may be able to support
such activities in ways that are not currently available to Peoples Federal. We
believe that the foundation will enable us and Peoples Federal to assist the
local community in areas beyond community development and lending.
The board of directors believes the establishment of a charitable
foundation is consistent with Peoples Federal's commitment to community
reinvestment activities. The board further believes that the funding of the
foundation with our common stock is a means of enabling the communities served
by Peoples Federal to share in our growth and success long after completion of
the conversion. The foundation will accomplish that goal by providing for
continued ties between the foundation and Peoples Federal, forming a partnership
with Peoples Federal's community. The establishment of the foundation also will
enable us and Peoples Federal to develop a unified charitable donation strategy.
Peoples Federal, however, does not expect the contribution to the foundation to
take the place of its traditional community lending activities. In this respect,
Peoples Federal may continue to make contributions to other charitable
organizations and/or it may make additional contributions to the foundation.
STRUCTURE OF THE FOUNDATION. Two members of both our board and Peoples
Federal's board of directors (Messrs. Green and Laker) and one other individual
chosen based on [HIS/HER] commitment and service to charitable and community
purposes will comprise the foundation's initial board of directors. The other
individual will not be affiliated with us or Peoples Federal. There are no plans
to change the size or composition of the foundation's board of directors during
the one-year period after the completion of the conversion. Peoples Federal
currently intends that less than a majority of Peoples Federal's or our
directors also will serve as directors of the foundation. Following the first
anniversary of the offering, the foundation may alter the size and composition
of its board of directors.
A nominating committee of the foundation's board will nominate
individuals eligible for election to the board of directors. The members of the
foundation, who are comprised of its board members, will elect the directors
from those nominated by the nominating committee. Directors will be divided into
three classes with each class appointed for three-year terms. It is not
anticipated that the members of our board and Peoples Federal's board of
directors who also serve as a director of the foundation will receive any
additional compensation for serving as a director of the foundation. We have not
determined whether the other foundation directors will receive any compensation.
The certificate of incorporation of the foundation provides that the corporation
is organized exclusively for charitable purposes, including community
development, as set forth in Section 501(c)(3) of the Internal Revenue Code. The
foundation's certificate of incorporation also provides that no part of the net
earnings of the foundation will inure to the benefit of, or be distributable to
its directors, officers or members. The foundation will make no award, grant or
distribution to any director, officer or employee of us or Peoples Federal or to
any of our affiliates. In addition, the conflict of interest rules of the OTS
will apply to those persons, if they serve as an officer, director or employee
of the foundation.
The board of directors of the foundation will have the authority for
the affairs of the foundation. Among the responsibility of the foundation
directors is the establishment of the policies of the foundation with respect to
its grants or donations, consistent with the purposes of the foundation.
Although no formal policy governing foundation grants exists at this time, the
foundation's board of directors will adopt a policy upon establishment of the
foundation. As directors of a nonprofit corporation, directors of the foundation
will at all times be bound by their fiduciary duty to advance the foundation's
charitable goals, to protect the assets of the foundation and to act in a manner
consistent with its charitable purpose. The directors of the foundation will
also be responsible for directing the activities of the foundation, including
the management of our common stock held by the foundation.
84
<Page>
However, it is expected that as a condition to receiving the approval of the OTS
to Peoples Federal's conversion, that the foundation will be required to commit
to the OTS that all shares of our common stock held by the foundation will be
voted in the same ratio as all other shares of our common stock, on all
proposals considered by our stockholders. However, the OTS may waive this voting
restriction under certain circumstances. If a waiver is granted, the OTS may
impose additional conditions regarding the composition of the foundation's board
of directors.
The foundation's place of business is expected to be located at Peoples
Federal's administrative offices. Initially, the foundation is expected to have
no separate employees but will utilize the staff of Peoples Federal and may pay
Peoples Federal for the value of these services. The board of directors of the
foundation will appoint such officers as may be necessary to manage the
operations of the foundation. In this regard, it is expected that the OTS will
require Peoples Federal to provide it with a commitment that, to the extent
applicable, Peoples Federal will comply with the affiliate restrictions set
forth in Sections 23A and 23B of the Federal Reserve Act with respect to any
transactions between Peoples Federal and the foundation.
We intend to capitalize the foundation with the number of shares equal
to 2.0% of the shares of our common stock of sold in the stock offering which
would have a market value of $195,500 to $264,500 ($304,175 at the maximum, as
adjusted), based on the purchase price of $10.00 per share. Messrs. Green and
Laker, who will serve as initial directors of the foundation, and their
affiliates, intend to purchase, subject to availability, an aggregate of
50,000 shares of common stock. The shares of common stock to be acquired by
the foundation, when combined with the proposed purchases of shares of common
stock by Messrs. Green and Laker and their affiliates will total 73,000 shares
or 6.35% of the total number of shares of common stock to be issued and
outstanding, assuming the sale of 1,150,000 shares of our common stock.
The foundation will receive working capital from any dividends paid on
the common stock, and subject to applicable federal and state laws, loans
collateralized by the common stock or from the proceeds of the sale of any of
the common stock in the open market permitted from time to time to provide the
foundation with additional liquidity. As a private foundation under Section
501(c)(3) of the Internal Revenue Code, the foundation will be required to
distribute annually in grants or donations, a minimum of 5.0% of the average
fair market value of its net investment assets. One of the conditions imposed on
the gift of our common stock is that the amount of common stock that may be sold
by the foundation in any one year shall not exceed 5.0% of the average market
value of the assets held by the foundation. This condition does not apply where
the board of directors of the foundation determines that the failure to sell an
amount of common stock greater than such amount would result in a longer-term
reduction of the value of the foundation's assets and as such would jeopardize
the foundation's capacity to carry out its charitable purposes. Failure to
distribute this minimum return will require the payment of substantial federal
taxes. Upon completion of the conversion and the contribution of shares of
common stock to the foundation, we would have 997,050, 1,173,000, 1,348,950 and
1,551,293 shares issued and outstanding based on the minimum, midpoint, maximum
and maximum as adjusted of the estimated offering range.
TAX CONSIDERATIONS. Our outside tax advisor has advised us that an
organization created and operated for the above charitable purposes would
generally qualify as a Section 501(c)(3) exempt organization under the Internal
Revenue Code, and that this type of an organization would likely be classified
as a private foundation as determined in Section 501 of the Internal Revenue
Code. The foundation will submit a timely request to the IRS to be recognized as
an exempt organization. As long as the foundation files its application for
recognition of tax-exempt status within 15 months from the date of its
organization, and provided the IRS approves the application, the effective date
of the foundation's status as a Section 501(c)(3) organization will be the date
of its organization. Our outside tax advisor, however, has not advised us on the
regulatory condition to the contribution which is expected to
85
<Page>
require that all shares of our common stock held by the foundation must be voted
in the same ratio as all other outstanding shares of our common stock, on all
proposals considered by our stockholders. Consistent with the expected
condition, in the event that our legal counsel or the foundation's legal counsel
renders an opinion that compliance with this voting restriction would have the
effect of causing the foundation to lose its tax-exempt status or otherwise have
a material and adverse tax consequence on the foundation, or subject the
foundation to an excise tax under Section 4941 of the Internal Revenue Code, it
is expected that the OTS would waive such voting restriction upon submission of
a legal opinion(s) by us or the foundation satisfactory to the OTS. See
"-Regulatory Conditions Imposed on the Foundation."
The Internal Revenue Code generally allows a deduction for charitable
contributions made to qualifying donees within the taxable year of up to 10% of
its taxable income of the consolidated group of corporations (with certain
modifications) for that year. Charitable contributions made by us in excess of
the annual deductible amount will be deductible over each of the five succeeding
taxable years, subject to certain limitations. We believe that the conversion
presents a unique opportunity to establish and fund a charitable foundation
given the substantial amount of additional capital being raised in the
conversion. In making such a determination, we considered the dilutive impact of
the contribution of common stock to the foundation on the amount of common stock
available to be offered for sale in the stock offering. Based on such
consideration, we believe that the contribution to the foundation in excess of
the 10% annual deduction limitation is justified given Peoples Federal's capital
position and its earnings, the substantial additional capital being raised in
the stock offering and the potential benefits of the foundation to the
communities served by Peoples Federal. In this regard, assuming the sale of
shares at the maximum of the estimated offering range, we would have pro forma
stockholders' equity of $24.8 million or _____% of pro forma consolidated assets
and Peoples Federal's pro forma leverage, risk-based and total capital ratios
would be 16.03%, 28.23% and 16.03%, respectively. See "Peoples Federal Bank
Exceeds All Regulatory Capital Requirements," "Capitalization," "Comparison of
Independent Valuation and Pro Forma Financial Information With and Without the
Foundation" and "Pro Forma Data." We believe that the amount of the charitable
contribution is reasonable given Peoples Federal's pro forma capital position.
As such, we believe that the contribution does not raise safety and soundness
concerns.
We have received an opinion of our outside tax advisor that the
contribution of our own stock to the foundation should not constitute an act of
self-dealing. We should also, more likely than not be entitled to a deduction in
the amount of the fair market value of the stock at the time of the contribution
less the nominal par value that the foundation is required to pay to us for such
stock, subject to the annual deduction limitation described above. However, we
would be able to carry forward any unused portion of the deduction for five
years following the contribution, subject to certain limitations. Our outside
tax advisor, however, has not rendered advice as to fair market value for
purposes of determining the amount of the tax deduction. Assuming the close of
the stock offering at the maximum of the estimated price range, we estimate that
all of the contribution should be deductible over the six-year period. We and/or
Peoples Federal may make further contributions to the foundation following the
initial contribution. In addition, Peoples Federal and we also may continue to
make charitable contributions to other qualifying organizations. Any of these
future contributions would be based on an assessment of, among other factors,
our financial condition and that of Peoples Federal at that time, the interests
of stockholders and depositors of Peoples Federal, and the financial condition
and operations of the foundation.
Although we have received an opinion of our outside tax advisor that we
will more likely than not be entitled to a deduction for the charitable
contribution, there can be no assurances that the IRS will recognize the
foundation as a Section 501(c)(3) exempt organization or that a deduction for
the charitable contribution will be allowed. In either case, our contribution to
the foundation would be expensed without tax benefit, resulting in a reduction
in earnings in the year in which the IRS makes the determination.
86
<Page>
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The foundation will be required to make an
annual filing with the IRS within four and one-half months after the close of
the foundation's fiscal year. The foundation also will be required to publish a
notice that the annual information return will be available for public
inspection for a period of 180 days after the date of the public notice. The
information return for a private foundation must include, among other things, an
itemized list of all grants made or approved, showing the amount of each grant,
the recipient, any relationship between a grant recipient and the foundation's
managers and a concise statement of the purpose of each grant. Numerous other
restrictions exist in the operation of the foundation including transactions
with related entities, level of investment and distributions for charitable
purposes.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of PFS
Community Foundation is expected to be subject to the following conditions being
agreed to in writing by the foundation as a condition to receiving the OTS'
approval of the conversion:
(1) the foundation will be subject to examination by the OTS;
(2) the foundation must comply with supervisory directives imposed
by the OTS;
(3) the foundation will operate in accordance with written
policies adopted by its board of directors, including a
conflict of interest policy;
(4) any shares of our common stock held by the foundation must be
voted in the same ratio as all other shares of our common
stock, voting on all proposals considered by our stockholders;
provided, however, that, consistent with the condition, the
OTS could waive this voting restriction under certain
circumstances and subject to certain conditions if compliance
with the voting restriction would:
a. cause a violation of the law of the State of
Delaware, and the OTS determines that federal law
would not preempt the application of the laws of
Delaware to the foundation;
b. would cause the foundation to lose its tax-exempt
status or otherwise have a material and adverse tax
consequence on the foundation; or
c. would cause the foundation to be subject to an excise
tax under Section 4941 of the Internal Revenue Code;
and
In order to obtain a waiver of condition number 4 above, our legal
counsel or the foundation's legal counsel would be required to render an opinion
satisfactory to the OTS. While there is no current intention for us or the
foundation to seek a waiver from the OTS from these restrictions, there can be
no assurances that a legal opinion addressing these issues could be rendered, or
if rendered, that the OTS would grant an unconditional waiver of the voting
restriction. If the voting restriction is waived or becomes unenforceable, the
OTS may either impose a condition that provides a certain portion of the members
of the foundation's board of directors shall be persons who are not directors,
officers or employees of us, Peoples Federal or any affiliate or impose other
conditions relating to
87
<Page>
control of the foundation's common stock as is determined by the OTS to be
appropriate at the time. In no event would the voting restriction survive the
sale of shares of the common stock held by the foundation.
Various OTS regulations may be deemed to apply to the foundation
including regulations regarding transactions with affiliates, conflicts of
interest and capital distributions. Because only two directors who are common to
both us and Peoples Federal are expected to serve as directors of the
foundation, we do not believe that the foundation should be deemed an affiliate
of Peoples Federal. We anticipate that the foundation's affairs will be
conducted in a manner consistent with the OTS' conflict of interest regulations.
Peoples Federal has provided information to the OTS demonstrating that the
initial contribution of our common stock to the foundation would be within the
amount which Peoples Federal would be permitted to make as a capital
distribution assuming such contribution is deemed to have been made by Peoples
Federal.
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the plan of conversion, rights to subscribe for the
purchase of common stock have been granted under the plan of conversion to the
following persons in the following order of descending priority:
(1) Eligible Account Holders,
(2) Our employee stock ownership plan,
(3) Supplemental Eligible Account Holders,
(4) Other Members of Peoples Federal, and
(5) directors, officers and employees of Peoples Federal.
All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the plan of conversion and as described below under "- Limitations
on Common Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of:
(a) $150,000 (15,000 shares) of common stock offered, and
(b) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common
stock to be issued by a fraction, of which the numerator is
the amount of the Eligible Account Holder's qualifying deposit
and the denominator of which is the total amount of qualifying
deposits of all Eligible Account Holders,
in each case as of the close of business on December 31, 1999 (the "Eligibility
Record Date"), subject to the overall purchase limitations. See "- Limitations
on Common Stock Purchases."
