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Dear Shareholders:
The fiscal year ended June 30, 2001 was the second most profitable year in the
history of Peoples Savings Bank. Total earnings performance was only slightly
behind the record earnings of fiscal 2000 for our 112 year-old financial
institution. This success was accomplished while constructing and opening a new
banking center in a new market and while initiating the creation of a holding
company. These proactive initiatives and others were developed to enable growth
for our independent community bank and to diversify product/service areas. Our
efforts and direction in fiscal year 2001 were designed to enhance profitability
and shareholder value.
In January, 2001, Peoples opened a new full-service, state-of-the-art banking
center and two stand-alone drive-thru ATM locations in Clayton (Northern
Montgomery County). The new center and ATMs complement our existing banking
centers, ATM locations, and trust offices in Troy and Piqua. In late June 2001,
Peoples Board of Directors announced the intent to form a savings and loan
holding company. Our shareholders will be asked to approve the formation at the
annual meeting in October, 2001. The formation of a holding company will provide
a more suitable corporate structure for responding to the rapidly changing
environment in the financial institutions industry. In addition to enabling
Peoples to diversify and expand services, the holding company will allow the
repurchase of holding company shares without adverse tax consequences.
Peoples Savings Bank has repeatedly been recognized as one of the top performing
institutions among its peers in Ohio. We believe that the Clayton office/market
and the creation of a holding company will reinforce that status.
In addition to the foregoing, our team initiated two new areas of product
offerings during the last fiscal year. One is remittance processing services for
businesses that wish to outsource the bill paying process and to improve cash
flow as a result. The second area is the growth in the number of ATM locations
and the increase in income from fees related to the new ATMs. The strategy of
providing very good basic products and services while growing and developing new
areas of service continues to be a priority for the bank.
As this report highlights, total earnings for the fiscal year ended June 30,
2001, equaled $2,421,190, $0.33 per share. Return on average assets (ROAA) was
1.14% while return on equity (ROE) was 11.87% for fiscal 2001. Peoples achieved
this solid performance while working to improve productivity and efficiency
ratios. Peoples enjoyed another strong year in the mortgage loan area and
continued success in the Trust Department which now manages $143,567,194 in
assets. We continue to service more customers while expending fewer resources.
It is important to emphasize that the outstanding asset quality for the bank as
year-end delinquency rate was 1.06%.
Of course, the numbers are only part of the Peoples story. We believe that the
bank has an excellent team of skilled managers, capable employees, and dedicated
Board members. The drive and innovation of these individuals contribute to our
overall success as we face the challenges of banking today.
To remain competitive, we must continue to aggressively market and brand the
Peoples way of doing business... constantly reminding customers and community
that being "the local bank" represents an important difference in the way
banking services are provided. The community service role that we play in every
community served is also a fundamental part of the mission as a local bank.
Peoples Savings Bank will continue to have success by remaining true to our
values as a local community bank while constantly reinventing ourselves to meet
changing customer needs and market conditions.
/s/ Ronald B. Scott
-------------------
Ronald B. Scott
President/CEO
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PEOPLES BUILDS AND OPENS
BANKING CENTER IN NEW MARKET
In January, 2001, Peoples Savings Bank opened a new full-service,
state-of-the-art banking center and two stand-alone drive-thru ATMs in Clayton,
Ohio.
The new 2,200 square-foot banking center integrates the latest technological
advances in banking while continuing Peoples personal relationship approach
with customers. It features four drive-thru locations in two lanes (with unique
"stacking" feature), one night deposit and three inside teller stations.
Integral to the new banking center is a high-tech, high-touch remote teller
system that is the first of its kind in Southwest Ohio. Also, Peoples built and
opened two new drive-thru ATM locations, one at Randolph Plaza/N. Main and the
other at the Clayton City Government Center/Taywood Road.
Working with Alan Scherr Associates (architect and project manager) and with
Miller-Valentine Group (builder), Peoples used an aggressive design/build
approach to cost-effectively construct the new center. This followed a
cooperative process with City of Clayton officials in identifying that community
as an excellent site for a banking center.
Peoples is excited to have the opportunity to be the only local bank for
Clayton. The bank has been impressed with the planning and vision that is being
executed by leaders in the community. Peoples is somewhat unique in that it is
still locally-owned and operated. As a result, the bank is able to provide
personalized, yet comprehensive financial services in a small-town, friendly
manner. That approach fits the Clayton community well.
[PHOTOS]
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The 2,200 sq. ft. building was designed to present a positive design image that
clearly "branded" the Peoples identity.
[PHOTO]
The lobby features warm wood paneling and teller stations that allow privacy in
the transaction process. Also a flat screen TV displays up-to-the minute news,
sports and financial information for customers' convenience.
[PHOTO]
On right, Ron Scott, President/CEO of Peoples, congratulates Jim Story, Manager
of Clayton banking center, on a successful opening.
[PHOTO]
The inside remote teller station has a 14" color monitor which allows for quick
and efficient video communication. The four drive-thru teller stations also
contain two-way color monitors. There are two lanes with two stations each,
which allow "double-stacking" of customers in drive-thru for faster, quicker
personal service.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
--------------------------------------------------------------------------------
At June 30,
------------------------------------------------------------------------
STATEMENT OF FINANCIAL CONDITION DATA:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
Total amount of:
Assets $214,841 $205,140 $180,056 $145,175 $126,883
Held-to-maturity securities - at cost 1,484 1,670 1,956 2,696 3,236
Loans receivable - net 197,483 189,878 167,300 131,141 111,256
Deposits 108,398 109,461 107,073 97,453 82,924
FHLB advances and other borrowings 83,522 74,726 53,918 32,098 30,200
Shareholders' equity 21,002 18,702 15,725 13,893 12,570
Year ended June 30,
------------------------------------------------------------------------
STATEMENT OF INCOME DATA: 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
Total interest income $ 16,338 $ 14,598 $ 12,387 $ 10,667 $ 9,375
Total interest expense 9,392 7,931 6,231 5,243 4,367
------------------------------------------------------------------------
Net interest income 6,946 6,667 6,156 5,424 5,008
Provision for loan losses -- 30 50 -- --
------------------------------------------------------------------------
Net interest income after provision
for loan losses 6,946 6,637 6,106 5,424 5,008
Non-interest income 1,485 1,374 1,109 768 607
Non-interest expense 4,737 4,268 3,947 3,551 3,795
------------------------------------------------------------------------
Income before income taxes 3,694 3,743 3,268 2,641 1,820
Federal income taxes 1,273 1,263 1,077 878 579
------------------------------------------------------------------------
Net income 2,421 2,480 2,191 1,763 1,241
========================================================================
Earnings per share
Basic 0.33 0.33 0.30 0.24 0.17
Diluted 0.32 0.31 0.28 0.23 0.165
Year ended June 30,
------------------------------------------------------------------------
OTHER DATA: 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Return on average assets 1.14% 1.28% 1.35% 1.31% 1.06%
Return on average equity 11.87 13.62 13.81 12.62 10.02
Average equity to average assets 9.64 9.37 9.74 10.24 10.54
Dividend payout ratio (1) 9.09 9.09 6.67 7.81 7.35
----------------
(1) Represents dividends per share divided by basic earnings per share.