88
<Page>
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated among subscribing Eligible Account
Holders so as to permit each such Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining after each subscribing Eligible Account Holder
has been allocated the lesser of the number of shares subscribed for or 100
shares will be allocated among the subscribing Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective eligible deposits bear to the total amount of eligible deposits of
all subscribing Eligible Account Holders whose subscriptions remain unfilled,
provided that no fractional shares shall be issued. Subscription Rights of
Eligible Account Holders will be subordinated to the priority rights of
Tax-Qualified Employee Stock Benefit Plans to purchase shares in excess of the
maximum of the offering range.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of Peoples Federal
or their associates will be subordinated to the subscription rights of other
Eligible Account Holders to the extent attributable to increased deposits in the
year preceding December 31, 1999.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. Our employee stock ownership
plan will receive, without payment therefor, second priority, nontransferable
subscription rights to purchase, in the aggregate, up to 8% of the common stock,
including any increase in the number of shares of common stock after the date
hereof as a result of an increase of up to 15% in the maximum of the offering
range. Our employee stock ownership plan intends to purchase 8% of the shares of
common stock, or 78,200 shares and 105,800 shares based on the minimum and
maximum of the offering range, respectively. Subscriptions by our employee stock
ownership plan will not be aggregated with shares of common stock purchased
directly by or which are otherwise attributable to any other participants in the
Subscription and Community Offerings, including subscriptions of any of Peoples
Federal's directors, officers, employees or associates thereof. In the event
that the total number of shares offered in the conversion is increased to an
amount greater than the number of shares representing the maximum of the
offering range ("Maximum Shares"), our employee stock ownership plan will have a
priority right to purchase any such shares exceeding the Maximum Shares up to an
aggregate of 8% of the common stock. See " - Limitations on Common Stock
Purchases" and "Risk Factors - An Increase in the Offering Range Would Be
Dilutive."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
Eligible Account Holders and our employee stock ownership plan, each
Supplemental Eligible Account Holder will receive, without payment therefor,
third priority, nontransferable subscription rights to subscribe for in the
Subscription Offering up to the greater of:
(a) $150,000 (15,000 shares) of common stock offered, and
(b) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common
stock to be issued by a fraction, of which the numerator is
the amount of the Supplemental Eligible Account Holder's
qualifying deposit and the denominator of which is the total
amount of qualifying deposits of all Supplemental Eligible
Account Holders, in each case as of the close of business on
[JUNE 30,] 2001(the "Supplemental Eligibility Record Date"),
subject to the overall purchase limitations. See
"-Limitations on Common Stock Purchases."
89
<Page>
If there are not sufficient shares available to satisfy all
subscriptions of all Supplemental Eligible Account Holders, available shares
first will be allocated among subscribing Supplemental Eligible Account Holders
so as to permit each such Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining available will be allocated among the
Supplemental Eligible Account Holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective eligible deposits bear to the
total amount of eligible deposits of all subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled, provided that no fractional
shares shall be issued.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, our employee stock ownership plan and Supplemental Eligible Account
Holders, each Other Member will receive, without payment therefor, fourth
priority, nontransferable subscription rights to purchase up to $150,000 (15,000
shares) of common stock offered, subject to the overall purchase limitations.
See "- Limitations on Common Stock Purchases."
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, our
employee stock ownership plan and Supplemental Eligible Account Holders, is in
excess of the total number of shares of common stock offered in the conversion,
shares first will be allocated so as to permit each subscribing Other Member, to
the extent possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Thereafter, any remaining shares will be allocated among such
subscribing Other Members on an equal number of shares basis per order until all
orders have been fulfilled or the remaining shares have been allocated, provided
that no fractional shares shall be issued.
PRIORITY 5: DIRECTORS, OFFICERS AND EMPLOYEES. To the extent that there
are sufficient shares remaining after satisfaction of all subscriptions by
Eligible Account Holders, our employee stock ownership plan, Supplemental
Eligible Account Holders and Other Members, then directors, officers and
employees of Peoples Federal will receive, without payment therefor, fifth
priority, nontransferable subscription rights to subscribe for, in this
category, an aggregate of up to 23% of the shares of common stock offered in the
Subscription Offering provided, however; that no director, officer or employee
may purchase more than 5% of the shares of common stock offered. The ability of
directors, officers and employees to purchase common stock under this category
is in addition to rights which are otherwise available to them under the plan of
conversion as they may fall within higher priority categories, and the plan of
conversion generally allows such persons to purchase in the aggregate up to 33%
of common stock sold in the conversion. See "- Limitations on Common Stock
Purchases."
In the event of an oversubscription in this category, subscription
rights will be allocated among the individual directors, officers and employees
on a point system basis, whereby such individuals will receive subscription
rights in the proportion that the number of points assigned to each of them
bears to the total points assigned to all directors, officers and employees,
provided that no fractional shares shall be issued. One point will be assigned
for each year of service with Peoples Federal, one point for each salary
increment of $5,000 per annum and five points for each office presently held in
Peoples Federal, including directorships. For information as to the number of
shares proposed to be purchased by the directors and executive officers, see
"Proposed Management Purchases."
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription
Offering will expire at 12:00 noon, Eastern Daylight Time, on _____ __, 2001
(the "Expiration Date"), unless extended for up to 45 days or for such
additional periods by us as may be approved by the Office of Thrift Supervision.
The Subscription Offering may
90
<Page>
not be extended beyond _____ __, 2003. Subscription rights which have not been
exercised prior to the Expiration Date (unless extended) will become void.
We will not execute orders until at least the minimum number of shares
of common stock (_____ shares) have been subscribed for or otherwise sold. If
all shares have not been subscribed for or sold within 45 days after the
Expiration Date, unless such period is extended with the consent of the Office
of Thrift Supervision, all funds delivered to Peoples Federal pursuant to the
Subscription Offering will be returned promptly to the subscribers with interest
and all withdrawal authorizations will be canceled. If an extension beyond the
45-day period following the Expiration Date is granted, we will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of Eligible Account Holders, our employee
stock ownership plan, Supplemental Eligible Account Holders, Other Members and
directors, officers and employees of Peoples Federal, we may elect to offer such
shares either prior to or upon completion of the Subscription Offering to
certain members of the general public, with preference given to natural persons
residing in Dearborn, Switzerland and Ohio Counties, Indiana (such natural
persons referred to as "Preferred Subscribers"). Persons, together with their
associates, or a group of persons acting in concert may purchase up to $150,000
(15,000 shares) of common stock offered in the Community Offering, subject to
the maximum purchase limitations. See "- Limitations on Common Stock Purchases."
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Subscription and Community
Offerings, such stock will be allocated first to each Preferred Subscriber whose
order is accepted by us, in an amount equal to the lesser of 100 shares or the
number of shares subscribed for by each such Preferred Subscriber, if possible.
Thereafter, unallocated shares will be allocated among the Preferred Subscribers
whose accepted orders remain unsatisfied on an equal number of shares basis per
order until all orders have been filled or the remaining shares have been
allocated, provided that no fractional shares shall be issued. Orders for common
stock in the Community Offering will first be filled to a maximum of 2% of the
total number of shares of common stock sold in the conversion and thereafter any
remaining shares will be allocated on an equal number of shares basis per order
until all orders have been filled, provided no fractional shares will be issued.
If there are any shares remaining, shares will be allocated to other members of
the general public who subscribe in the Community Offering applying the same
allocation described above for Preferred Subscribers.
THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE
COMMUNITY OFFERING CATEGORY IS SUBJECT TO OUR RIGHT, IN OUR SOLE DISCRETION, TO
ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF
RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.
SYNDICATED COMMUNITY OFFERING
The plan of conversion provides that, if necessary, all shares of
common stock not purchased in the Subscription and Community Offerings, if any,
may be offered for sale to the general public in a Syndicated Community Offering
through selected dealers managed by Prestige Financial Center, Inc. acting as
our agent in the sale of the common stock. We have the right to reject orders,
in whole or in part, in our sole discretion in the Syndicated Community
Offering. Neither Prestige Financial Center nor any registered broker-dealer
shall have any obligation to take or purchase any shares of common stock in the
Syndicated Community Offering; however, Prestige Financial Center has agreed to
use its best efforts in the sale of shares in the Syndicated Community
91
<Page>
Offering. Common stock sold in the Syndicated Community Offering will be sold at
a purchase price per share which is the same price as all other shares being
offered in the conversion. The amount of shares that any person, together with
any associate, or group of persons acting in concert may purchase in the
Syndicated Community Offering can not exceed 5% of the shares of common stock
offered in the Subscription Offering. Orders for common stock in the Syndicated
Community Offering will first be filled to a maximum of 2% of the total number
of shares sold in the conversion and thereafter any remaining shares will be
allocated on an equal number of shares basis per order until all orders have
been filled, provided no fractional shares will be issued.
It is estimated that the selected dealers will receive a negotiated
commission based on the amount of common stock sold by the selected dealer,
payable by us. During the Syndicated Community Offering, selected dealers may
only solicit indications of interest from their customers to place orders with
us as of a certain date (the "Order Date") for the purchase of shares of common
stock. When and if we and Prestige Financial Center believe that enough
indications and orders have been received in the offering to consummate the
conversion, Prestige Financial Center will request, as of the Order Date,
selected dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected dealers will
send confirmations of the orders to such customers on the next business day
after the Order Date. Selected dealers will debit the accounts of their
customers on a date which will be three business days from the Order Date
("Debit Date"). Customers who authorize selected dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the Debit Date. On the next business day following the Debit
Date, select dealers will remit funds to the account that we will establish for
each selected dealer. After payment has been received by us from selected
dealers, funds will earn interest at Peoples Federal's passbook savings rate
until the conversion is completed. In the event the conversion is not completed,
funds will be returned promptly with interest to the selected dealers, who, in
turn, will promptly credit their customers' brokerage account.
The Syndicated Community Offering may close at any time after the
Expiration Date at our discretion, but in no case later than 45 days after the
Expiration Date, unless further extended with the consent of the Office of
Thrift Supervision. The offering may not be extended beyond _____ __, 2003.
PERSONS WHO CANNOT EXERCISE SUBSCRIPTION RIGHTS
We will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for stock
pursuant to the plan of conversion reside. However, we are not required to offer
stock in the Subscription Offering to any person who resides in a foreign
country or resides in a state of the United States with respect to which:
o the number of persons otherwise eligible to subscribe for
shares under the plan of conversion who reside in such
jurisdiction is small;
o the granting of subscription rights or the offer or sale of
shares of common stock to such persons would require any of
us, Peoples Federal or our officers, directors or employees,
under the laws of such jurisdiction, to register as a broker,
dealer, salesman or selling agent or to register or otherwise
qualify its securities for sale in such jurisdiction or to
qualify as a foreign corporation or file a consent to service
of process in such jurisdiction; or
o such registration, qualification or filing in our judgment
would be impracticable or unduly burdensome for reasons of
costs or otherwise.
92
<Page>
Where the number of persons eligible to subscribe for shares in one state is
small, we will base our decision as to whether or not to offer the common stock
in such state on a number of factors, including but not limited to the size of
accounts held by account holders in the state, the cost of registering or
qualifying the shares or the need to register us, Peoples Federal or our
officers, directors or employees as brokers, dealers or salesmen.
LIMITATIONS ON COMMON STOCK PURCHASES
The plan of conversion includes the following limitations on the number
of shares of common stock which may be purchased in the conversion:
(1) No fewer than 25 shares of common stock may be purchased,
to the extent such shares are available;
(2) Each Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of (a) $150,000
(15,000 shares) of common stock and (b) 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number
of shares of common stock offered by a fraction, of which the numerator
is the amount of the qualifying deposit of the Eligible Account Holder
and the denominator is the total amount of qualifying deposits of all
Eligible Account Holders, in each case as of the close of business on
the Eligibility Record Date, with clauses (a) and (b) above subject to
the overall limitation in clause (6) below;
(3) Our employee stock ownership plan may purchase in the
aggregate up to 8% of the shares of common stock, including any
additional shares issued in the event of an increase in the offering
range;
(4) Each Supplemental Eligible Account Holder may subscribe
for and purchase in the Subscription Offering up to the greater of (a)
$150,000 (15,000 shares) of common stock and (b) 15 times the product
(rounded down to the next whole number) obtained by multiplying the
total number of shares of common stock offered by a fraction, of which
the numerator is the amount of the qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total
amount of qualifying deposits of all Supplemental Eligible Account
Holders, in each case as of the close of business on the Supplemental
Eligibility Record Date, with clauses (a) and (b) above subject to the
overall limitation in clause (6) below;
(5) Each Other Member or any person purchasing shares of
common stock in the Community Offering may subscribe for and purchase
up to $150,000 (15,000 shares) of common stock offered in the
Subscription Offering or Community Offering, subject to the overall
limitation in clause (6) below;
(6) Except for our employee stock ownership plan and certain
Eligible Account Holders and Supplemental Eligible Account Holders
whose subscription rights are based upon the amount of their deposits,
the maximum number of shares of common stock subscribed for or
purchased in all categories of the conversion by any person, together
with associates of and groups of persons acting in concert with such
persons, shall not exceed $250,000 (25,000 shares) of common stock; and
(7) No more than 33% of the total number of shares offered for
sale in the conversion may be purchased by directors and officers of
Peoples Federal and their associates in the aggregate, excluding
purchases by our employee stock ownership plan.
93
<Page>
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
Peoples Federal, the individual amount permitted to be subscribed for and the
overall purchase limitations may be increased or decreased. If such amount is
increased, subscribers for the maximum amount will be given the opportunity to
increase their subscriptions up to the then applicable limit. If such amount is
decreased, subscribers for the maximum amount will be decreased by the minimum
amount necessary so that the subscriber will be in compliance with the new
maximum limitation.
In the event of an increase in the total number of shares of common
stock offered in the conversion due to an increase in the offering range of up
to 15%, the additional shares will be allocated in the following order of
priority in accordance with the plan of conversion:
(1) to fill our employee stock ownership plan's subscription
of 8% of the adjusted maximum number of shares;
(2) in the event that there is an oversubscription by Eligible
Account Holders, to fill unfulfilled subscriptions of Eligible Account
Holders, inclusive of the adjusted maximum;
(3) in the event that there is an oversubscription by
Supplemental Eligible Account Holders, to fill unfulfilled
subscriptions of Supplemental Eligible Account Holders, inclusive of
the adjusted maximum;
(4) in the event that there is an oversubscription by Other
Members, to fill unfulfilled subscriptions of Other Members, inclusive
of the adjusted maximum;
(5) in the event there is an oversubscription by our
directors, officers and employees, to fill unfulfilled subscriptions of
directors, officers and employees, inclusive of the adjusted maximum;
and
(6) to fill unfulfilled subscriptions in the Community
Offering to the extent possible, inclusive of the adjusted maximum.
The term "associate" of a person is defined to include the following:
(a) any corporation or other organization (other than us,
Peoples Federal or a majority-owned subsidiary of Peoples Federal) of
which such person is a director, officer or partner or is directly or
indirectly the beneficial owner of 10% or more of any class of equity
securities;
(b) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as
trustee or in a similar fiduciary capacity, provided, however, that
such term shall not include any of our or Peoples Federal's
tax-qualified employee stock benefit plan in which such person has a
substantial beneficial interest or serves as a trustee or in a similar
fiduciary capacity; and
(c) any relative or spouse of such person, or any relative of
such spouse, who either has the same home as such person or who is a
director or officer of us or any of our subsidiaries.
The term "acting in concert" is defined to mean (1) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement, or (2) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose
94
<Page>
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise. We may presume that certain persons
are acting in concert based upon, among other things, joint account
relationships, common addresses on Peoples Federal's records and the fact that
such persons have filed joint Schedules 13D or 13G with the SEC with respect to
other companies.