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INDEPENDENT ACCOUNTANTS' REPORT
[Letterhead BKD LLP]
To the Stockholders and
Board of Directors
Peoples Savings Bank of Troy
Troy, Ohio
We have audited the accompanying consolidated balance sheet of Peoples Savings
Bank of Troy and subsidiary as of June 30, 2001, and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The consolidated
statements of Peoples Savings Bank of Troy as of June 30, 2000 and for each of
the two-year periods then ended were audited by other auditors whose report
dated August 4, 2000 expressed an unqualified opinion on those financial
statements.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of Peoples
Savings Bank of Troy and subsidiary as of June 30, 2001, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ BKD LLP
Cincinnati, Ohio
July 19, 2001
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CONSOLIDATED BALANCE SHEET
JUNE 30, 2001 2000
-------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 5,118,227 $ 4,579,550
Investment securities, held to maturity (fair value of $1,503,000
and $1,635,000) 1,484,294 1,669,993
Loans, net of allowance for loan losses of $843,081 and $887,882 197,482,915 189,878,071
Premises and equipment 4,193,858 3,605,192
Federal Home Loan Bank stock 4,785,900 3,979,100
Interest receivable 1,026,513 957,832
Other assets 749,118 470,387
----------------------------------
Total assets $214,840,825 $205,140,125
==================================
LIABILITIES
Deposits $108,398,334 $109,460,962
FHLB advances 83,521,561 74,725,728
Interest payable 259,813 523,606
Other liabilities 1,277,946 1,167,698
----------------------------------
Total liabilities 193,457,654 185,877,994
----------------------------------
COMMITMENTS AND CONTINGENCIES
EQUITY FROM ESOP SHARES 381,498 559,705
SHAREHOLDER'S EQUITY
Preferred stock, $1 par value, 10,000,000 shares authorized;
none issued or outstanding
Common stock, $1 par value
Authorized - 90,000,000 shares
Issued and outstanding - 7,439,650 and 7,436,350 shares,
less ESOP shares of 127,166 and 135,686 7,312,484 7,300,664
Additional paid-in capital 203,084 67,138
Retained earnings 13,486,105 11,334,624
----------------------------------
Total shareholder's equity 21,001,673 18,702,426
----------------------------------
Total liabilities and shareholder's equity $214,840,825 $205,140,125
==================================
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans receivable $15,828,683 $14,136,354 $11,934,146
Investment securities 106,313 122,673 158,235
Other interest and dividend income 403,710 338,975 295,049
---------------------------------------------------
Total interest income 16,338,706 14,598,002 12,387,430
---------------------------------------------------
INTEREST EXPENSE
Deposits 4,104,961 3,946,448 3,884,602
Borrowings 5,287,390 3,984,082 2,346,597
---------------------------------------------------
Total interest expense 9,392,351 7,930,530 6,231,199
---------------------------------------------------
NET INTEREST INCOME 6,946,355 6,667,472 6,156,231
Provision for loan losses 30,000 50,000
---------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,946,355 6,637,472 6,106,231
---------------------------------------------------
OTHER INCOME
Fiduciary activities 818,450 783,050 641,832
Service charges on deposit accounts and other 522,154 483,723 380,772
Other income 144,578 107,587 86,827
---------------------------------------------------
Total other income 1,485,182 1,374,360 1,109,431
---------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 2,244,088 2,051,162 1,890,151
Net occupancy expenses 365,116 337,364 342,937
Equipment expenses 126,360 90,142 76,521
Data processing fees 413,405 349,560 315,771
State of Ohio franchise taxes 208,780 179,935 170,181
Other expenses 1,379,234 1,260,116 1,151,660
---------------------------------------------------
Total other expenses 4,736,983 4,268,279 3,947,221
---------------------------------------------------
INCOME BEFORE INCOME TAX 3,694,554 3,743,553 3,268,441
Income tax expense 1,273,364 1,263,100 1,077,600
---------------------------------------------------
NET INCOME $ 2,421,190 $ 2,480,453 $ 2,190,841
===================================================
BASIC EARNINGS PER SHARE $ 0.33 $ 0.33 $ 0.30
===================================================
DILUTED EARNINGS PER SHARE $ 0.32 $ 0.31 $ 0.28
===================================================
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
---------------------------------------------------------------------------------------------------------------------------
BALANCES, JULY 1, 1998 $ 3,611,805 $ 83,421 $ 10,197,531 $ 13,892,757
Net income 2,190,841 2,190,841
Cash dividends ($.02 per share) (147,778) (147,778)
Exercise of stock options 31,944 21,500 53,444
Tax benefit from exercise of
stock options 41,118 41,118
Net change in equity from ESOP shares (4,750) (295,846) (300,596)
Two-for-one stock split 3,627,727 (96,411) (3,535,676) (4,360)
---------------------------------------------------------------------------
BALANCES, JUNE 30, 1999 7,266,726 49,628 8,409,072 15,725,426
Net income 2,480,453 2,480,453
Cash dividends ($.03 per share) (222,919) (222,919)
Exercise of stock options 26,406 (2,286) 24,120
Tax benefit from exercise of
stock options 19,796 19,796
Net change in equity from
ESOP shares 7,532 668,018 675,550
---------------------------------------------------------------------------
BALANCES, JUNE 30, 2000 7,300,664 67,138 11,334,624 18,702,426
Net income 2,421,190 2,421,190
Cash dividends ($.03 per share) (223,190) (223,190)
Exercise of stock options 92,000 94,600 186,600
Tax benefit from exercise of
stock options 41,346 41,346
Purchase of stock (88,700) (216,206) (304,906)
Net change in equity from ESOP
shares 8,520 169,687 178,207
---------------------------------------------------------------------------
BALANCES, JUNE 30, 2001 $ 7,312,484 $ 203,084 $ 13,486,105 $ 21,001,673
===========================================================================
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 2001 2000 1999
----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,421,190 $ 2,480,453 $ 2,190,841
Adjustments to reconcile net income
to net cash provided by operating activities
Provision for loan losses 30,000 50,000
Depreciation and amortization 340,400 291,856 266,070
Amortization of deferred loan fees (30,776) (70,554) (97,763)
Deferred income tax 106,000 66,656 38,532
Gain on sale of real estate owned (4,426)
Investment securities amortization (accretion), net (2,240) (195) 878
Federal Home Loan Bank stock dividends (328,600) (256,700) (204,500)
Net change in
Interest receivable (68,681) (39,469) (138,715)
Interest payable (263,793) (4,890) 229,190
Other assets (237,385) (8,580) (23,194)
Other liabilities 4,248 (567,892) 1,166,947
-----------------------------------------------------
Net cash provided by operating activities 1,940,363 1,920,685 3,473,860
-----------------------------------------------------
INVESTING ACTIVITIES
Purchases of securities held to maturity (100,000)
Proceeds from maturities of securities held to maturity 187,939 286,354 839,102
Net change in loans (7,574,068) (22,537,491) (36,111,742)
Purchases of premises and equipment (929,066) (481,831) (298,543)
Federal Home Loan Bank stock purchased (478,200) (512,700) (479,200)
Investment in real estate owned (55,218)
Proceeds from sales of real estate owned 59,644
-----------------------------------------------------
Net cash used by investing activities (8,793,395) (23,245,668) (36,145,957)
-----------------------------------------------------
FINANCING ACTIVITIES
Net change in
Interest-bearing demand and savings deposits 4,822,747 3,812,318 1,872,685
Certificates of deposit (5,885,375) (1,370,363) 7,661,873
Proceeds of FHLB advances 310,591,027 166,950,905 141,000,000
Repayment of FHLB advances (301,795,194) (146,142,802) (119,180,366)
Cash dividends (223,190) (222,919) (147,778)
Purchase of stock (304,906)
Proceeds from exercise of stock options 186,600 24,120 49,084
-----------------------------------------------------
Net cash provided by financing activities 7,391,709 23,051,259 31,255,498
-----------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 538,677 1,726,276 (1,416,599)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,579,550 2,853,274 4,269,873
-----------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,118,227 $ 4,579,550 $ 2,853,274
=====================================================
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 9,656,144 $ 7,935,420 $ 6,002,009
Income tax paid 1,220,000 1,265,000 915,000
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Peoples Savings Bank of Troy (Bank) and
its wholly owned subsidiary, Peoples Building and Savings Service Corporation
(Service Corporation) (an inactive corporation), conform to generally accepted
accounting principles and reporting practices followed by the thrift industry.