MARKETING ARRANGEMENTS
To assist us and Peoples Federal in marketing the common stock, we have
retained the services of Young & Associates, Inc. and Prestige Financial Center,
Inc. Young and Associates will assist us as follows: (1) providing advice
regarding the financial implications of the conversion; (2) reviewing the
appraisal and business plan prepared in connection with the conversion; (3)
training the staff of Peoples Federal in connection with the conversion; and (4)
providing oversight of the Sales Center during the conversion. Prestige
Financial, which is a broker-dealer registered with the Securities and Exchange
Commission and a member of the National Association of Securities Dealers, Inc.,
will assist us in the conversion as follows: (1) reviewing the offering
materials from a marketing perspective; (2) providing general securities
training for the staff of Peoples Federal; (3) preparing marketing materials for
use in the Subscription and Community Offering; (4) assisting in the
establishment and oversight of the Stock Sales Center; (5) preparing data to
assist the transfer agent in issuing stock certificates upon completion of the
conversion; and (6) assisting in collecting and tabulating proxies from the
members of Peoples Federal.
For providing these services, we have paid to Young and Associates a
non-refundable retainer of $15,000, and have agreed to pay an additional fee of
$10,000 payable upon the completion of conversion. We have also agreed to pay to
Prestige Financial a marketing fee of $85,000 payable upon the completion of the
conversion. We will also reimburse Young and Associates for any reasonable
out-of-pocket expenses incurred in the conversion, including expenses relating
to travel, printing, copying, communications and mailing, in an amount not to
exceed $2,500, and have agreed to reimburse Prestige Financial for any such
out-of-pocket expenses and disbursements, including fees of counsel, in an
amount not to exceed $25,000. Offers and sales in the Subscription Offering and
the Community Offering will be on a best efforts basis and, as a result, neither
Young and Associates nor Prestige Financial is obligated to purchase any shares
of the common stock that we issue in the conversion. We have also agreed to
indemnify Young and Associates and Prestige Financial, under certain
circumstances, against liabilities and expenses (including legal fees) arising
out of Prestige Financial's engagement by us, including liabilities under the
Securities Act .
Our directors and executive officers may participate in the
solicitation of offers to purchase common stock by mailing written materials to
members of Peoples Federal and other prospective investors, responding to
inquiries of prospective investors, and performing ministerial or clerical work.
In each jurisdiction in which the securities laws require that the offer and/or
sale of the common stock be made through a broker-dealer registered in such
jurisdiction, all written materials will be mailed under cover of a letter from
_______. Other employees of Peoples Federal may participate in the offering in
ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers to
purchase common stock or provide advice regarding the purchase of common stock.
Questions of prospective purchasers will be directed to executive officers or
registered representatives. We will rely on Rule 3a4-1 under the Exchange Act,
and sales of common stock will be conducted within the requirements of Rule
3a4-1, so as to permit officers, directors and employees to participate in the
sale of common stock. We will not compensate our officers, directors or
employees in connection with their participation by the payment of commissions
or other remuneration based either directly or indirectly on the transactions in
the common stock.
95
<Page>
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date (unless extended) in accordance with Rule 15c2-8 of
the Exchange Act, no prospectus will be mailed any later than five days prior to
such date or hand delivered any later than two days prior to such date.
Execution of the order form will confirm receipt or delivery in accordance with
Rule 15c2-8. Order forms will only be distributed with a prospectus.
To purchase shares in the Subscription and Community Offerings, an
executed order form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from a deposit account at Peoples
Federal (which may be given by completing the appropriate blanks in the order
form), must be received by Peoples Federal by 12:00 noon, Eastern Daylight Time,
on the Expiration Date (unless extended). In addition, we will require a
prospective purchaser to execute a certification in the form required by
applicable Office of Thrift Supervision regulations in connection with any sale
of common stock. Order forms which are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. Copies of order forms, order
forms unaccompanied by an executed certification form, payments from other
private third parties and wire transfers are also not required to be accepted.
We have the right to waive or permit the correction of incomplete or improperly
executed forms, but do not represent that we will do so. Once received, an
executed order form may not be modified, amended or rescinded without our
consent, unless the conversion has not been completed within 45 days after the
end of the Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date (December 31, 1999) or the Supplemental Eligibility Record Date
([JUNE 30,] 2001) and depositors as of the close of business on the Voting
Record Date (_____ __, 2001) must list all accounts on the stock order form
giving all names in each account and the account numbers. FAILURE TO LIST ALL OF
YOUR ACCOUNTS MAY RESULT IN FEWER SHARES BEING ALLOCATED TO YOU THAN IF ALL OF
YOUR ACCOUNTS HAD BEEN DISCLOSED.
Payment for subscriptions may be made (1) in cash only if delivered in
person at the main office of Peoples Federal Savings Association, Second and
Bridgeway Streets, Aurora, Indiana, (2) by check or money order, or (3) by
authorization of withdrawal from deposit accounts maintained with Peoples
Federal. Interest will be paid on payments made by cash, check or money order at
Peoples Federal's passbook rate of interest from the date payment is received
until the conversion is completed or terminated. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the conversion, but a hold
will be placed on such funds, thereby making them unavailable to the depositor
until completion or termination of the conversion.
If a subscriber authorizes Peoples Federal to withdraw the amount of
the purchase price from his deposit account, Peoples Federal will do so as of
the effective date of the conversion. Peoples Federal will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate.
96
<Page>
Our employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes. Instead, our employee stock
ownership plan may pay for the shares of common stock subscribed for by it at
the purchase price upon completion of the Subscription and Community Offerings,
provided that there is a valid loan commitment in force from the time of its
subscription until such time. The loan commitment may be from an unrelated
financial institution or PFS Bancorp, Inc. to lend to our employee stock
ownership plan, at the completion of the conversion, the aggregate purchase
price of the shares for which our employee stock ownership plan subscribed.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of common stock in the Subscription and Community Offerings,
provided that such IRAs are not maintained at Peoples Federal. Persons with IRAs
maintained at Peoples Federal must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of common stock in the
Subscription and Community Offerings. In addition, applicable regulations
require that officers, directors and 10% stockholders who use self-directed IRA
funds to purchase shares of common stock in the Subscription and Community
Offerings make such purchases for the exclusive benefit of the IRAs. Any
interested parties wishing to use IRA funds for stock purchases are advised to
contact the Stock Information Center for additional information and allow
sufficient time for the account to be transferred as required.
Certificates representing shares of common stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of Peoples Federal, or to such other address as may be specified in
properly completed order forms, as soon as practicable following consummation of
the conversion. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
You may not transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of your subscription rights issued
under the plan of conversion or the shares of common stock to be issued upon
their exercise. You may exercise your subscription rights only for your own
account. If you exercise your subscription rights, you will be required to
certify that you are purchasing shares solely for your own account and that you
have no agreement or understanding regarding the sale or transfer of such
shares. Federal regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of common stock prior to the completion of the
conversion.
WE WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT WE
BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS
KNOWN BY US TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
LIQUIDATION RIGHTS OF CERTAIN DEPOSITORS
In the unlikely event of a complete liquidation of Peoples Federal in
its present mutual form, each depositor of Peoples Federal would receive his pro
rata share of any assets of Peoples Federal remaining after payment of claims of
all creditors (including the claims of all depositors to the withdrawal value of
their accounts). Each depositor's pro rata share of such remaining assets would
be in the same proportion as the value of his deposit account was to the total
value of all deposit accounts in Peoples Federal at the time of liquidation.
After the conversion, each depositor, in the event of a complete liquidation of
Peoples Federal, would have a claim as a creditor of the same general priority
as the claims of all other general creditors of Peoples Federal. However, except
as described below, his claim would be solely in the amount of the balance in
his deposit account plus accrued interest. The depositor would not have an
interest in the value or assets of Peoples Federal above that amount.
97
<Page>
The plan of conversion provides for the establishment, upon the
completion of the conversion, of a special "liquidation account" for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders in an
amount equal to Peoples Federal's net worth as of the date of its latest
statement of financial condition contained in the final prospectus utilized in
the conversion. As of March 31, 2001, the initial balance of the liquidation
account would be approximately $13.6 million. Each Eligible Account Holder and
Supplemental Eligible Account Holder, if he were to continue to maintain his
deposit account at Peoples Federal, would be entitled, upon a complete
liquidation of Peoples Federal after the conversion, to an interest in the
liquidation account prior to any payment to us as the sole stockholder of
Peoples Federal. Each Eligible Account Holder and Supplemental Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account, including passbook accounts, NOW accounts, money market deposit
accounts, and certificates of deposit, held in Peoples Federal at the close of
business on December 31, 1999, or [JUNE 30,] 2001, as the case may be. Each
Eligible Account Holder and Supplemental Eligible Account Holder will have a pro
rata interest in the total liquidation account for each of his deposit accounts
based on the proportion that the balance of each such deposit account on the
December 31, 1999, eligibility record date (or the [JUNE 30,] 2001, supplemental
eligibility record date, as the case may be) bore to the balance of all deposit
accounts in Peoples Federal on such dates. For deposit accounts in existence at
both the December 31, 1999 eligibility record date and the [JUNE 30,] 2001
supplemental eligibility record date, separate initial sub account balances will
be determined for such accounts on each of the respective dates. The liquidation
account will be an off balance sheet memorandum account. The balance of the
liquidation account will not be reflected in our or Peoples Federal's published
financial statements.
If, however, on any December 31 annual closing date of Peoples Federal,
commencing December 31, 2001, the amount in any deposit account is less than the
amount in such deposit account on December 31, 1999 or [JUNE 30,] 2001, as the
case may be, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. In addition, no interest in the liquidation account
would ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the claims of general creditors (including
the claims of all depositors to the withdrawal value of their accounts) and the
above liquidation rights of Eligible Account Holders and Supplemental Eligible
Account Holders are satisfied would be distributed to us as the sole stockholder
of Peoples Federal.
TAX ASPECTS
Completion of the conversion is expressly conditioned upon prior
receipt of either a ruling or an opinion of counsel with respect to federal tax
laws, and either a ruling or an opinion with respect to Indiana tax laws, to the
effect that consummation of the transactions contemplated hereby will not result
in a taxable reorganization under the provisions of the applicable codes or
otherwise result in any adverse tax consequences to us or to account holders
receiving subscription rights, except to the extent, if any, that subscription
rights are deemed to have fair market value on the date such rights are issued.
The following discussion includes all material federal tax aspects of the
offering.
Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C., has issued an
opinion to us that, for federal income tax purposes:
(1) Peoples Federal's change in form from mutual to stock
ownership will constitute a reorganization under Section 368(a)(1)(F)
of the Internal Revenue Code and we will not recognize any gain or loss
as a result of the conversion;
98
<Page>
(2) no gain or loss will be recognized by us upon our purchase
of Peoples Federal's capital stock;
(3) no gain or loss will be recognized by Eligible Account
Holders and Supplemental Eligible Account Holders upon the issuance to
them of deposit accounts in Peoples Federal in its stock form plus
their interests in the liquidation account in exchange for their
deposit accounts in Peoples Federal in its mutual form;
(4) assuming the non-transferable subscription rights to
purchase common stock have no value, the tax basis of the depositors'
deposit accounts in Peoples Federal immediately after the conversion
will be the same as the basis of their deposit accounts immediately
prior to the conversion;
(5) assuming the non-transferable subscription rights to
purchase common stock have no value, the tax basis of each Eligible
Account Holder's and Supplemental Eligible Account Holder's interest in
the liquidation account will be zero; and
(6) the tax basis to the stockholders of the common stock
purchased in the conversion will be the amount paid therefor, and the
holding period for the shares of common stock purchased by such persons
will begin on the date of consummation of the conversion if purchased
through the exercise of subscription rights and on the day after the
date of purchase if purchased in the Community Offering.
Grant Thornton LLP, Cincinnati, Ohio, also has rendered an opinion that
the foregoing tax effects of the conversion under Indiana law are substantially
the same as they are under federal law.
In the opinion of RP Financial, the subscription rights do not have any
value, based on the fact that such rights are acquired by the recipients without
cost, are nontransferable and of short duration, and afford the recipients the
right only to purchase the common stock at a price equal to its estimated fair
market value, which will be the same price as the purchase price for the
unsubscribed shares of common stock. If the subscription rights granted to
eligible subscribers are deemed to have an ascertainable value, receipt of such
rights would be taxable probably only to those eligible subscribers who exercise
the subscription rights (either as a capital gain or ordinary income) in an
amount equal to such value, and we could recognize gain on such distribution.
Eligible subscribers are encouraged to consult with their own tax advisor as to
the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.
The opinions of Elias, Matz, Tiernan & Herrick, Grant Thornton and RP
Financial are filed as exhibits to the Registration Statement that we filed with
the SEC. See "Additional Information."
Unlike private rulings, an opinion is not binding on the IRS, and the
IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
DELIVERY OF CERTIFICATES
Certificates representing common stock issued in the conversion will be
mailed by our transfer agent to the persons entitled thereto at the addresses of
such persons appearing on the stock order form as soon as practicable following
completion of the conversion. Any certificates returned as undeliverable will be
held by us until claimed by persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Until certificates for
99
<Page>
common stock are available and delivered to subscribers, such subscribers may
not be able to sell the shares of common stock for which they have subscribed,
even though trading of the common stock may have commenced.
REQUIRED APPROVALS
Various approvals of the Office of Thrift Supervision are required to
complete the conversion. The Office of Thrift Supervision approved the plan of
conversion, subject to approval by Peoples Federal's members and other standard
conditions. The Office of Thrift Supervision has also approved our holding
company application, subject to the following standard conditions:
(1) The acquisition of Peoples Federal by PFS Bancorp must be completed within
120 days of approval of the application;
(2) File Company, legal and accounting certifications with the OTS; and
(3) PFS Bancorp must not take any action that would prevent its stock from
being listed on an exchange or quoted on the Nasdaq system.
We are required to make certain filings with state securities
regulatory authorities in connection with the issuance of common stock in the
conversion.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER THE CONVERSION
All shares of common stock purchased in connection with the conversion
by any of our directors or executive officers will be subject to a restriction
that the shares not be sold for a period of one year following the conversion,
except in the event of the death of such director or executive officer or
pursuant to a merger or similar transaction approved by the Office of Thrift
Supervision. Each certificate for restricted shares will bear a legend giving
notice of this restriction on transfer, and appropriate stop-transfer
instructions will be issued to our transfer agent. Any shares of common stock
issued at a later date within this one year period as a stock dividend, stock
split or otherwise with respect to such restricted stock will be subject to the
same restrictions. Our directors and executive officers will also be subject to
the insider trading rules promulgated pursuant to the Exchange Act as long as
the common stock is registered pursuant to Section 12(g) of the Exchange Act.