The more significant of the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The Bank operates under a state thrift charter and provides full banking
services, including trust services. As a state-chartered thrift, the Bank is
subject to regulation by the Office of Thrift Supervision, Ohio Department of
Commerce, Division of Financial Institutions, and the Federal Deposit Insurance
Corporation.
The Bank generates commercial, mortgage and consumer loans and receives deposits
from customers located primarily in Miami County, and surrounding counties.
The Bank's loans are generally secured by specific items of collateral including
real property, consumer assets and business assets
CONSOLIDATION - The consolidated financial statements include the accounts of
the Bank and Service Corporation after elimination of all material intercompany
transactions.
INVESTMENT SECURITIES - Debt securities are classified as held to maturity when
the Bank has the positive intent and ability to hold the securities to maturity.
Securities held to maturity are carried at amortized cost. Debt securities not
classified as held to maturity and marketable equity securities are classified
as available for sale. Securities available for sale are carried at fair value
with unrealized gains and losses reported separately in accumulated other
comprehensive income, net of tax
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
LOANS are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of June
30, 2001 the allowance for loan losses is adequate based on information
currently available. A worsening or protracted economic decline in the areas
within which the Bank operates would increase the likelihood of additional
losses due to credit and market risks and could create the need for additional
loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets. Maintenance and repairs are expensed as
incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
FEDERAL HOME LOAN BANK STOCK is a required investment for institutions that are
members of Federal Home Loan Bank system. The required investment in the common
stock is based on a predetermined formula.
FORECLOSED ASSETS are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are acquired, any required adjustment is
charged to the allowance for loan losses. All subsequent activity is included in
current operations.
STOCK OPTIONS are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Bank accounts for and will continue to account for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants.
INCOME TAX in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Bank
files consolidated income tax returns with its subsidiary.
RECLASSIFICATIONS of certain amounts in the 2000 and 1999 consolidated financial
statements have been made to conform to the 2001 presentation.
NOTE 2 - REORGANIZATION
On June 25, 2001, the Bank's Board of Directors authorized the formation of a
holding company for the Bank in a transaction in which each of the outstanding
shares of the Bank would be exchanged for one share of the holding company. The
Bank would thereafter be a wholly-owned subsidiary of the holding company.
NOTE 3 - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at June 30, 2001 was $200,000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
NOTE 4 - INVESTMENT SECURITIES
2001
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
JUNE 30 COST GAINS LOSSES VALUE
---------------------------------------------------------------------------------------------------------------
Held to maturity
U.S. Treasury $ 100 $ 2 $ 102
State and municipal 100 $ (8) 92
Mortgage-backed securities 1,284 25 1,309
-----------------------------------------------------------------
Total investment securities $ 1,484 $ 27 $ (8) $ 1,503
=================================================================
2000
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
JUNE 30 COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------------------------------------
Held to maturity
U.S. Treasury $ 99 $ (4) $ 95
State and municipal 100 (9) 91
Mortgage-backed securities 1,471 $ 1 (23) 1,449
-----------------------------------------------------------------
Total investment securities $ 1,670 $ 1 $ (36) $ 1,635
=================================================================
The amortized cost and fair value of securities held to maturity and available
for sale at June 30, 2001, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
HELD TO MATURITY
-------------------------------------
AMORTIZED FAIR
COST VALUE
-------------------------------------------------------------------------------------------------------------
One to five years $ 100 $ 102
After ten years 100 92
-----------------------------------
200 194
Mortgage-backed securities 1,284 1,309
-----------------------------------
Totals $1,484 $1,503
===================================
Securities with a carrying value of $3,266,853 and $1,543,250 were pledged at
June 30, 2001 and 2000 to secure certain deposits and for other purposes as
permitted or required by law.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
NOTE 5 - LOANS AND ALLOWANCE
JUNE 30 2001 2000
------------------------------------------------------------------------------------------
Mortgage loans on existing real estate
Residential single family units $ 150,711 $ 146,404
Other residential and commercial 23,467 21,172
--------------------------------------------
Total real estate loans 174,178 167,576
Construction loans 12,817 14,842
Commercial business 5,323 3,450
Consumer 4,769 4,293
Home improvement 6,065 5,777
Deposit and other loans 612 548
--------------------------------------------
203,764 196,486
Deferred loan fees (163) (170)
Undisbursed portion of loans (5,275) (5,550)
Allowance for loan losses (843) (888)
--------------------------------------------
Total loans $ 197,483 $ 189,878
=============================================
JUNE 30 2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Allowance for loan losses
Balances, July 1 $ 888 $ 880 $ 863
Provision for losses 30 50
Recoveries on loans 6 2 4
Loans charged off (51) (24) (37)
----------------------------------------------------------------
Balances, June 30 $ 843 $ 888 $ 880
===============================================================
NOTE 6 - PREMISES AND EQUIPMENT
JUNE 30 2001 2000
------------------------------------------------------------------------------------------
Land $ 955 $ 955
Buildings 4,443 3,885
Equipment 2,953 2,582
-------------------------------------------
Total cost 8,351 7,422
Accumulated depreciation (4,157) (3,817)
-------------------------------------------
Net $4,194 3,605
===========================================
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
NOTE 7 - DEPOSITS
JUNE 30 2001 2000
-----------------------------------------------------------------------------------------------------
Noninterest bearing accounts $ 5,161 $ 4,342
NOW accounts 21,480 19,404
Super NOW accounts 244 211
Passbook accounts 16,604 15,259
Money market accounts 9,243 8,693
Certificates and other time deposits of $100,000 or more 15,216 30,578
Other certificates and time deposits 40,450 30,974
-------------------------------
Total deposits $108,398 $109,461
===============================
Certificates and other time deposits maturing
in years ending June 30
2002 $ 43,552
2003 8,394
2004 1,987
2005 1,303
2006 430
--------
Total $ 55,666
========
NOTE 8 - LONG-TERM DEBT
JUNE 30 2001 2000
----------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances, fixed and variable rates, due
at various dates through May 1, 2013 $ 83,522 $74,726
The Federal Home Loan Bank advances are secured by substantially all first-mortgage loans and FHLB stock.
Advances are subject to restrictions or penalties in the event of repayment.
Maturities in years ending June 30
2002 $ 50,217
2003 2,231
2004 2,246
2005 12,262
2006 3,278
Thereafter 13,288
--------
Total $ 83,522
========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
NOTE 9 - INCOME TAX
YEAR ENDED JUNE 30 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------
Income tax expense
Currently payable $1,167 $1,196 $1,039
Deferred 106 67 39
--------------------------------------------------------
Total income tax expense $1,273 $1,263 $1,078
========================================================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $1,256 $1,273 $1,111
Other 17 (10) (33)
--------------------------------------------------------
Actual tax expense $1,273 $1,263 $1,078
========================================================
A cumulative net deferred tax liability is included in other liabilities.
The components of the liability are as follows:
JUNE 30 2001 2000
--------------------------------------------------------------------------------------------
ASSETS
Allowance for loan losses $ 163 $ 138
Other 3 11
--------------------------------
Total assets 166 149
================================
LIABILITIES
FHLB stock (487) (376)
Depreciation (12)
--------------------------------
Total liabilities (499) (376)
--------------------------------
$(333) $(227)
================================
Retained earnings include approximately $2,390,000 for which no deferred income
tax liability has been recognized. This amount represents an allocation of
income to bad debt deductions as of December 31, 1987 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses would create income
for tax purposes only, which income would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amounts was approximately $812,600.
15
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Bank exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making such commitments
as it does for instruments that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of June 30
were as follows:
2001 2000
--------------------------------------------------------------------------------------------
Commitments to extend credit $15,017 $11,005
Mortgage loans serviced for others with recourse 130 134
Standby letters of credit 735 2,019
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
The Bank and subsidiary are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Bank.
NOTE 11 - DIVIDEND AND CAPITAL RESTRICTIONS
Without prior approval, current regulations allow the Bank to pay dividends not
exceeding net profits (as defined) for the current year plus retained net income
for the previous two calendar years. The Bank normally restricts dividends to a
lesser amount because of the need to maintain an adequate capital structure. At
June 30, 2001, total regulatory capital of the Bank was $21,383,171, of which
approximately $5,578,000 was potentially available for distribution to
stockholders.
16
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
NOTE 12 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, Tier 1 capital, and
Tier 1 leverage ratios. The ratios are intended to measure capital relative to
assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At June 30, 2001 and 2000, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since June 30, 2001 that
management believes have changed the Bank's classification.
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL (1) CAPITALIZED (1)
----------------- -------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
AS OF JUNE 30, 2001
Total risk-based capital (1)
(to risk-weighted assets) $22,226 16.8% $10,588 8.0% $13,235 10.0%
Tier 1 capital (1)
(to risk-weighted assets) 21,383 16.2% 5,294 4.0% 7,941 6.0%
Core capital (1)
(to adjusted total assets) 21,383 10.0% 6,442 3.0% 10,736 5.0%
Core capital (1)
(to adjusted tangible assets) 21,383 10.0% 4,294 2.0% N/A
Tangible capital (1)
(to adjusted total assets) 21,383 10.0% 3,221 1.5% N/A
AS OF JUNE 30, 2000
Total risk-based capital (1)
(to risk-weighted assets) $20,150 16.1% $10,017 8.0% $12,521 10.0%
Tier 1 capital (1)
(to risk-weighted assets) 19,262 15.4% 5,008 4.0% 7,513 6.0%
Core capital (1)
(to adjusted total assets) 19,262 9.4% 6,152 3.0% 10,254 5.0%
Core capital (1)
(to adjusted tangible assets) 19,262 9.4% 4,102 2.0% N/A
Tangible capital (1)
(to adjusted total assets) 19,262 9.4% 3,076 1.5% N/A
(1) As defined by regulatory agencies
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Bank's defined-benefit pension plan covers substantially all of its
employees. The following table sets forth the plan's funded status and amounts
recognized in the consolidated financial statements:
JUNE 30 2001 2000
------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 705 $ 605
Service cost 74 63
Interest cost 51 42
Actuarial loss 26 2
Benefits paid (8) (7)
------------------------------
Benefit obligation at end of year 848 705
------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 956 761
Actual return on plan assets (354) 203
Benefits paid (7) (8)
------------------------------
Fair value of plan assets at end of year 595 956
------------------------------
Funded status (253) 251
Unrecognized net actuarial (gain) loss 265 (197)
Unrecognized prior service cost (56) (63)
Unrecognized transition (asset) liability 33 36
------------------------------
Prepaid (accrued) benefit cost $ (11) $ 27
==============================
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
YEAR ENDED JUNE 30 2001 2000 1999
--------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 74 $ 63 $ 53
Interest cost 51 42 36
Expected return on plan assets 354 (196) (238)
Net amortization and deferral (441) 131 195
-------------------------------
Net periodic benefit cost $ 38 $ 40 $ 46
===============================
Assumptions used in the accounting were:
Discount rate 7% 7% 7%
Rate of increase in compensation 4% 4% 4%
Expected long-term rate of return on assets 8% 8% 8%
The Bank has a retirement savings 401(k) plan in which substantially all
employees may participate. The Bank matches employees' contributions at the
rate of 3 percent of base salary contributed by participants. The Bank's expense
for the plan was $39,357 for 2001, $41,200 for 2000 and $36,100 for 1999.
The Bank also has an employee stock ownership plan covering substantially all of
its employees. The cost of the plan is borne by the Bank through contributions
to an employee stock ownership trust in amounts determined by the Board of
Directors. The cash contributions to the plan in 2001, 2000 and 1999 were
$40,000, $64,125 and $37,500, respectively.
In addition to the contributions made to participants' accounts, the accounts
are credited annually with the participants' share of investment earnings,
losses or expenses of the trust fund. Benefits under the Plan become 100% vested
over periods up to 7 years or in the event of death, disability, or attaining
age 65 (normal retirement age under the Plan) or termination of the Plan. The
total number of shares held by the plan, all of which have been allocated to
participant accounts, were 127,166 and 135,686 at June 30, 2001 and 2000. All
ESOP shares are included as outstanding in the calculation of earnings per
share information.