Purchases of our common stock by our directors, executive officers and
their associates during the three-year period following completion of the
conversion may be made only through a broker or dealer registered with the SEC,
except with the prior written approval of the Office of Thrift Supervision. This
restriction does not apply, however, to negotiated transactions involving more
than 1% of our outstanding common stock or to certain purchases of stock
pursuant to an employee stock benefit plan, such as our employee stock ownership
plan, or by any non-tax-qualified employee stock benefit plan, such as the
recognition plan.
Any repurchases of common stock by us in the future will be subject to
the receipt of any necessary approvals from the Office of Thrift Supervision
during the first year after the conversion.
100
<Page>
RESTRICTIONS ON ACQUISITION OF US AND PEOPLES FEDERAL
AND RELATED ANTI-TAKEOVER PROVISIONS
GENERAL
As described below, certain provisions in our articles of incorporation
and bylaws and in our proposed benefit plans, together with provisions of
Indiana corporate law and Office of Thrift Supervision regulations, may have
anti-takeover effects. In addition, regulatory restrictions may make it
difficult for persons or companies to acquire control of us.
RESTRICTIONS IN OUR ARTICLES OF INCORPORATION AND BYLAWS
GENERAL. A number of provisions of our articles of incorporation and
bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion of our articles of incorporation and
bylaws summarizes the material provisions which might be deemed to have a
potential "anti-takeover" effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by our board of
directors but which individual stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions also will render the removal of our current board of
directors or management more difficult. The following description of certain of
the provisions of our articles of incorporation and bylaws is necessarily
general and reference should be made in each case to the articles of
incorporation and bylaws, which are incorporated herein by reference. See
"Additional Information" as to how to obtain a copy of these documents.
LIMITATION ON VOTING RIGHTS. Article XI.B. of our articles of
incorporation provides that no person shall directly or indirectly offer to
acquire or acquire the beneficial ownership of:
(1) more than 10% of our issued and outstanding shares of any
class of our equity securities, or
(2) any securities convertible into, or exercisable for, any
of our equity securities if, assuming conversion or exercise by such
person of all securities of which such person is the beneficial owner
which are convertible into, or exercisable for, such equity securities
(but of no securities convertible into, or exercisable for, such equity
securities of which such person is not the beneficial owner), such
person would be the beneficial owner of more than 10% of any class of
our equity securities.
The term "person" is broadly defined to prevent circumvention of this
restriction.
The foregoing restrictions do not apply to the following:
o any offer with a view toward public resale made exclusively to
us by underwriters or a selling group acting on our behalf,
o any tax-qualified employee benefit plan or arrangement
established by us and any trustee of such a plan or
arrangement, or
o any other offer or acquisition approved in advance by the
affirmative vote of two-thirds of our entire board of
directors.
101
<Page>
In the event that shares are acquired in violation of Article XI.B, all shares
beneficially owned by any person in excess of 10% shall be considered "excess
shares" and shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matters
submitted to stockholders for a vote, and our board of directors may cause these
excess shares to be transferred to an independent trustee for sale on the open
market or otherwise, with the expenses of the trustee to be paid out of the
proceeds of sale.
BOARD OF DIRECTORS. Article V.B of our articles of incorporation
contains provisions relating to the board of directors and provides, among other
things, that the board of directors shall be divided into three classes as
nearly equal in number as possible, with the term of office of one class
expiring each year. See "Management - Management of PFS Bancorp, Inc." The
classified board is intended to provide for continuity of the board of directors
and to make it more difficult and time consuming for a stockholder group to
fully use its voting power to gain control of the board of directors without the
consent of our incumbent board of directors. Cumulative voting in the election
of directors is not permitted.
Directors may be removed only for cause at a duly constituted meeting
of stockholders called expressly for that purpose upon the vote of the holders
of more than 50% of the total votes eligible to be cast by stockholders. Cause
for removal shall exist only if the director whose removal is proposed has been
either declared incompetent by an order of a court, convicted of a felony or of
an offense punishable by imprisonment for a term of more than one year by a
court of competent jurisdiction, or deemed liable by a court of competent
jurisdiction for gross negligence or misconduct in the performance of such
director's duties to us. Any vacancy occurring in the board of directors for any
reason (including an increase in the number of authorized directors) may be
filled by the affirmative vote of a majority of the remaining directors, whether
or not a quorum of the board of directors is present, and a director appointed
to fill a vacancy shall serve until the expiration of the term to which he was
appointed.
Article III, Section 14 of our Bylaws governs nominations for election
to the board of directors, and requires all nominations for election to the
board other than those made by the board to be made by a stockholder eligible to
vote at an annual meeting of stockholders who has complied with the notice
provisions in that section. Written notice of a stockholder nomination must be
delivered to, or mailed to and received at, our principal executive offices not
later than 120 days prior to the anniversary date of the initial mailing of
proxy materials by us in connection with the immediately preceding annual
meeting of our stockholders, provided that, with respect to the first scheduled
annual meeting following completion of the conversion, notice must be received
no later than the close of business on June 26, 2002. Each such notice shall set
forth the following:
(a) the name, age, business address and residence address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated;
(b) the principal occupation or employment of the stockholder
submitting the notice and of each person being nominated;
(c) the class and number of shares of our stock beneficially owned by
the stockholder submitting the notice, by any person who is acting in concert
with or who is an affiliate or associate of such stockholder (as such terms are
defined in our articles of incorporation), by any person who is a member of any
group with such stockholder with respect to our stock or who is known by such
stockholder to be supporting such nominee(s) on the date the notice is given to
us, by each person being nominated, and by each person who is in control of, is
controlled by or is under common control with any of the foregoing persons (if
any of the foregoing persons is a partnership, corporation, limited liability
company, association or trust, information must be provided regarding the name
and address of, and the class and number of shares of our stock which are
beneficially owned by, each partner
102
<Page>
in such partnership, each director, executive officer and stockholder in such
corporation, each member in such limited liability company or association, and
each trustee and beneficiary of such trust, and in each case each person
controlling such entity and each partner, director, executive officer,
stockholder, member or trustee of any entity which is ultimately in control of
such partnership, corporation, limited liability company, association or trust);
(d) a representation that the stockholder is a holder of record of our
stock entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(e) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder;
(f) such other information regarding the stockholder submitting the
notice, each nominee proposed by such stockholder and any other person covered
by clause (c) of this paragraph as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the SEC; and
(g) the consent of each nominee to serve as our director if so elected.
The provisions regarding director elections and other provisions in the
articles of incorporation and bylaws are generally designed to protect our
ability of our board of directors to negotiate with the proponent of an
unfriendly or unsolicited proposal to take over or restructure us by making it
more difficult and time-consuming to change majority control of the board,
whether by proxy contest or otherwise. The effect of these provisions will be to
generally require at least two (and possibly three) annual stockholders'
meetings, instead of one, to effect a change in control of our board of
directors even if holders of a majority of our capital stock believed that a
change in the composition of the board of directors was desirable. Because a
majority of the directors at any given time will have prior experience as
directors, these requirements will help to ensure continuity and stability of
our management and policies and facilitate long-range planning for our business.
The provisions relating to removal of directors and filling of vacancies are
consistent with and supportive of a classified board of directors.
The procedures regarding stockholder nominations will provide our board
of directors with sufficient time and information to evaluate a stockholder
nominee to the board and other relevant information, such as existing
stockholder support for the nominee. The proposed procedures, however, will
provide incumbent directors advance notice of a dissident slate of nominees for
directors, and will make it easier for the Board to solicit proxies in
opposition to such nominees. This may make it easier for the incumbent directors
to retain their status as directors, even when certain stockholders view the
stockholder nominations as in our and our stockholders' best interests.
AUTHORIZED SHARES. Article VI of our articles of incorporation
authorizes the issuance of 15,000,000 shares of stock, of which 5,000,000 shares
shall be shares of serial preferred stock, and 10,000,000 shares shall be common
stock. The shares of common stock and preferred stock were authorized in an
amount greater than that to be issued in the conversion to provide us with as
much flexibility as possible to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and employee stock options. However,
these additional authorized shares may also be used by the board of directors
consistent with its fiduciary duty to deter future attempts to gain control of
us. The board of directors also has sole authority to determine the terms of any
one or more series of preferred stock, including voting rights, conversion
rates, and liquidation preferences. As a result of the ability to fix voting
rights for a series of preferred stock, the board has the power, to the extent
consistent with its fiduciary duty, to issue a series of preferred stock to
persons friendly to management in order to attempt to block a post-tender offer
merger or other transaction by which a third party seeks control, and thereby
assist management
103
<Page>
to retain its position. We currently have no plans for the issuance of
additional shares, other than the issuance of additional shares pursuant to
stock benefit plans.
SPECIAL MEETINGS OF STOCKHOLDERS AND STOCKHOLDER PROPOSALS. Article
VIII of our articles of incorporation provides that special meetings of our
stockholders may only be called by the following:
o the Chairman of the Board, or
o three-fourths of the board of directors.
The articles of incorporation also provide that any action permitted to be taken
at a meeting of stockholders may only be taken at such a meeting.
Article II.12 of our bylaws provides that only such business as shall
have been properly brought before an annual meeting of stockholders shall be
conducted at the annual meeting. In order to be properly brought before an
annual meeting following completion of the conversion, business must be brought
before the meeting by or at the direction of the board of directors or by a
stockholder who has given timely and complete notice thereof in writing to us.
For stockholder proposals to be included in our proxy materials, the stockholder
must comply with all the timing and informational requirements of Rule 14a-8 of
the Exchange Act. With respect to stockholder proposals to be considered at the
annual meeting of stockholders but not included in our proxy materials, the
stockholder's notice must be delivered to or mailed and received at our
principal executive offices not later than 120 days prior to the anniversary
date of the initial mailing of our proxy materials in connection with the
immediately preceding annual meeting; provided, however, that with respect to
the first scheduled annual meeting following completion of the conversion, such
written notice must be received by us not later than the close of business on
June 26, 2002. A stockholder's notice shall set forth as to each matter the
stockholder proposes to bring before the annual meeting the following:
(a) a description of the proposal desired to be brought before the
annual meeting;
(b) the name and address, as they appear on our books, of the
stockholder proposing such business, and, to the extent known, any other
stockholders known by such stockholder to be supporting such proposal;
(c) the class and number of our shares beneficially owned by the
stockholder submitting the notice, by any person who is acting in concert with
or who is an affiliate or associate of such stockholder (as such terms are
defined in our articles of incorporation), by any person who is a member of any
group with such stockholder with respect to our stock or who is known by such
stockholder to be supporting such proposal on the date the notice is given to us
and by each person who is in control of, is controlled by or is under common
control with any of the foregoing persons (if any of the foregoing persons is a
partnership, corporation, limited liability company, association or trust,
information must be provided regarding the name and address of, and the class
and number of shares of our stock which are beneficially owned by, each partner
in such partnership, each director, executive officer and stockholder in such
corporation, each member in such limited liability company or association, and
each trustee and beneficiary of such trust, and in each case each person
controlling such entity and each partner, director, executive officer,
stockholder, member or trustee of any entity which is ultimately in control of
such partnership, corporation, limited liability company, association or trust);
(d) the identification of any person retained or to be compensated by
the stockholder submitting the proposal, or any person acting on his or her
behalf, to make solicitations or recommendations to stockholders for
104
<Page>
the purpose of assisting in the passage of such proposal and a brief description
of the terms of such employment, retainer or arrangement for compensation; and
(e) any material interest of the stockholder in such business.
The procedures regarding stockholder proposals are designed to provide
the board with sufficient time and information to evaluate a stockholder
proposal and other relevant information, such as existing stockholder support
for the proposal. The proposed procedures, however, will give incumbent
directors advance notice of a stockholder proposal. This may make it easier for
the incumbent directors to defeat a stockholder proposal, even when certain
stockholders view such proposal as in our or our stockholders best interests.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Article XII of our
articles of incorporation generally provides that any amendment of the articles
of incorporation must be first approved by a majority of our board of directors
and then by the holders of at least a majority of our shares entitled to vote in
an election of directors ("Voting Shares"), except that any amendment to our
Articles of Incorporation with respect to:
o the board of directors (Article V),
o meetings of shareholders and our bylaws (Article VIII),
o shareholder approvals of mergers, sale or dissolutions
(Article X), or
o offers or acquisitions of our common stock (Article XI) must
be approved by 80% of our Voting Shares.
Our bylaws may be amended by a majority of the board of directors.
INDIANA CORPORATE LAW
Several provisions of the Indiana Business Corporation Law could affect
the acquisition of shares of our common stock or otherwise affect the control of
us. The Indiana Business Corporation Law prohibits certain business
combinations, including mergers, sales of assets, recapitalizations, and reverse
stock splits, between corporations such as us and an interested shareholder,
defined as the beneficial owner of 10% or more of the voting power of the
outstanding voting shares, for five years following the date on which the
shareholder obtained 10% ownership unless the acquisition was approved in
advance of that date by the board of directors. If prior approval is not
obtained, several price and procedural requirements must be met before the
business combination can be completed.
In addition, the Indiana Business Corporation Law contains provisions
designed to assure that minority shareholders have some say in their future
relationship with Indiana corporations in the event that a person made a tender
offer for, or otherwise acquired, shares giving that person more than 20%, 33
1/3%, and 50% of the outstanding voting securities of corporations having 100 or
more shareholders (the "Control Share Acquisitions Statute"). Under the Control
Share Acquisitions Statute, if an acquiror purchases those shares at a time that
the corporation is subject to the Control Share Acquisitions Statute, then until
each class or series of shares entitled to vote separately on the proposal, by a
majority of all votes entitled to be cast by that group (excluding shares held
by officers of the corporation, by employees of the corporation who are
directors thereof and by the acquiror), approves in a special or annual meeting
the rights of the acquiror to vote the shares which take the acquiror over each
level of ownership as stated in the statute, the acquiror cannot vote those
shares. An Indiana corporation otherwise subject to the Control Share
Acquisitions Statute may elect not to be covered by the statute by so providing
in its articles of incorporation or bylaws. We, however, will be subject to this
statute because of our desire to discourage non-negotiated hostile takeovers by
third parties.
105
<Page>
The Indiana Business Corporation Law specifically authorizes Indiana
corporations to issue options, warrants or rights for the purchase of shares or
other securities of the corporation or any successor in interest of the
corporation. These options, warrants or rights may , but need not be, issued to
shareholders on a pro rata basis.
The Indiana Business Corporation Law specifically authorizes directors,
in considering the best interest of a corporation, to consider the effects of
any action on shareholders, employees, suppliers, and customers of the
corporation, and communities in which offices or other facilities of the
corporation are located, and any other factors the directors consider pertinent.