Below are the transactions affecting the ESOP equity accounts:
COMMON RETAINED
STOCK EARNINGS TOTAL
----------------------------------
Balances, July 1, 1998 $ 69 $ 865 $ 934
Two-for-one stock split 69 (69)
Net change in equity from ESOP shares 5 296 301
----------------------------------
Balances, June 30, 1999 143 1,092 1,235
Net Change in equity from ESOP shares (7) (668) (675)
----------------------------------
Balances, June 30, 2000 136 424 560
Net Change in equity from ESOP shares (9) (170) (179)
----------------------------------
Balances, June 30, 2001 $ 127 $ 254 $ 381
==================================
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
( Table Dollar Amounts in Thousands)
NOTE 14 - RELATED PARTY TRANSACTIONSON
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. The aggregate
amount of loans, as defined, to such related parties were as follows:
Balances, July 1, 2000 $2,020
Changes in composition of related parties (92)
New loans, including renewals 711
Payments, etc., including renewals (387)
------
Balances, June 30, 2001 $2,252
======
NOTE 15 - STOCK OPTION PLAN
Under the Bank's incentive stock option plan, the Bank grants selected
executives and other key employees stock option awards which vest and become
fully exercisable at the date of grant. Under the Bank's stock option plan for
non-employee directors, at each year's annual meeting of shareholders, there
shall be granted automatically to each outside director, the option to purchase
3,000 shares of common stock. Both plans are accounted for in accordance with
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees and related interpretations. During 2001, the Bank granted options
for 132,745 shares of the Bank's common stock. The exercise price of each
option, which has a ten-year life, was equal to the market price of the Bank's
stock on the date of grant; therefore, no compensation expense was recognized.
Although the Bank has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Bank had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated on the grant date using an option-pricing model
with the following assumptions:
2001 2000 1999
-------------------------------------------
Risk-free interest rates 5.7 to 5.8% 6.4 to 6.5% 4.6% to 5.5%
Dividend yields .88% .01% .01%
Volatility factors of expected market price
of common stock 35% 15% 15%
Weighted-average expected life of the options 10 years 10 years 10 years
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
2001 2000 1999
---------------------------------------------
Net income As reported $ 2,421 $ 2,480 $ 2,191
Pro forma 2,252 2,144 1,931
Earnings per share As reported .33 .33 .30
Pro forma .30 .29 .26
Diluted earnings per share As reported .32 .31 .28
Pro forma .29 .27 .24
The following is a summary of the status of the Bank's stock option plans and
changes in those plans as of and for the years ended June 30, 2001, 2000 and
1999.
EMPLOYEES:
YEAR ENDED JUNE 30 2001 2000 1999
----------------------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
OPTIONS SHARES PRICE Shares Price Shares Price
----------------------------------------------------------------------------------------------
Outstanding, beginning
of year 740,057 $3.42 650,648 $2.57 285,977 $3.34
Granted 108,745 3.94 109,000 8.13 54,000 6.81
Exercised (92,000) 2.03 (18,846) 1.11 (15,384) 0.72
Forfeited/expired (64,500) 6.57 (745) 7.92 (500) 6.81
Adjustment for stock split 326,555
------- ------- -------
Outstanding, end of year 692,302 3.40 740,057 3.42 650,648 2.57
======= ======= =======
Options exercisable
at year end 692,302 3.40 740,057 3.42 650,648 2.57
Weighted-average
fair value of options
granted during the year 2.03 2.98 1.50
As of June 30, 2001, the employee options outstanding and exercisable are as
follows:
Outstanding and Exercisable
------------------------------------------------------------------------
Weighted Average Weighted
Remaining Average
Range of Exercise Number Contractual Life Exercise
Prices (Months) Price
--------------------------------------------------------------------------------
$0.01 to $1.00 75,298 17.90 $0.42
$1.01 to $2.50 276,304 47.57 1.64
$2.51 to $5.00 173,645 94.73 3.56
$5.01 to $7.50 82,680 86.30 6.81
$7.50 to $10.00 84,375 98.93 8.13
-------
692,302 67.06 3.40
=======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
DIRECTORS:
YEAR ENDED JUNE 30 2001 2000 1999
----------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
OPTIONS SHARES PRICE Shares Price Shares Price
----------------------------------------------------------------------------------------------
Outstanding, beginning
of year 166,884 $3.42 150,444 $2.57 73,002 $3.34
Granted 24,000 2.94 24,000 7.13 12,000 7.25
Exercised (7,560) .42 (16,560) 2.17
Adjustment for stock split 82,002
Outstanding, end of year 190,884 3.35 166,884 3.42 150,444 2.57
------- ------- -------
Options exercisable at
year end 190,884 3.35 166,884 3.42 150,444 2.57
======= ======= =======
Weighted-average fair
value of options granted
during the year 1.50 2.98 1.50
As of June 30, 2001, the directors options outstanding and exercisable are as
follows:
Outstanding and Exercisable
----------------------------------------------------------------
Weighted Average Weighted
Remaining Average
Range of Exercise Contractural Life Exercise
Prices Number (Months) Price
-------------------------------------------------------------------------------------------
$1.01 to $2.50 100,884 37.05 $1.75
$2.51 to $5.00 45,000 96.29 3.10
$5.01 to $7.50 45,000 95.46 7.18
-------
190,884 71.89 3.35
=======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
NOTE 16 - EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
Year Ended June 30, 2001
-----------------------------------------
Weighted
Average Per-Share
Income Shares Amount
-----------------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $2,421 7,439,225 $0.33
EFFECT OF DILUTIVE SECURITIES
Stock options 240,534
-------
DILUTED EARNINGS PER SHARE
Income available to common stockholders and
assumed conversions $ 2,421 7,679,759 $0.32
==========================================
Options to purchase 406,700 shares of common stock at $3.13 to $8.13 per share
were outstanding at June 30, 2001, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
Year Ended June 30, 2000
-----------------------------------------------
Weighted
Average Per-Share
Income Shares Amount
-----------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $2,480 7,426,510 $0.33
EFFECT OF DILUTIVE SECURITIES
Stock options 479,815
-------
DILUTED EARNINGS PER SHARE
Income available to common stockholders and
assumed conversions $2,480 7,906,325 $0.31
================================================
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
Options to purchase 260,055 shares of common stock at $6.81 to $8.13 per share
were outstanding at June 30, 2000, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
Year Ended June 30, 1999
--------------------------------------------
Weighted
Average Per-Shares
Income Shares Amount
--------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $2,191 7,384,125 $0.30
EFFECT OF DILUTIVE SECURITIES
Stock options 550,763
-------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $2,191 7,934,888 $0.28
==============================================
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS - The fair value of cash and cash equivalents
approximates carrying value.
SECURITIES AND MORTGAGE-BACKED SECURITIES - Fair values are based on quoted
market prices.
LOANS - For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values are based
on carrying values. The fair values for certain mortgage loans, including
one-to-four family residential, are based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair value for other loans is estimated
using discounted cash flow analyses using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE - The fair values of interest receivable/payable
approximate carrying values.
FHLB STOCK - Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
DEPOSITS - The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
FEDERAL HOME LOAN BANK ADVANCES - The fair value of these borrowings are
estimated using a disounted cash flow calculation, based on current rates for
similar debt.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
Off-Balance Sheet Commitments - Commitments include commitments to purchase and
originate mortgage loans, commitments to sell mortgage loans, and standby
letters of credit and are generally of a short-term nature. The fair value of
such commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
The estimated fair values of the Bank's financial instruments are as follows:
2001 2000
--------------------------------------------
CARRYING FAIR Carrying Fair
JUNE 30 AMOUNT VALUE Amount Value
------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 5,118 $ 5,118 $ 4,580 $ 4,580
Investment securities held to maturity 1,484 1,503 1,670 1,636
Loans, net 197,483 202,410 189,878 184,818
Interest receivable 1,027 1,027 958 958
Stock in FHLB 4,786 4,786 3,979 3,979
LIABILITIES
Deposits 108,398 108,787 109,461 109,657
FHLB advances 83,522 82,250 74,726 73,807
Interest payable 260 260 524 524
NOTE 18 - SEGMENT INFORMATION
The Bank uses differences in products as the basis for defining its reportable
segments. The Bank reports one product segment: Bank operations.
The Bank operations segment consists of the business of offering savings
deposits through issuance of savings accounts, money market accounts and
certificates of deposit and lending or utilizing funds primarily for the
purchase, construction and improvement of real estate. The largest percentage
of the mortgage loans are fixed-rate mortgages. The Bank also attempts to
originate as many adjustable-rate mortgages as feasible. Mortgage loans are
generally made for up to thirty years in length. The Bank's principal sources of
income are interest on mortgage loans and fees for service charges, as well as
interest and dividends on investments.
In addition to the product segment, the Bank reports on personal trust services
in an Other segment. The Bank began trust operations in July 1995 and derives
revenue from management fees charged by the Trust Department for serving as
trustee, custodian of IRA accounts, and agent for personal investment accounts.
Fees are based on market values of each account and are charged quarterly as a
percentage of market value based on a published fee schedule. The Trust
Department sponsors no common, mutual, or proprietary funds.
The accounting policies of the segments are the same as those described in the
summary of the significant accounting policies. The Bank evaluates performance
of the segments based on net income. The Bank does not evaluate assets by
segment; therefore, assets are not included in the table below.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Table Dollar Amounts in Thousands)
The following table summarizes the financial results of the Bank's business
segments for the years ended June 30, 2001, 2000, and 1999:
Bank
Operations Other Total
-------------------------------------------------------------------------------------------------
2001
----
Interest income $16,338 $16,338
Interest expense 9,392 9,392
--------- --------
Net interest income 6,946 6,946
--------- --------
Non-interest income 667 $818 1,485
Other expenses 4,196 541 4,737
Federal income tax 1,179 94 1,273
Net income 2,238 183 2,421
2000
----
Interest income $14,598 $14,598
Interest expense 7,931 7,931
--------- --------
Net interest income 6,667 6,667
--------- --------
Non-interest income 591 $783 1,374
Other expenses 3,767 531 4,298
Federal income tax 1,177 86 1,263
Net income 2,314 166 2,480
1999
----
Interest income $12,387 $12,387
Interest expense 6,231 6,231
--------- --------
Net interest income 6,156 6,156
--------- --------
Non-interest income 467 $642 1,109
Other expenses 3,489 508 3,997
Federal income tax 1,032 46 1,078
Net income 2,102 88 2,191
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
--------------------------------------------------------------------------------
GENERAL
The Bank is primarily engaged in the business of attracting deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied one-to-four family residences. In addition to
attracting deposits, the Bank borrows funds from the Federal Home Loan Bank and
invests such funds primarily in loans. The Bank also originates loans secured by
multifamily real estate, nonresidential real estate, consumer loans, including
home equity and home improvement loans, secured and unsecured lines-of-credit,
construction loans, and commercial loans. In recent years, management has
aggressively pursued creditworthy commercial borrowers in the Bank's lending
area in an effort to better diversify its portfolio and balance its interest
rate risk. Commercial loans have experienced an annual increase of 57% over the
past three years; however, they represent just 2.61% of the loan portfolio.
The Bank's profitability is primarily dependent upon its net interest income,
which is the difference between interest income on its loan and investment
portfolios and interest paid on deposits and other borrowed funds. Net interest
income is directly affected by the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on such
amounts. The Bank's profitability is also affected by its provision for loan
losses. The provision is a function of credit quality, loan loss experience,
economic conditions, and changes in the composition of the loan portfolio.
Additionally, profitability is affected by noninterest income and expenses and
income tax expense. Noninterest income consists primarily of fees for personal
trust services and service charges on deposit accounts. Noninterest expenses
primarily consist of salaries and employee benefits, occupancy and equipment
expense, data processing fees, state franchise taxes, and other operating
expenses.
The Bank is significantly affected by prevailing economic conditions, as well as
government policies and regulations concerning, among other things, monetary and
fiscal policies and the policies of the Ohio Division of Financial Institutions,
Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
Lending activities are influenced by the demand for and supply of housing, the
availability and cost of funds, competition, and other factors. Deposit
gathering is influenced by interest rates paid on competing investments, types
of products offered, competition, and other factors.
The following discussion is intended to assist the reader's understanding of the
Bank's financial condition and results of operations. The information contained
in this section should be read in conjunction with our consolidated financial
statements and the accompanying notes to our consolidated financial statements.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This discussion contains various forward-looking statements which are based on
assumptions and describe our future plans and strategies and our expectations.
These forward-looking statements are generally identified by words such as
"believe", "expect", "intend", "anticipate", "estimate", "project", or similar
words. Our ability to predict results or the actual effect of future plans or
strategies is uncertain. The Bank's actual results could differ significantly
from those discussed in the forward-looking statements. Some of the factors that
could cause or contribute to such differences include, but are not limited to,
changes in the economy and interest rates in the nation and in the Bank market
area, monetary and fiscal policies of the U.S. Government, including policies of
the U.S. Treasury and the Federal Reserve Board, the quality and composition of
our loan and investment portfolios, demand for our loan products, deposit flows,
borrowing availability, and competition. These risks and uncertainties should be
considered in evaluating forward-looking statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
--------------------------------------------------------------------------------
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are daily average balances.