Our articles of incorporation contain a provision having a similar effect. Under
the Indiana Business Corporation Law, directors are not required to approve a
proposed business combination or other corporate action if the directors
determine in good faith that such approval is not in the best interest of the
corporation. In addition, the Indiana Business Corporation Law states that
directors are not required to redeem any rights under or render inapplicable a
shareholder rights plan or to take or decline to take any other action solely
because of the effect such action might have on a proposed change of control of
the corporation or the amounts to be paid to shareholders upon such a change of
control. The Indiana Business Corporation Law explicitly provides that the
different or higher degree of scrutiny imposed in Delaware and certain other
jurisdictions upon director actions taken in response to potential changes in
control will not apply. The Delaware Supreme Court has held that defensive
measures in response to a potential takeover must be "reasonable in relation to
the threat posed."
In taking or declining to take any action or in making any
recommendation to a corporation's shareholders with respect to any matter,
directors are authorized under the Indiana Business Corporation Law to consider
both the short-term and long-term interests of the corporation as well as
interests of other constituencies and other relevant factors. Any determination
made with respect to the foregoing by a majority of the disinterested directors
shall conclusively be presumed to be valid unless it can be demonstrated that
such determination was not made in good faith.
Because of the foregoing provisions of the Indiana Business Corporation
Law, our Board of Directors will have flexibility in responding to unsolicited
proposals to acquire us and, accordingly, it may be more difficult for an
acquiror to gain control of us in a transaction not approved by our board of
directors.
ANTI-TAKEOVER EFFECTS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND MANAGEMENT
REMUNERATION ADOPTED IN THE CONVERSION
The foregoing provisions of our articles of incorporation and bylaws
and Indiana law could have the effect of discouraging an acquisition of us or
stock purchases in furtherance of an acquisition, and could accordingly, under
certain circumstances, discourage transactions which might otherwise have a
favorable effect on the price of our common stock.
In addition, certain provisions in our proposed stock benefit plans
provide for accelerated benefits to participants in the event of a change in
control of us. See "Management - New Stock Benefit Plans." The foregoing
provisions and limitations may make it more costly for companies or persons to
acquire control of us.
Our board of directors believes that the provisions described above are
prudent and will reduce vulnerability to takeover attempts and certain other
transactions that are not negotiated with and approved by our board of
directors. The board of directors believes that these provisions are in our and
our future stockholders' best interests. In the board of directors' judgment,
the board of directors is in the best position to determine our true value and
to negotiate more effectively for what may be in the best interests of our
stockholders. Accordingly, the board of directors believes that it is in our and
our future stockholders' best interests to encourage potential
106
<Page>
acquirors to negotiate directly with the board and that these provisions will
encourage such negotiations and discourage hostile takeover attempts. It is also
the board of directors' view that these provisions should not discourage persons
from proposing a merger or other transaction at prices reflective of our true
value and where the transaction is in the best interests of all stockholders.
Despite the board of directors' belief as to the benefits to our
stockholders of the foregoing provisions, these provisions also may have the
effect of discouraging a future takeover attempt in which stockholders might
receive a substantial premium for their shares over then current market prices
and may tend to perpetuate existing management. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. The board of directors, however, has concluded that the potential
benefits of these provisions outweigh their possible disadvantages.
We are not aware of any effort that might be made to acquire control of
us.
REGULATORY RESTRICTIONS
Applicable law provides that no person, acting directly or indirectly
or through or in concert with one or more other persons, may acquire control of
a savings institution unless the Office of Thrift Supervision has been given at
least 60 days' prior written notice. The HOLA provides that no company may
acquire "control" of a savings institution without the prior approval of the
Office of Thrift Supervision. Any company that acquires such control becomes a
savings and loan holding company subject to registration, examination and
regulation by the Office of Thrift Supervision. Pursuant to federal regulations,
control of a savings institution is conclusively deemed to have been acquired
by, among other things, the acquisition of more than 25% of any class of voting
stock of the institution or the ability to control the election of a majority of
the directors of an institution. Moreover, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock, or of more than 25% of any class of stock, of a savings
institution where certain enumerated "control factors" are also present in the
acquisition. The Office of Thrift Supervision may prohibit an acquisition if:
o it would result in a monopoly or substantially lessen
competition,
o the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or
o the competence, experience or integrity of the acquiring
person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of
control by such person.
The foregoing restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plan or plans do not have beneficial ownership in the
aggregate of more than 25% of any class of equity security of the savings
institution.
For three years following the conversion, Office of Thrift Supervision
regulations prohibit any person from acquiring, either directly or indirectly,
or making an offer to acquire more than 10% of the stock of any converted
savings institution or its holding company, without the prior written approval
of the Office of Thrift Supervision, except for:
(1) any offer with a view toward public resale made
exclusively to the institution or its holding company or to
underwriters or a selling group acting on its behalf,
107
<Page>
(2) offers that if consummated would not result in the
acquisition by such person during the preceding 12-month period of more
than 1% of such stock,
(3) offers in the aggregate for up to 24.9% by our ESOP or
other tax-qualified plans, and
(4) an offer to acquire or acquisition of beneficial ownership
of more than 10% of the common stock of the savings institution or its
holding company by a corporation whose ownership is or will be
substantially the same as the ownership of the savings institution,
provided that the offer or acquisition is made more than one year
following the date of completion of the conversion. Such prohibition
also is applicable to the acquisition of the common stock.
In the event that any person, directly or indirectly, violates this regulation,
the securities beneficially owned by such person in excess of 10% shall not be
counted as shares entitled to vote and shall not be voted by any person or
counted as voting shares in connection with any matters submitted to a vote of
stockholders. The definition of beneficial ownership for this regulation extends
to persons holding revocable or irrevocable proxies for the stock of an
institution or its holding company under circumstances that give rise to a
conclusive or rebuttable determination of control under Office of Thrift
Supervision regulations.
Previously, the Office of Thrift Supervision routinely approved
acquisitions in excess of 10% of the stock of converted savings associations or
their holding companies after one year from conversion, especially where such
acquisitions were negotiated with the target company. The Office of Thrift
Supervision, however, recently indicated that it would be more restrictive in
approving acquisitions of greater than 10% during the three years following a
conversion. As a result, the Office of Thrift Supervision may preclude any
acquisition of control of us for at least three years after completion of the
conversion.
In addition to the foregoing, the plan of conversion prohibits any
person, prior to the completion of the conversion, from offering, or making an
announcement of an intent to make an offer, to purchase subscription rights for
common stock. See "The Conversion - Restrictions on Transfer of Subscription
Rights and Shares."
DESCRIPTION OF OUR CAPITAL STOCK
GENERAL
We are authorized to issue 15,000,000 shares of capital stock, of which
10,000,000 are shares of common stock, par value $.01 per share and 5,000,000
are shares of preferred stock, par value $.01 per share. We currently expect to
issue up to a maximum of 1,348,950 shares of common stock and no shares of
preferred stock in the conversion. Each share of our common stock issued in the
conversion will have the same relative rights as, and will be identical in all
respects with, each other share of common stock issued in the conversion. Upon
payment of the purchase price for the common stock in accordance with the plan
of conversion, all such stock will be duly authorized, fully paid and
nonassessable based on the laws and regulations in effect as of the date of
consummation of the conversion.
OUR COMMON STOCK WILL REPRESENT NONWITHDRAWABLE CAPITAL, WILL NOT BE AN
ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
108
<Page>
COMMON STOCK
DIVIDENDS. We can pay dividends if, as and when declared by our board
of directors, subject to compliance with limitations which are imposed by law.
See "We Intend to Pay Semiannual Cash Dividends." The holders of our common
stock will be entitled to receive and share equally in such dividends as may be
declared by our board of directors out of funds legally available therefor. If
we issue preferred stock, the holders thereof may have a priority over the
holders of the common stock with respect to dividends.
VOTING RIGHTS. Upon completion of the conversion, the holders of common
stock will possess exclusive voting rights in us. They will elect our board of
directors and act on such other matters as are required to be presented to them
under Indiana law or our articles of incorporation or as are otherwise presented
to them by the board of directors. Except as discussed in "Restrictions on
Acquisition of Us and Peoples Federal and Related Anti-Takeover Provisions,"
each holder of common stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors. If we issue
preferred stock, holders of the preferred stock may also possess voting rights.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
of Peoples Federal, we, as the sole holder of Peoples Federal's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of Peoples Federal (including all deposit accounts and
accrued interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "The Conversion - Liquidation Rights of Certain
Depositors"), all assets of Peoples Federal available for distribution. In the
event of any liquidation, dissolution or winding up of us, the holders of our
common stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of our assets available for
distribution. If preferred stock is issued, the holders thereof may have a
priority over the holders of the common stock in the event of liquidation or
dissolution.
PREEMPTIVE RIGHTS. Holders of our common stock will not be entitled to
preemptive rights with respect to any shares which may be issued in the future.
The common stock is not subject to any required redemption.
PREFERRED STOCK
None of our authorized shares of preferred stock will be issued in the
conversion. Such stock may be issued with such preferences and designations as
our board of directors may from time to time determine. The board of directors
can, without stockholder approval, issue preferred stock with voting, dividend,
liquidation and conversion rights which could dilute the voting strength of the
holders of the common stock and may assist management in impeding an unfriendly
takeover or attempted change in control.
EXPERTS
The financial statements of Peoples Federal as of June 30, 2000 and
1999 and for each of the years ended June 30, 2000 and 1999 included in this
prospectus have been included herein in reliance upon the report of Grant
Thornton L.L.P. independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
RP Financial, LC has consented to the publication herein of the summary
of its report to us setting forth its opinion as to the estimated pro forma
market value of the common stock to be outstanding upon completion of the
conversion and its opinion with respect to subscription rights.
109
<Page>
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax
consequences of the conversion will be passed upon for us by Elias, Matz,
Tiernan & Herrick L.L.P., Washington, D.C., our special counsel. The Indiana
income tax consequences of the conversion will be passed upon for us by Grant
Thornton L.L.P., Cincinnati, Ohio.
ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement under the
Securities Act with respect to the common stock offered hereby. As permitted by
the rules and regulations of the SEC, this prospectus does not contain all the
information set forth in the Registration Statement. Such information, including
the appraisal report which is an exhibit to the Registration Statement, can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can
be obtained from the SEC at prescribed rates. You may contact the SEC by calling
1-800-SEC-0330. In addition, the SEC maintains a web site that contains
registration statements and other reports regarding registrants that file
electronically with the SEC (such as PFS Bancorp, Inc.). The address of the
SEC's web site is http://www.sec.gov. The statements contained in this
prospectus as to the contents of any contract or other document filed as an
exhibit to the Registration Statement summarize the provisions of such contracts
or other documents which are deemed to be material. However, such summary is, of
necessity, a brief description of the provisions and is not necessarily
complete; each such statement is qualified by reference to such contract or
document.
Peoples Federal has filed an Application for Conversion with the Office
of Thrift Supervision with respect to the conversion. This prospectus omits
certain information contained in that application. The application may be
examined at the principal office of the Office of Thrift Supervision, 1700 G
Street, N.W., Washington, D.C. 20552 and at the Central Regional Office of the
Office of Thrift Supervision located at 200 West Madison Street, Suite 1300,
Chicago, Illinois 60606.
In connection with the conversion, we will register our common stock
with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, we and the holders of our stock will become subject to the proxy
and tender offer rules, insider trading reporting requirements and restrictions
on stock purchases and sales by directors, officers and greater than 10%
stockholders, and certain other requirements of the Exchange Act. Under the plan
of conversion, we have undertaken that we will not terminate such registration
for a period of at least three years following the conversion.
A copy of the plan of conversion, our articles of incorporation and the
bylaws and Peoples Federal's charter and bylaws are available without charge
from Peoples Federal. Requests for such information should be directed to: Mr.
Mel E. Green, Chief Executive Officer and Managing Officer, Peoples Federal
Savings Bank, Second and Bridgeway Streets, Aurora, Indiana, 47001, telephone
number (812) 926-0631.
Copies of the appraisal report of RP Financial, including any amendments
thereto, are available from Peoples Federal at the above address.
110
<Page>
INDEX
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Report of Independent Certified Public
Accountants....................................... F-2
Financial Statements
Statements of Financial Condition (As of March 31, 2001 (unaudited), June 30,
2000 and
1999).............................................................
F-3
Statements of Earnings for the years ended June 30, 2000 and
1999..................... 36
Statements of Comprehensive Income (for the nine months ended March 31, 2001
and
2000 (unaudited) and the years ended June 30, 2000, 1999 and
1998).............. F-4
Statements of Retained Earnings (for the nine months ended March 31, 2001 and
2000
(unaudited) and the years ended June 30, 2000, 1999 and 1998
(audited)..... F-5
Statements of Cash Flows (for the nine months ended March 31, 2001 and 2000
(unaudited) and the years ended June 30, 2000, 1999 and 1998
(audited)...... F-6
Notes to Financial
Statements............................................................
F-8
</Table>
All financial statement schedules are omitted because the required
information either is not applicable or is shown in the financial statements or
in the notes thereto.
PFS Bancorp, Inc. incorporated in June 2001. We have engaged in only
minimal activities to date; accordingly, our financial statements have been
omitted because of their immateriality.
F-1
<Page>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Peoples Federal Savings Bank
We have audited the accompanying statements of financial condition of Peoples
Federal Savings Bank as of June 30, 2000 and 1999, and the related statements of
earnings, comprehensive income, retained earnings and cash flows for the three
years in the period ended June 30, 2000. These financial statements are the
responsibility of the Savings Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Peoples Federal Savings Bank as
of June 30, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Cincinnati, Ohio
August 23, 2000
F-2
<Page>
PEOPLES FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
(In thousands)
<Table>
<Caption>
MARCH 31, JUNE 30,
ASSETS
2001 2000 1999
(unaudited)
Cash and due from banks
$ 1,421 $ 940 $ 721
Interest-bearing deposits in other financial institutions
11,862 7,861 4,657
-------- --------- --------
Cash and cash equivalents
13,283 8,801 5,378
Investment securities designated as available for sale -
at market
1,343 1,054 1,509
Investment securities held to maturity - at amortized cost, which
approximates market
169 178 185
Mortgage-backed securities held to maturity - at amortized cost,
which approximates market
- 1 5
Loans receivable - net
96,141 95,492 92,827
Office premises and equipment - at depreciated cost
1,127 1,194 1,140
Real estate acquired through foreclosure
102 6 121
Property acquired in settlement of loans
- 26 -
Federal Home Loan Bank stock - at cost
694 694 691
Accrued interest receivable
468 482 403
Prepaid expenses and other assets
60 47 44
Prepaid federal income taxes
- - 74
--------- --------- --------
Total assets
$113,387 $107,975 $102,377
========= ========= ========
LIABILITIES AND RETAINED EARNINGS
Deposits
$ 95,754 $ 90,822 $ 85,561
Advances from the Federal Home Loan Bank
3,000 3,750 3,750
Advances by borrowers for taxes and insurance
109 67 106
Accrued interest payable
61 39 59
Deferred compensation
611 - -
Other liabilities
132 131 66
Accrued federal income taxes
10 26 -
Deferred federal income taxes
159 288 493
--------- --------- --------
Total liabilities
99,836 95,123 90,035
Commitments and contingent liabilities
- - -
Retained earnings - substantially restricted
12,678 12,173 11,363
Accumulated other comprehensive income - unrealized gains on
securities designated as available for sale, net of related tax effects
873 679 979
--------- --------- --------
Total retained earnings
13,551 12,852 12,342
--------- --------- --------
Total liabilities and retained earnings
$113,387 $107,975 $102,377
========= ========= ========
</Table>
The accompanying notes are an integral part of these statements.
F-3
<Page>
PEOPLES FEDERAL SAVINGS BANK
STATEMENTS OF EARNINGS
(In thousands)
<Table>
<Caption>
NINE
MONTHS ENDED YEAR ENDED
MARCH
31, JUNE 30,
2001
2000 2000 1999 1998
(unaudited)
Interest income
Loans $5,853
$5,460 $7,349 $7,161 $7,591
Investment and mortgage-backed securities 21
24 21 25 28
Interest-bearing deposits and other 429
217 333 337 322
------
- ------ ------ ------ ------
Total interest income 6,303
5,701 7,703 7,523 7,941
Interest expense
Deposits 3,568
2,981 4,051 4,111 4,259
Borrowings 157
195 258 237 305
------
- ------ ------ ------ ------
Total interest expense 3,725
3,176 4,309 4,348 4,564
-----
- ----- ----- ----- -----
Net interest income 2,578
2,525 3,394 3,175 3,377
Provision for losses on loans 132
64 88 84 80
------
- ------- ------- ------- -------
Net interest income after provision for
losses on loans 2,446
2,461 3,306 3,091 3,297
Other income
Gain on sale of real estate acquired through foreclosure 2
- 3 - 7
Gain on sale of investment securities 344
- - - -
Gain on sale of equipment -
- - - 12
Service fee income on deposits 148
124 176 144 121
Other operating 99
77 112 130 110
------
- ------ ------ ------ ------
Total other income 593
201 291 274 250
General, administrative and other expense
Employee compensation and benefits 1,390
756 1,004 952 895
Occupancy and equipment 189
268 333 268 202
Data processing 168
190 245 246 205
Federal deposit insurance premiums 37
52 64 49 49
Advertising 60
68 90 73 58
Other operating 308
406 473 530 403
------
- ------ ------ ------ ------
Total general, administrative and other expense 2,152
1,740 2,209 2,118 1,812
-----
- ----- ----- ----- -----
Earnings before income taxes 887
922 1,388 1,247 1,735
Income taxes
Current 611
412 628 525 698
Deferred (229)
(38) (50) (32) (25)
------
- ------- ------- ------- -------
Total income taxes 382
374 578 493 673
------
- ------ ------ ------ ------
NET EARNINGS $ 505 $
548 $ 810 $ 754 $1,062
======
====== ====== ====== =====
</Table>
The accompanying notes are an integral part of these statements.
F-4
<Page>
PEOPLES FEDERAL SAVINGS BANK
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<Table>
<Caption>
NINE
MONTHS ENDED YEAR ENDED
MARCH 31, JUNE 30,
2001
2000 2000 1999 1998
(unaudited)
Net earnings $505
$548 $810 $754 $1,062
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities, net of
taxes (benefits) of $143 and $(122) during the nine months
ended March 31, 2001 and 2000, respectively and $(155),
$97 and $107 during the fiscal years ended June 30,
2000, 1999 and 1998, respectively 421
(237) (300) 188 207
Reclassification adjustment for realized gains included in
earnings, net of tax of $117 (227)
- - - -
---
--- --- --- -----
Comprehensive income $699
$311 $510 $942 $1,269
===
=== === === =====
Accumulated comprehensive income $873
$742 $679 $979 $ 791
===
=== === === =====
</Table>
The accompanying notes are an integral part of these statements.
F-5
vc<Page>
PEOPLES FEDERAL SAVINGS BANK
STATEMENTS OF RETAINED EARNINGS
(In thousands)
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED
MARCH 31,
JUNE 30,
2001
2000 1999 1998
(unaudited)
Balance at beginning of period $12,852
$12,342 $11,400 $10,131
Net earnings for the period 505
810 754 1,062
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects 194
(300) 188 207
--------
-------- -------- --------
Balance at end of period $13,551
$12,852 $12,342 $11,400
========
======== ======== ========
</Table>
The accompanying notes are an integral part of these statements.
F-6
<Page>
PEOPLES FEDERAL SAVINGS BANK
STATEMENTS OF CASH FLOWS
(In thousands)
<Table>
<Caption>
NINE MONTHS
ENDED YEAR ENDED
MARCH 31,
JUNE 30,
2001
2000 2000 1999 1998
(unaudited)
Cash flows from operating activities:
Net earnings for the period $ 505 $
548 $ 810 $ 754 $ 1,062
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (35)
(42) (54) (91) (103)
Gain on sale of investment securities (344) -
- - -
Gain on sale of real estate acquired through foreclosure (2) -
(3) - (7)
Gain on sale of equipment - -
- - (12)
Depreciation and amortization 91
101 136 130 70
Provision for losses on loans 132
64 88 84 80
Increase (decrease) in cash due to changes in:
Accrued interest receivable 14
(35) (79) 69 (39)
Prepaid expenses and other assets (13)
(23) (3) 1 (5)
Deferred compensation liability 611 -
- - -
Other liabilities 1
59 65 21 (12)
Accrued interest payable 22
(21) (20) - 12
Federal income taxes
Current (16)
76 100 (177) 20
Deferred (229)
(38) (50) (32) (25)
--------
- --------- --------- --------- ---------
Net cash provided by operating activities 737
689 990 759 1,041
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 1
3 4 4 5
Proceeds from maturities of investment securities 9
7 7 8 8
Proceeds from sale of investment securities 349 -
- - -
Proceeds from sale of real estate acquired
through foreclosure 157
172 224 - 51
Loan principal repayments 23,607
23,423 30,040 38,492 34,879
Loan disbursements (24,578)
(25,117) (32,871) (42,205) (36,403)
Proceeds from sale of equipment - -
- - 12
Purchase of office premises and equipment (24)
(192) (190) (148) (233)
Purchase of Federal Home Loan Bank stock - -
(3) - (17)
--------
- --------- --------- --------- ---------
Net cash used in investing activities (479)
(1,704) (2,789) (3,849) (1,698)
Cash flows provided by (used in) financing activities:
Net increase (decrease) n deposits 4,932
2,081 5,261 2,795 (115)
Proceeds from Federal Home Loan Bank advances 1,000
4,750 7,750 1,000 4,000
Repayment of Federal Home Loan Bank advances (1,750)
(4,250) (7,750) (2,250) (2,500)
Advances by borrowers for taxes and insurance 42
9 (39) 6 55
--------
- --------- --------- --------- ---------
Net cash provided by financing activities 4,224
2,590 5,222 1,551 1,440
--------
- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 4,482
1,575 3,423 (1,539) 783
Cash and cash equivalents at beginning of period 8,801
5,378 5,378 6,917 6,134
--------
- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 13,283 $
6,953 $ 8,801 $ 5,378 $ 6,917
========
========= ========= ========= =========
</Table>
F-7
<Page>
PEOPLES FEDERAL SAVINGS BANK
STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<Table>
<Caption>
NINE MONTHS
ENDED YEAR ENDED
MARCH 31,
JUNE 30,
2001
2000 2000 1999 1998
(unaudited)
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 436 $
392 $ 360 $ 720 $ 519
======
====== ====== ====== =====
Interest on deposits and borrowings $3,703
$3,197 $4,329 $4,348 $4,552
======
====== ====== ====== =====
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through
foreclosure $ 249 $
116 $ 136 $ 121 $ -
======
====== ====== ====== =====
Unrealized gains (losses) on securities designated
as available for sale, net of related tax effects $ 194 $
(237) $ (300) $ 188 $ 207
======
====== ====== ====== =======
Issuance of loans upon sale of real estate
acquired through foreclosure $ 20 $
171 $ 171 $ - $ 42
======
====== ====== ====== =======
</Table>
The accompanying notes are an integral part of these statements.
F-8
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Peoples Federal Savings Bank ("Peoples" or the "Savings Bank") conducts a
general banking business in southeastern Indiana which primarily consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer, and nonresidential purposes.
Peoples' 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 on interest-bearing liabilities (i.e. deposits and borrowed funds).
Net interest income is affected by the relative amount of interest-earning
assets and interest-bearing liabilities and the interest received or paid on
these balances. The level of interest rates paid or received by Peoples can
be significantly influenced by a number of environmental factors, such as
governmental monetary policy, that are outside of management's control.
The financial information presented herein has been prepared in accordance
with accounting principles generally accepted in the United States of
America ("U.S. GAAP") and general accounting practices within the financial
services industry. In preparing financial statements in accordance with U.S.
GAAP, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reporting period. Actual results could
differ from such estimates.
The following is a summary of significant accounting policies which have
been consistently applied in the preparation of the accompanying financial
statements.
1. BASIS OF PRESENTATION
The financial statements as of March 31, 2001, and for the nine months ended
March 31, 2001 and 2000, are unaudited. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of financial position and results of operations have been
made. The results of operations for the nine months ended March 31, 2001,
are not necessarily indicative of results which may be expected for the
entire fiscal year.
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Savings Bank accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No.
115 requires that investments in debt and equity securities be categorized
as held-to-maturity, trading, or available for sale. Securities classified
as held-to-maturity are to be carried at cost only if the Savings Bank has
the positive intent and ability to hold these securities to maturity.
Trading securities and securities designated as available for sale are
carried at fair value with resulting unrealized gains or losses recorded to
operations or retained earnings, respectively.
F-9
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
At March 31, 2001 and June 30, 2000 and 1999, the Savings Bank's retained
earnings reflected a net unrealized gain on securities designated as
available for sale of approximately $873,000, $679,000 and $979,000,
respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. LOANS RECEIVABLE
Loans receivable are stated at the principal amount outstanding, adjusted
for deferred loan origination fees and the allowance for loan losses.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Interest on loans that are contractually past due is charged off, or
an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments has
returned to normal, in which case the loan is returned to accrual status. If
the ultimate collectibility of the loan is in doubt, in whole or in part,
all payments received on nonaccrual loans are applied to reduce principal
until such doubt is eliminated.
4. LOAN ORIGINATION FEES
The Savings Bank accounts for loan origination fees in accordance with SFAS
No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases". Pursuant
to the provisions of SFAS No. 91, origination fees received from loans, net
of direct origination costs, are deferred and amortized to interest income
using the level-yield method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to the direct costs 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 Savings Bank's experience
with similar commitments are deferred and amortized over the life of the
related loan using the interest method.
5. ALLOWANCE FOR LOAN LOSSES
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in the level
of delinquent and problem loans, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral and current economic conditions in the primary lending area.
When the
F-10
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
5. ALLOWANCE FOR LOAN LOSSES (continued)
collection of a loan becomes doubtful, or otherwise troubled, the Savings
Bank 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).
The Savings Bank accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," which requires that
impaired loans be measured based upon the present value of expected future
cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loan's observable market price or fair value of the
collateral. The Savings Bank's current procedures for evaluating impaired
loans result in carrying such loans at the lower of cost or fair value.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Savings Bank
considers its investment in one-to-four family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Savings Bank's investment in multi-family and nonresidential loans, and its
evaluation of impairment thereof, such loans are collateral dependent, and
as a result, are carried as a practical expedient at the lower of cost or
fair value.
It is the Savings Bank's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans
which are more than ninety days delinquent are considered to constitute more
than a minimum delay in repayment and are evaluated for impairment under
SFAS No. 114 at that time.
At June 30, 2000, the Savings Bank had one loan of approximately $100,000
which was defined as impaired under SFAS No. 114. The Savings Bank
maintained an allowance for credit losses related to this impaired loan of
approximately $10,000 at June 30, 2000. No loans were defined as impaired
under SFAS No. 114 at March 31, 2001 and June 30, 1999.
6. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided primarily using the straight-line
and declining balance methods over the useful lives of the assets, generally
estimated to be thirty years for buildings and building improvements and
five to seven years for furniture and equipment. An accelerated depreciation
method is used for tax reporting purposes.
F-11
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the 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.
8. FEDERAL INCOME TAXES
The Savings Bank accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset
is computed by applying the current statutory tax rates to net taxable or
deductible differences between the tax basis of an asset or liability and
its reported amount in the financial statements that will result in taxable
or deductible amounts in future periods. Deferred tax assets are recorded
only to the extent that the amount of net deductible temporary differences
or carryforward attributes may be utilized against current period earnings,
carried back against prior years earnings, offset against taxable temporary
differences reversing in future periods, or utilized to the extent of
management's estimate of future taxable income. A valuation allowance is
provided for deferred tax assets to the extent that the value of net
deductible temporary differences and carryforward attributes exceeds
management's estimates of taxes payable on future taxable income. Deferred
tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Savings Bank's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred compensation, deferred loan origination fees,
general loan loss allowances and the percentage of earnings bad debt
deduction. Additionally, a temporary difference is recognized for
depreciation utilizing accelerated methods for federal income tax purposes.
9. BENEFIT PLANS
The Savings Bank funds its defined benefit pension plan through
participation in the Pentegra Defined Benefit Plan (the "Plan"). The Savings
Bank is required to fund pension costs accrued. Contributions to the Plan
were not required during the nine month period ended March 31, 2001 and the
fiscal years ended June 30, 2000, 1999 and 1998 due to the Plan's overfunded
status. The provision for pension expense is computed by the Plan's
actuaries utilizing the projected unit credit cost method and assuming a
7.5% return on Plan assets. The Savings Bank is not required to disclose
separate actuarial information due to the Plan's classification as a
multi-employer pension plan.
F-12
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
9. BENEFIT PLANS (continued)
The Savings Bank has a 401(k) savings plan for all employees. All employees
are eligible and receive matching contributions from the Savings Bank at a
predetermined rate. Expense recognized in connection with the 401(k) savings
plan totaled approximately $6,000 for each of the nine month periods ended
March 31, 2001 and 2000, and $8,000, $8,000 and $9,000 for the fiscal years
ended June 30, 2000, 1999 and 1998, respectively.
Peoples initiated a profit sharing plan during fiscal 1999, which provides
for additional compensation to employees if the Savings Bank meets certain
performance goals. Approximately $13,000 in expense was recognized in
connection with the profit sharing plan for the nine months ended March 31,
2001. No expense was recognized in connection with the profit sharing plan
for the nine months ended March 31, 2000 and fiscal year ended June 30,
2000, respectively. Approximately $27,000 in expense was recognized in
connection with the profit sharing plan in fiscal 1999.