Year Ended June 30,
-------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------------------------------------------------------------------------
Average Average Average
Outstanding Interest Yield/ Outstanding Yield/ Outstanding Interest Yield/
Balance Income Rate Balance Interest Rate Balance Income Rate
-------------------------------------------------------------------------------------------------------
ASSETS: (DOLLARS IN THOUSANDS)
Loans, including
nonaccrual loans $196,338 $ 15,828 8.06% $180,298 $ 14,136 7.84% $148,268 $ 11,934 8.05%
Investment securities 1,551 106 6.83 1,780 123 6.91 2,385 158 6.62
Other interest
and dividends 5,914 404 6.83 5,358 339 6.33 5,034 295 5.86
------------------- -------------------- -------------------
Total interest-earning
assets 203,803 16,338 8.02 187,436 14,598 7.79 155,687 12,387 7.96
-------- -------- -------
Noninterest earning
assets 7,839 7,068 6,707
-------- -------- --------
Total assets $211,642 $194,504 $162,394
======== ======== ========
LIABILITIES AND
STOCKHOLDERS'EQUITY:
Savings accounts $ 14,133 314 2.22 $ 13,891 297 2.14 $ 14,062 313 2.23
NOW and money
market accounts 21,964 437 1.99 21,701 443 2.04 20,321 452 2.22
Certificates of deposit 55,514 3,354 6.04 61,334 3,207 5.23 59,145 3120 5.28
Borrowings 85,088 5,287 6.21 66,418 3,984 6.00 41,076 2,346 5.71
------------------- -------------------- -------------------
Total interest-bearing
liabilities 176,699 9,392 5.32 163,344 7,931 4.86 134,604 6,231 4.63
------------------- -------------------- -------------------
Other liabilities 14,546 12,942 11,920
-------- -------- --------
STOCKHOLDER'S EQUITY,
INCLUDING EQUITY FROM:
ESOP shares 20,397 18,218 15,870
-------- -------- --------
Total liabilities and
stockholders' equity $211,642 $194,504 $162,394
======== ======== ========
Net interest-earning
assets $27,104 $24,092 $21,083
======= ======= =======
Net interest income $6,946 $6,667 $6,156
====== ====== ======
Interest rate spread 2.70% 2.93% 3.33%
==== ==== ====
Net yield on average
interest-earning assets 3.41% 3.56% 3.95%
==== ==== ====
Average interest-
earning assets to
average interest-
bearing liabilities 115.34% 114.75% 115.66%
====== ====== ======
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (1) changes in volume, which are changes in volume multiplied by the prior
year rate, and (2) changes in rate, which are changes in rate multiplied by the
prior year volume. Changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
Year Ended June 30,
---------------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
---------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------ -----------------------------------
Total Total
increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
------------------------
Loans $ 1,285 $ 407 $ 1,692 $ 2,502 $ (300) $ 2,202
Investment securities (16) (1) (17) (42) 7 (35)
Other 37 28 65 20 24 44
---------------------------------------------------------------------
Total interest-earning
assets 1,306 434 1,740 2,480 (269) 2,211
---------------------------------------------------------------------
Interest-bearing liabilities:
-----------------------------
Savings 5 12 17 (4) (12) (16)
NOW and money
market accounts 5 (11) (6) 47 (56) (9)
Certificates of deposit (231) 378 147 114 (27) 87
Borrowings 1,155 148 1,303 1,514 124 1,638
---------------------------------------------------------------------
Total interest-bearing
liabilities 934 527 1,461 1,671 29 1,700
---------------------------------------------------------------------
Increase (decrease) in
net interest income $ 372 $ (93) $ 279 $ 809 $ (298) $ 511
=====================================================================
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
--------------------------------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-COMPARISON OF YEARS ENDED JUNE 30,
2001 AND 2000
At June 30, 2001, the Bank had total assets of $214.8 million, which was an
increase of 4.7% compared to $205.1 million in assets at June 30, 2000. The
increase resulted from continued strong loan demand in the Miami County market,
a demand which resulted in an increase in net loans of $7.6 million compared to
June 30, 2000. Loans for the purchase or construction of residential property
represented 56% of all originations during the year ended June 30, 2001. The
Bank was also able to originate $10.3 million in adjustable-rate and balloon
mortgages.
Non-performing assets equaled $437,852 at June 30, 2001, or 0.20% of assets,
compared with $261,600, or 0.13% of assets at June 30, 2000. Loan loss reserves
at June 30, 2001, equaled 192.5% of non-performing assets. In the future, if the
quality of the loan portfolio diminishes or as the level of allowances in total,
or as a percentage of loans outstanding, decreases, management may deem it
necessary to provide additional amounts to the allowance.
Total liabilities increased by $7.6 million from June 30, 2000, to June 30,
2001. Deposits decreased by $1.1 million and borrowings increased by $8.8
million. The continued strong loan demand in Miami County was funded primarily
through the increase in short to intermediate maturity borrowings from the FHLB.
Maturities on FHLB advances averaged between one and four years. Shareholders'
equity increased by $2.3 million.
The Bank's earnings have historically depended primarily upon the Bank's net
interest income. Net interest income is affected by (i) the difference between
rates of interest earned on the Bank's interest-earning assets and rates paid on
its interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of its interest-earning assets and interest-bearing liabilities.
The Bank's interest income increased by $1.7 million for the year ended June 30,
2001, compared to the year ended June 30, 2000. The increase was due primarily
to an increase in net loans of $7.6 million during such period. The yield on
interest-earning assets increased by 23 basis points in the year ended June 30,
2001 over 2000.
Interest expense increased in the year ended June 30, 2001, as compared to the
same period in 2000, by $1.5 million. The increase was due to the increase in
interest expense on both deposits and borrowings. The cost of interest- bearing
deposits increased by 41 basis points while the cost of borrowing increased by
21 basis points (100 basis points equals 1%).
Net interest income increased by $279,000 for the year ended June 30, 2001, over
the comparable period in 2000. The net interest rate spread decreased by 23
basis points for the year; however, the decrease was offset by a significant
increase in earning assets. Management believes that the net interest margin may
continue to narrow slightly in the year to end June 30, 2002 as a result of
strong loan originations in lower yielding fixed rate mortgages, the increase in
interest rates and the Bank's liability sensitivity.
During the year ended June 30, 2001, there was no additional provision for loan
losses. Management undertakes a quarterly analysis of the allowance and its
determination of the adequacy of the allowance is based on the current quality
of the loan portfolio and management's evaluation of the inherent risk.
Non-interest income increased by $111,000 for the year ended June 30, 2001, as
compared to the year ended June 30, 2000. Revenues of the Trust department grew
$35,000 or 4.5% for the year ended June 30, 2001. Customer service charges, and
other non-interest income, increased by over $38,000 for the year ended June 30,
2001.
30
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
--------------------------------------------------------------------------------
For the year ended June 30, 2001, the Bank's non-interest expenses increased by
$469,000 over the year ended June 30, 2000. The Bank had an increase in salary
and employee benefits of 9.4% in 2001 over 2000. This increase was the result of
normal wage increases and the addition of personnel to staff the new Clayton
branch. The Bank built and opened a new full service branch in Clayton, Ohio
during fiscal 2001. Management expects initial startup expenses will exceed
revenues in the short-term, but will add to the long-term profitability of the
Bank. Data processing expenses increased 18.3% in 2001 over 2000 as a result of
upgrades in software, addition of new soft-ware modules, and an expansion of
remittance processing or lock box services. Management believes that these
upgrades and expansions will provide additional efficiencies and a profitable
noninterest income product. Other expenses increased 9.5% in 2001 over 2000
principally as a result of outsourcing the internal audit function and legal and
accounting costs in connection with the proposed formation of savings and loan
holding company.
The Bank's federal income tax expense increased by $10,000 during the period
ended June 30, 2001, compared to the same period ended 2000. The effective tax
rate was 34.5% for 2001 and 33.7% for 2000.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-COMPARISON OF YEARS ENDED JUNE 30,
2000 AND 1999
At June 30, 2000, the Bank had total assets of $205.1 million, an increase of
13.7% compared to $180 million in assets at June 30, 1999. The increase resulted
from continued strong loan demand in the Miami County market, a demand which
resulted in an increase in loans of $22.6 million compared to June 30, 1999. The
growth in loans was funded primarily by the $22.7 million increase in deposits
and borrowings during the year ended June 30, 2000. Loans for the purchase or
construction of residential properties represented 56% of all originations
during the year ended June 30, 2000. The Bank was also able to originate $18.6
million in adjustable-rate and balloon mortgages.