The Savings Bank implemented a nonqualified Executive Officers and Directors
Deferred Compensation Plan (the "Compensation Plan") during the nine-month
period ended March 31, 2001, which provides for the payment of benefits to
its directors and certain officers upon termination of service with the
Savings Bank and vesting in the Compensation Plan after ten years of
service. The Savings Bank recorded $611,000 in expense associated with the
Compensation Plan during the nine-month period ended March 31, 2001.
10. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-bearing deposits in other financial
institutions with original terms to maturity of less than ninety days.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the statements of financial
condition, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from the disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Savings Bank.
F-13
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following methods and assumptions were used by the Savings Bank in
estimating its fair value disclosures for financial instruments. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
CASH AND CASH EQUIVALENTS: The carrying amounts presented in
the statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: Fair values for
investment and mortgage-backed securities are based on quoted
market prices and dealer quotes.
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 categories were further
delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant 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.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in
the statements of financial condition is deemed to approximate
fair value.
DEPOSITS: The fair values of deposits with no stated maturity,
such as NOW accounts, passbook accounts and money market
passbook accounts are deemed to approximate the amount payable
on demand as of March 31, 2001 and June 30, 2000 and 1999. The
fair values for fixed-rate certificates of deposit are based
on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered
for deposits of similar remaining maturities.
ADVANCES FROM THE FEDERAL HOME LOAN BANK: The fair value of
these advances is estimated using the rates currently offered
for similar advances of similar remaining maturities or, when
available, quoted market prices.
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE: The carrying
amount of advances by borrowers for taxes and insurance is
deemed to approximate fair value.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. The difference between the fair
value and notional amount of outstanding loan commitments at
March 31, 2001 and June 30, 2000 and 1999, was not material.
F-14
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Savings Bank's financial instruments are as follows at March
31, 2001 and June 30, 2000 and 1999:
<Table>
<Caption>
MARCH 31,
JUNE 30,
2001
2000 1999
CARRYING FAIR
CARRYING FAIR CARRYING FAIR
VALUE VALUE
VALUE VALUE VALUE VALUE
(unaudited)
(In thousands)
Financial assets
Cash and cash equivalents $ 13,283 $ 13,283 $
8,801 $ 8,801 $ 5,378 $ 5,378
Investment securities designated as
available for sale 1,343 1,343
1,054 1,054 1,509 1,509
Investment securities held to maturity 169 169
178 178 185 185
Mortgage-backed securities held to maturity - -
1 1 5 5
Loans receivable - net 96,141 96,740
95,492 95,370 92,827 98,000
Federal Home Loan Bank stock 694 694
694 694 691 691
------- -------
- ------- ------- ------- -------
$111,630 $112,229
$106,220 $106,098 $100,595 $105,768
======= =======
======= ======= ======= =======
Financial liabilities
Deposits $ 95,754 $ 96,405 $
90,822 $ 90,904 $ 85,561 $ 86,977
Advances from the Federal Home Loan Bank 3,000 3,000
3,750 3,750 3,750 3,750
Advances by borrowers for taxes and
insurance 109 109
67 67 106 106
------- -------
- ------- ------- ------- -------
$ 98,863 $ 99,514 $
94,639 $ 94,721 $ 89,417 $ 90,833
======= =======
======= ======= ======= =======
</Table>
12. ADVERTISING
Advertising costs are expensed when incurred. The Savings Bank's advertising
expense totaled $48,000 and $68,000 for the nine months ended March 31, 2001
and 2000, respectively, and $90,000, $73,000 and $24,000 for the fiscal
years ended June 30, 2000, 1999 and 1998, respectively.
13. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2001
financial statement presentation.
F-15
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Amortized cost and estimated fair values of investment securities at June 30
are summarized as follows:
<Table>
<Caption>
MARCH 31, 2001
JUNE 30,
2000
1999
ESTIMATED
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED
FAIR AMORTIZED FAIR
COST VALUE COST
VALUE COST VALUE
(unaudited)
(In
thousands)
HELD TO MATURITY:
Municipal obligations $169 $ 169 $178
$ 178 $185 $ 185
=== ====== ===
====== === ======
AVAILABLE FOR SALE:
FHLMC stock $ 20 $1,343 $ 25
$1,054 $ 25 $1,509
==== ===== ====
===== ==== =====
</Table>
At June 30, 2000 and 1999, the Savings Bank's cost carrying value of
mortgage-backed securities designated as held-to-maturity approximated
market values, which totaled $1,000 and $5,000, respectively.
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio is as follows:
<Table>
<Caption>
MARCH
31, JUNE 30,
2001 2000 1999
(unaudited)
(In thousands)
Residential real estate
One-to-four family
$70,110 $68,875 $71,454
Multi-family
314 945 929
Construction
2,606 1,888 2,211
Nonresidential real estate
14,952 13,194 11,786
Commercial
2,846 4,887 1,615
Consumer and other loans
6,439 7,164 6,935
- ------- ------ -------
97,267 96,953 94,930
Less:
Undisbursed loans in process
319 678 1,345
Deferred loan origination fees
130 156 190
Allowance for loan losses
677 627 568
- ------- ------ -------
$96,141 $95,492 $92,827
====== ====== ======
</Table>
F-16
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE C - LOANS RECEIVABLE (continued)
As depicted above, the Savings Bank's lending efforts have generally focused
on one- to four-family and multi-family residential real estate loans, which
comprise approximately $72.7 million, or 76% of the total loan portfolio at
March 31, 2001, $69.9 million, or 73% of the total loan portfolio at June
30, 2000 and $72.3 million, or 78% of the total loan portfolio at June 30,
1999. Customarily, such loans have been underwritten on the basis of no more
than an 80% loan-to-value ratio, which has historically provided the Savings
Bank with adequate collateral coverage in the event of default.
Nevertheless, the Savings Bank, as with any lending institution, is subject
to the risk that residential real estate values could deteriorate in its
primary lending area of southeastern Indiana, thereby impairing collateral
values. However, management is of the belief that real estate values in the
Savings Bank's primary lending area are presently stable.
In the ordinary course of business, the Savings Bank has granted loans to
some of its officers, directors, and their related interests. Related party
loans are within applicable regulatory lending limitations and do not
involve more than the normal risk of collectibility. The aggregate dollar
amount of these loans was approximately $633,000 at March 31, 2001, and
$647,000 and $502,000 at June 30, 2000 and 1999, respectively.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows:
<Table>
<Caption>
MARCH 31,
JUNE 30,
2001 2000
2000 1999 1998
(unaudited)
(In
thousands)
Beginning balance $ 627 $568
$568 $519 $508
Provision for losses on loans 132 64
88 84 80
Charge-off of loans (101) (23)
(42) (64) (72)
Recoveries 19 8
13 29 3
---- -----
- ---- ---- ----
Ending balance 677 $617
$627 $568 $519
==== ====
==== ==== ====
</Table>
As of March 31, 2001 and June 30, 2000, the Savings Bank's allowance for
loan losses was solely general in nature, which is includible as a component
of regulatory risk-based capital.
At March 31, 2001 and 2000, and June 30, 2000, 1999 and 1998, the Savings
Bank's nonperforming loans totaled approximately $311,000, $501,000,
$634,000, $641,000 and $327,000, respectively.
F-17
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)
During the nine month periods ended March 31, 2001 and 2000, interest income
of approximately $21,000 and $24,000, respectively, would have been
recognized if such loans had performed pursuant to contractual terms.
During the fiscal years ended June 30, 2000, 1999 and 1998, interest income
of approximately $24,000, $16,000 and $14,000, respectively, would have been
recognized if such loans had performed pursuant to contractual terms.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment consist of the following:
<Table>
<Caption>
MARCH
31, JUNE 30,
2001 2000 1999
(unaudited)
(In thousands)
Land and improvements $
106 $ 106 $ 135
Buildings and improvements
1,266 1,266 1,075
Furniture and equipment
870 846 931
Automobiles
26 26 26
- ----- ----- -----
2,268 2,244 2,167
Less accumulated depreciation
and amortization
1,141 1,050 1,027
- ----- ----- -----
$1,127 $1,194 $1,140
===== ===== =====
</Table>
F-18
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<Table>
<Caption>
DEPOSIT TYPE AND WEIGHTED- MARCH 31,
JUNE 30,
AVERAGE INTEREST RATE 2001
2000 1999
(unaudited)
(In thousands)
NOW accounts
March 31, 2001 - 2.82% $12,125
June 30, 2000 - 2.53%
$ 9,716
June 30, 1999 - 2.22%
$ 7,092
Passbook
March 31, 2001 - 2.50% 9,158
June 30, 2000 - 2.57%
9,177
June 30, 1999 - 2.57%
9,148
Money market passbook
March 31, 2001 - 2.96% 5,615
June 30, 2000 - 2.98%
5,851
June 30, 1999 - 2.98%
6,831
---------
- --------- --------
Total demand, transaction and
passbook deposits 26,898
24,744 23,071
Certificates of deposit
Original maturities of:
Less than 12 months
March 31, 2001 - 5.92% 4,054
June 30, 2000 - 5.11%
2,592
June 30, 1999 - 4.42%
3,184
12 months to 24 months
March 31, 2001 - 6.16% 18,219
June 30, 2000 - 5.70%
19,984
June 30, 1999 - 5.00%
19,318
24 months to 36 months
March 31, 2001 - 5.94% 12,047
June 30, 2000 - 5.72%
11,004
June 30, 1999 - 5.63%
11,406
More than 36 months
March 31, 2001 - 5.98% 4,166
June 30, 2000 - 5.95%
4,198
June 30, 1999 - 5.63%
3,029
Individual retirement
March 31, 2001 - 5.78% 9,407
June 30, 2000 - 5.61%
8,930
June 30, 1999 - 5.74%
8,897
Jumbo
March 31, 2001 - 6.15% 20,963
June 30, 2000 - 6.19%
19,370
June 30, 1999 - 5.34%
16,656
---------
- --------- --------
Total certificates of deposit 68,856
66,078 62,490
---------
- --------- --------
Total deposit accounts $95,754
$90,822 $85,561
======
====== ======
</Table>
Individual deposits in excess of $100,000 are not federally insured.
F-19
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE F - DEPOSITS (continued)
At March 31, 2001, June 30, 2000 and 1999, the Savings Bank had certificate
of deposit accounts with balances in excess of $100,000 totaling
approximately $26.0 million, $26.1 million and $16.0 million, respectively.
Interest expense on deposits is summarized as follows:
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED
MARCH 31,
JUNE 30,
2001 2000
2000 1999 1998
(unaudited)
(In thousands)
Passbook and NOW accounts $ 520 $ 451
$ 603 $ 558 $ 521
Certificates of deposit and money
market deposits 3,048 2,530
3,448 3,553 3,738
----- -----
----- ----- -----
$3,568 $2,981
$4,051 $4,111 $4,259
===== =====
===== ===== =====
</Table>
Maturities of outstanding certificates of deposit are summarized as follows:
<Table>
<Caption>
MARCH 31,
JUNE 30,
2001
2000 1999
(unaudited)
(In thousands)
Less than six months $15,355
$18,493 $14,835
Six months to one year 30,290
28,044 30,278
One year to three years 21,467
15,949 11,261
Three years or more 1,744
3,592 6,116
-------
------- -------
$68,856
$66,078 $62,490
======
====== ======
</Table>
F-20
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at March 31, 2001
and June 30, 2000 by pledges of certain residential mortgage loans totaling
$4.8 million and $6.0 million, respectively, and the Savings Bank's
investment in Federal Home Loan Bank stock, are summarized as follows:
<Table>
<Caption>
MATURING
FISCAL YEAR MARCH 31,
JUNE 30,
INTEREST RATE ENDING IN 2001
2000 1999
(unaudited)
(In thousands)
5.01% - 6.16% 2000 $ -
$ - $3,750
6.02% - 6.83% 2001 -
3,750 -
5.67% - 6.83% 2002 3,000
- -
-----
----- -----
$3,000
$3,750 $3,750
=====
===== =====
</Table>
NOTE H - INCOME TAXES
Income taxes differ from the amounts computed at the statutory corporate
rate as follows:
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED
MARCH 31,
JUNE 30,
2001 2000
2000 1999 1998
(unaudited)
(In thousands)
Federal income taxes computed at 34%
statutory rate $ 302 $ 313
$ 472 $ 424 $ 590
Increase (decrease) in taxes resulting from:
Dividends received (3) (3)
(4) (4) (4)
Tax exempt interest (3) (3)
(4) (4) (4)
State income taxes 79 34
111 77 87
Other 7 33
3 - 4
----- -----
----- ----- -----
Income tax provision per financial statements $ 382 $ 374
$ 578 $ 493 $ 673
===== =====
===== ===== =====
Effective income tax rate 43.1% 40.6%
41.6% 39.5 % 38.8%
===== =====
===== ===== =====
</Table>
F-21
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE H - FEDERAL INCOME TAXES (continued)
The composition of the Savings Bank's net deferred tax liability is as
follows:
<Table>
<Caption>
MARCH 31, JUNE 30,
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY
2001 2000 1999
DIFFERENCES AT STATUTORY RATE:
(unaudited)
(In thousands)
DEFERRED TAX LIABILITIES:
Difference between book and tax depreciation
$ (77) $ (69) $ (83)
Percentage of earnings bad debt deduction
(49) (78) (117)
Unrealized gain on securities available for sale
(450) (350) (505)
Other
(31) (11) (11)
----- ----- -----
Total deferred tax liabilities
(607) (508) (716)
DEFERRED TAX ASSETS:
Deferred loan origination fees
18 7 30
Deferred compensation
208 - -
General loan loss allowance
222 213 193
---- ---- ----
Total deferred tax assets
448 220 223
---- ---- ----
Net deferred tax liability
$(159) $(288) $(493)
==== ==== ====
</Table>
The Savings Bank 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 qualified as deductions for federal income tax purposes are
later used for purposes other than for bad debt losses, including
distributions in liquidation, such distributions will be subject to federal
income taxes at the then current corporate income tax rate. Retained
earnings at March 31, 2001, includes approximately $1.5 million for which
federal income taxes have not been provided. The amount of the unrecognized
deferred tax liability relating to the cumulative bad debt deduction is
approximately $425,000.
Pursuant to legislation enacted in 1996, the Savings Bank is required to
recapture as taxable income approximately $670,000 of its tax bad debt
reserve, which represents the post-1987 additions to the reserve, and will
be unable to utilize the percentage of earnings method to compute its bad
debt deduction in the future. The Savings Bank has provided deferred taxes
for this amount and began to amortize the recapture of the bad debt reserve
into taxable income over a six year period in fiscal 1998.
F-22
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE I - LOAN COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers, including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the statement of financial condition. The contract
or notional amounts of the commitments reflect the extent of the Savings
Bank's involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Savings Bank uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet instruments.
At March 31, 2001 and June 30, 2000, the Savings Bank had outstanding
commitments to originate loans of approximately $1.2 million and $1.4
million, respectively. Additionally, the Savings Bank was obligated under
unused lines of credit totaling $3.7 million and $3.4 million at March 31,
2001 and June 30, 2000, respectively. In the opinion of management, all loan
commitments equaled or exceeded prevalent market interest rates as of March
31, 2001 and June 30, 2000, and will be funded from normal cash flow from
operations and borrowings as necessary.
The Savings Bank had no contingent liabilities recorded at March 31, 2001
or June 30, 2000.
NOTE J - REGULATORY CAPITAL
The Savings Bank is subject to minimum regulatory capital standards
promulgated by the Office of Thrift Supervision (the "OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Savings Bank must meet specific capital guidelines that involve
quantitative measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
The minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement
and the risk-based capital requirement. The tangible capital requirement
provides for minimum tangible capital (defined as retained earnings less all
intangible assets) equal to 1.5% of adjusted total assets. The core capital
requirement provides for minimum core capital (tangible capital plus certain
forms of supervisory goodwill and other qualifying intangible assets)
generally equal to 4.0% of adjusted total assets except for those
associations with the highest examination rating and acceptable levels of
risk. The risk-based
F-23
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE J - REGULATORY CAPITAL (continued)
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 Savings Bank multiplies the value
of each asset on its statement of financial condition by a defined
risk-weighting factor, e.g., one- to four-family residential loans carry a
risk-weighted factor of 50%.
During the nine months ended March 31, 2001, the Savings Bank was notified
from its regulator that it was categorized as "well-capitalized" under the
regulatory framework for prompt corrective action. Additionally,
management is not aware of any recent event that would cause this
classification to change. To be categorized as "well-capitalized" the
Savings Bank must maintain minimum capital ratios as set forth in the
following tables.
As of March 31, 2001 and June 30, 2000 and 1999, management believes that
the Savings Bank met all capital adequacy requirements to which it was
subject.
<Table>
<Caption>
AS OF MARCH 31,
2001
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL
PROMPT CORRECTIVE
ACTUAL ADEQUACY
PURPOSES ACTION PROVISIONS
-----------------
- ---------------------- ---------------------
AMOUNT RATIO AMOUNT
RATIO AMOUNT RATIO
(Dollars in
thousands)
Tangible capital $12,678 11.3% =>$1,688
=>1.5% =>$5,626 => 5.0%
Core capital $12,678 11.3% =>$4,501
=>4.0% =>$6,751 => 6.0%
Risk-based capital $13,918 19.7% =>$5,651
=>8.0% =>$7,064 =>10.0%
</Table>
<Table>
<Caption>
AS OF JUNE 30,
2000
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL
PROMPT CORRECTIVE
ACTUAL ADEQUACY
PURPOSES ACTION PROVISIONS
-----------------
- ---------------------- ---------------------
AMOUNT RATIO AMOUNT
RATIO AMOUNT RATIO
(Dollars in
thousands)
Tangible capital $12,173 11.3% =>$1,611
=>1.5% =>$5,370 => 5.0%
Core capital $12,173 11.3% =>$4,296
=>4.0% =>$6,445 => 6.0%
Risk-based capital $13,263 19.4% =>$5,470
=>8.0% =>$6,837 =>10.0%
</Table>
F-24
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE J - REGULATORY CAPITAL (continued)
<Table>
<Caption>
AS OF JUNE 30,
1999
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL
PROMPT CORRECTIVE
ACTUAL ADEQUACY
PURPOSES ACTION PROVISIONS
-----------------
- ---------------------- ---------------------
AMOUNT RATIO AMOUNT
RATIO AMOUNT RATIO
(Dollars in
thousands)
Tangible capital $11,363 11.2% =>$1,522
=>1.5% =>$5,073 => 5.0%
Core capital $11,363 11.2% =>$4,059
=>4.0% =>$6,088 => 6.0%
Risk-based capital $11,931 18.3% =>$5,226
=>8.0% =>$6,533 =>10.0%
</Table>
The Savings Bank's management believes that, under the current regulatory
capital regulations, the Savings Bank will continue to meet its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the Savings Bank, such as increased interest rates or a downturn
in the economy in the Savings Bank's market area, could adversely affect
future earnings and, consequently, the ability to meet future minimum
regulatory capital requirements.
NOTE K - CORPORATE REORGANIZATION AND CONVERSION TO STOCK
FORM
In May 2001, the Savings Bank's Board of Directors adopted an overall plan
of conversion and reorganization (the "Plan") whereby the Savings Bank will
convert to the stock form of ownership, followed by the issuance of all the
Savings Bank's outstanding stock to a newly formed holding company, PFS
Bancorp, Inc. Pursuant to the Plan, as amended, PFS Bancorp, Inc. will offer
for sale between 977,500 and 1,520,875 common shares at $10.00 per share to
the Savings Bank's depositors, members of the community, and a newly formed
Employee Stock Ownership Plan ("ESOP"). The Plan further provides for the
issuance by PFS Bancorp, Inc. of an amount of common shares equal to 2
percent of the shares sold in the offering to the PFS Charitable Foundation,
which will result in total common shares outstanding upon the completion of
the offering ranging between 997,500 shares and 1,551,293 shares. The costs
of issuing the common stock will be deferred and deducted from the sale
proceeds of the offering. If the conversion is unsuccessful, all deferred
costs will be charged to operations. At March 31, 2001, the Savings Bank
had incurred deferred conversion costs totaling approximately $15,000.
The transaction is subject to approval by regulatory authorities and
members of the Savings Bank. At the completion of the conversion to stock
form, the Savings Bank will establish a liquidation account in the amount
of retained earnings contained in the final offering circular. The
liquidation account will be maintained for the benefit of eligible
savings account holders who maintain deposit accounts in the Savings Bank
after conversion.
In the event of a complete liquidation (and only in such event), each
eligible member will be entitled to receive a liquidation distribution from
the liquidation account in the amount of the then current adjusted balance
of deposit accounts held, before any liquidation distribution may be made
with respect to common stock. Except for the repurchase of stock and payment
of dividends by the Savings Bank, the existence of the liquidation account
will not restrict the use or application of such retained earnings.
F-25
<Page>
PEOPLES FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Nine months ended March 31, 2001 and 2000 (unaudited) and
years ended June 30, 2000, 1999 and 1998
NOTE K - CORPORATE REORGANIZATION AND CONVERSION TO STOCK
FORM (continued)
The Savings Bank may not declare, pay a cash dividend on, or repurchase any
of its common stock, if the effect thereof would cause retained earnings to
be reduced below either the amount required for the liquidation account or
the regulatory capital requirements of SAIF insured institutions.
F-26
<Page>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. IF THE
LAWS OF YOUR STATE OR OTHER JURISDICTION PROHIBIT US FROM OFFERING OUR COMMON
STOCK TO YOU, THEN THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF OUR COMMON STOCK. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO CHANGE
IN OUR AFFAIRS SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED
HEREIN OR SINCE THE DATE HEREOF.
OUR TABLE OF CONTENTS IS LOCATED ON THE INSIDE OF THE FRONT COVER PAGE
OF THIS DOCUMENT.
UNTIL _______ __, 2001 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED COMMUNITY
OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING TRANSACTIONS IN OUR
COMMON STOCK MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO ANY UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,322,500 Shares
(Anticipated Maximum)
(Subject to Increase to Up to
1,520,875 Shares)
PFS BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR
PEOPLES FEDERAL SAVINGS BANK)
COMMON STOCK
---------------------
PROSPECTUS
---------------------
PRESTIGE FINANCIAL CENTER, INC.
<Page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the Business Corporation Law of the State of
Indiana, Article IX of the Corporation's Articles of Incorporation provides as
follows:
ARTICLE IX
INDEMNIFICATION AND LIABILITY
A. PERSONAL LIABILITY OF DIRECTORS AND OFFICERS. A director or officer
of the Corporation shall not be personally liable for monetary damages
for any action taken or any failure to take any action as a director
except to the extent that by law a director's liability for monetary
damages may not be limited.
B. INDEMNIFICATION. The Corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, except actions by or
in the right of the Corporation, whether civil, criminal,
administrative or investigative, by reason of the fact that such person
is or was a director, officer, employee or agent of the Corporation or
who is serving at the request of the Corporation as a director, officer
or agent of any other corporation, against expenses (including
attorney's fees), judgments, fines, excise taxes and amounts paid in
settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding to the full extent
permissible under Indiana law.
C. ADVANCEMENT OF EXPENSES. Reasonable expenses incurred by an officer,
director, employee or agent of the Corporation or by a person serving
at the request of the Corporation as a director, officer or agent of
any other corporation in defending a civil or criminal action, suit or
proceeding described above in "Indemnification" shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding to the full extent permitted under Indiana law.
D. OTHER RIGHTS. The indemnification and advancement of expenses
provided by or pursuant to this Article shall not be deemed exclusive
of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under the Corporation's
Articles of Incorporation, any insurance or other agreement, vote of
shareholders or directors or otherwise, both as to actions in their
official capacity and as to actions in another capacity while holding
an office, and shall continue as to a person who has ceased to be a
director or officer and shall inure to the benefit to the heirs,
executors and administrators of such person provided that no
indemnification shall be made to or on behalf of any individual if a
judgment or other final adjudication establishes that his act or
omissions (i) were in breach of his duty of loyalty to the Corporation
or its shareholders, (ii) were not in good faith or involved a knowing
violation of law or (iii) resulted in the receipt of an improper
personal benefit.
E. INSURANCE. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of another corporation,
II-1
<Page>
partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability asserted against him and incurred by
him in any such capacity, or arising out of his status as such, whether
or not the Corporation would have the power to indemnify him against
such liability under the provisions of these Articles of Incorporation.
F. MODIFICATION. The duties of the Corporation to indemnify and to
advance expenses to a director or officer provided in this Article
shall be in the nature of a contract between the Corporation and each
such director or officer, and no amendment or repeal of any provision
of this Article shall alter, to the detriment of such director or
officer, the right of such person to the advance of expenses or
indemnification related to a claim based on an act or failure to act
which took place prior to such amendment or repeal.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<Table>
SEC filing
fees............................................................................
.. $ 3,878
OTS filing
fees............................................................................
.. 14,400
Printing, postage and mailing
............................................................... 75,000
Legal fees and
expenses......................................................................
110,000
Accounting fees and
expenses.................................................................
55,000
Young & Associates, Inc., fees and
expenses.................................................. 27,500
Prestige Financial Center, Inc:
Underwriting
fees.........................................................................
85,000
Out-of-pocket expenses, including legal
fees.............................................. 17,500
Appraiser's fees and expenses, including business
plan....................................... 35,000
Conversion agent fees and
expenses........................................................... 20,000
Transfer agent and stock
certificates........................................................ 5,000
Miscellaneous...................................................................
............. $ 11,722
---------
TOTAL...........................................................................
........ $460,000
=========
</Table>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 27. EXHIBITS
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) LIST OF EXHIBITS (filed herewith unless otherwise noted)
<Table>
1.1 Engagement Letter dated May 15, 2001 with Prestige Financial Center,
Inc.*
1.2 Form of Agency Agreement with Prestige Financial Center, Inc.
2.1 Plan of Conversion*
3.1 Articles of Incorporation of PFS Bancorp, Inc.*
3.2 Bylaws of PFS Bancorp, Inc.*
4.1 Form of Stock Certificate of PFS Bancorp, Inc.*
II-2
<Page>
5.1 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding legality of
securities
8.1 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding federal
income tax consequences
8.2 Opinion of Grant Thornton LLP regarding Indiana income tax consequences
8.3 Opinion of RP Financial, LC regarding subscription rights*
23.1 Consent of Grant Thornton LLP
23.2 Consent of RP Financial, LC*
23.3 Consent of Elias, Matz, Tiernan & Herrick L.L.P. (included in Exhibits
5.1 and 8.1)
24.1 Power of Attorney*
99.1 Proxy Statement and form of proxy for solicitation of members of
Peoples Federal Savings Bank*
99.2 Appraisal Report of RP Financial, LC**
99.3 Stock Order Form*
99.4 Marketing Materials*
</Table>
- --------------------------
* Previously filed.
** Statistical information portion of Exhibit 99.2 previously filed by
Form SE.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as not applicable or not required
under the rules of Regulation S-X.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of the securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424 (b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered
II-3
<Page>
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes to furnish stock
certificates to or in accordance with the instructions of the respective
purchasers of the common stock, so as to make delivery to each purchaser
promptly following the closing under the Plan of Conversion.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<Page>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this amended
Registration Statement to be signed on its behalf by the undersigned, in the
city of Aurora, State of Indiana, on August 2, 2001.
PFS BANCORP, INC.
By: /s/ MEL E. GREEN
-----------------------------
Mel E. Green
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
Name Title
Date
---- -----
----
/s/ Robert L. Laker Chairman of the Board
August 2, 2001
- -------------------------------------------
Robert L. Laker
/s/ Mel E. Green Director, President and
Chief August 2, 2001
- ------------------------------------------- Executive Officer
Mel E. Green
/s/ Gilbert L. Houze Director
August 2, 2001
- -------------------------------------------
Gilbert L. Houze
/s/ Dale R. Moeller Director
August 2, 2001
- -------------------------------------------
Dale R. Moeller
/s/ Carl E. Petty Director
August 2, 2001
- -------------------------------------------
Carl E. Petty
/s/ Jack D. Tandy Director, Vice President
August 2, 2001
- ------------------------------------------- and Secretary
Jack D. Tandy
/s/ Stuart Suggs Chief Financial Officer
August 2, 2001
- -------------------------------------------
Stuart Suggs
</Table>
<Page>
EXHIBIT INDEX (filed herewith unless otherwise noted)
<Table>
1.1 Engagement Letter dated May 15, 2001 with Prestige Financial Center,
Inc.*
1.2 Form of Agency Agreement with Prestige Financial Center, Inc.
2.1 Plan of Conversion*
3.1 Articles of Incorporation of PFS Bancorp, Inc.*
3.2 Bylaws of PFS Bancorp, Inc.*
4.1 Form of Stock Certificate of PFS Bancorp, Inc.*
5.1 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding legality of
securities
8.1 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding federal
income tax
consequences
8.2 Opinion of Grant Thornton LLP regarding Indiana income tax consequences
8.3 Opinion of RP Financial, LC regarding subscription rights*
23.1 Consent of Grant Thornton LLP
23.2 Consent of RP Financial, LC*
23.3 Consent of Elias, Matz, Tiernan & Herrick L.L.P. (included in Exhibits
5.1 and 8.1)
24.1 Power of Attorney*
99.1 Proxy Statement and form of proxy for solicitation of members of
Peoples Federal Savings Bank*
99.2 Appraisal Report of RP Financial, LC**
99.3 Stock Order Form*
99.4 Marketing Materials*
</Table>
- --------------------------
* Previously filed.
** Statistical information portion of Exhibit 99.2 previously filed by
Form SE.