Non-performing assets equaled $262,000 at June 30, 2000, or 0.13% of assets,
compared with $177,000, or 0.10% of assets at June 30, 1999. Loan loss reserves
at June 30, 2000 equaled 339.4% of non-performing assets.
Total liabilities increased by $22.8 million from June 30, 1999 to June 30,
2000. Deposits increased by $2.4 million and borrowings increased by $20.8
million. The continued strong loan demand in Miami County was funded primarily
through the increase in deposits and short to intermediate maturity borrowings
from the FHLB. Maturities on FHLB advances average between one and four years.
Shareholders' equity increased by $3.0 million.
The Bank's interest income increased by $2,211,000 for the year ended June 30,
2000, compared to the year ended June 30, 1999. The increase was due primarily
to an increase in net loans of $22,578,000 during such period. The yield on
interest-earning assets fell by 17 basis points for the year ended June 30,
2000, over June 30, 1999.
Interest expense increased in the year ended June 30, 2000, as compared to the
same period in 1999 by $1,700,000. The increase was due to the increase in
interest expense on both deposits and borrowings. The average interest-bearing
deposit balance increased by approximately $3,398,000 during the period. The
cost of deposits decreased by 8 basis points while the cost of borrowing
increased by 29 basis points.
Net interest income increased by $511,000 for the year ended June 30, 2000, over
the comparable period in 1999. The net interest rate spread decreased by 40
basis points for the year, but this was offset by a significant increase in
earning assets.
The provision for loan losses during the year ended June 30, 2000 was $30,000.
This compares to the $50,000 in provision in fiscal 1999. Management undertakes
a quarterly analysis of the allowance and its determination of the adequacy of
the allowance is based on the current quality of the loan portfolio and
management's evaluation of the inherent risk.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
Non-interest income increased by $265,000 for the year ended June 30, 2000, as
compared to the year ended June 30, 1999. Revenues of teh Trust department grew
$141,000 or 22% for teh year ended June 30, 2001. Customer service charges and
other non-interest income increased by oer $122,000 for the same period.
For the year ended June 30, 2000, the Bank's non-interest expenses increased by
$321,000. The Bank had increases in compensation, State of Ohio franchise taxes,
office properties and equipment, data processing and other operating expenses.
The Bank began operating a new Business Development Department in fiscal 2000
which increased the salaries and employee benefits.
The Bank's federal income tax expense increased by $186,000 during the period
ended June 20, 2000, compared to the same period ended 1999. This resulted
primarily from the increase in earnings from teh previous year while the
effective rate increased from 33.0% to 33.7%.
ASSET AND LIABILITY MANAGEMENT
The Bank's most significant market risk factor is interest rate risk.
Fluctuations in interest rates will ultimately impact both the level of income
and expense recorded on a large portion of the Bank's assets and liabilities,
and the market value of all interest earning assets, other than those that
possess a short term to maturity. The ongoing monitoring and management of this
risk is an important component of the Bank's asset/liability management process.
An effective interest rate risk (IRR) management process that maintains interest
rate risk within prudent levels is important for the safety and soundness of the
Bank
In fiscal 1999, the Bank amended its Interest Rate Risk Policy to comply with
Thrift Bulletin 13a, (TB13a) issued by the Office of Thrift Supervision on
December 1, 1998. TB13a requires establishment of specific minimum guidelines
for thrift institutions to observe in two areas of interest rate risk
management. The first guideline concerns establishment and maintenance of
board-approved limits on interest rate risk. The second, concerns institutions'
ability to measure their risk level.
Based on OTS TB13a guidelines, the Board has set limits on change in Net
Portfolio Value (NPV). NPV is defined as the net present value of the Bank's
assets, liabilities and off-balance sheet contracts. The limits specify the
minimum NPV ratio the Board is willing to allow under current interest rates and
for a range of six hypothetical interest rate scenarios. The hypothetical
scenarios are represented by immediate, permanent, parallel movements in the
term structure of interest rates of plus or minus 100, 200, and 300 basis points
from the actual term structure observed at quarter end. In order to ensure
compliance with the IRR limits the Board has set, management relies on the
quarterly NPV estimates produced by OTS and distributed in the Interest Rate
Risk Exposure Report.
The Bank has utilized various strategies regarding the interest rate sensitivity
of its assets and liabilities and to attempt to increase the differential
between its interest income and interest expense. These strategies include
originating more "balloon" and 10 year fixed rate mortgages over the long term
and extended the maturities of FHLB borrowings. For the year, 27.7% of all
originations had maturities or repricing of 10 years or less. The Bank has also
utilized short and medium FHLB advances and participated in the FHLB Community
Investment Program (CIP), which offers a discount on borrowing rates when the
project to be funded meets certain criteria. The Bank currently has two loans
out- standing under this program with remaining maturities from 7 to 12 years.
While the Bank is somewhat more interest- rate sensitive as a result of these
policies, and therefore has more interest-rate risk, management believes this
strategy has helped to maximize net interest income.
32
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[LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
The Bank has also sought to maintain a stable core deposit base that enables it
to control in part its cost of funds. For the years 2001, 2000 and 1999, the
Bank's statement savings, NOW accounts, super NOW accounts and money market
accounts ("Money Growth Fund") have amounted to 49.97%, 43.8% and 40.7% of total
deposits, respectively, and had weighted average rates of not more than 2.50%
throughout this period.
These factors have contributed significantly to the Bank's interest rate spread
of 2.70% for year ended June 30, 2001. While this is somewhat reduced from
fiscal 2000, management believes it demonstrates the Bank as a strong performer
as compared to Midwest savings and loans of similar size.
The Bank monitors interest rate risk, in part, through review of the reports of
the OTS that express the application of the "net portfolio value" ("NPV")
methodology. NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing liabilities. The methodology attempts to quantify the
interest rate risk as the change in NPV that would result, in theory, from a
change in market interest rates.
The following table sets forth the repricing of the Bank's interest-earning
assets and interest-bearing liabilities at June 30, 2001. Assumptions used in
the calculations are that of the OTS in assessing the interest rate sensitivity
of thrift institutions.
Change in Interest Rate $ Change % Change
(Basis Points) in NPV in NPV
----------------------- -------- --------
(Dollars in Thousands)
+300 $(14,015) (50)%
+200 (9,375) (34)%
+100 (4,532) (16)%
0 0 0
-100 2,900 10%
-200 4,323 15%
-300 5,605 20%
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate mortgage loans,
have features that restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
pre- payment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.
33
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[LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of investments that qualify as
liquid assets under Office of Thrift Supervision (OTS) regulations. The Bank's
regulatory liquidity was 5.25% at June 30, 2001. OTS regulations presently
require the Bank to maintain an average daily balance of investments in U.S.
Treasury obligations, federal agency obligations and other investments having
maturities of five years or less equal to 4% of the sum of withdrawable deposits
with a maturity of one year or less and borrowings payable in one year or less.
The Bank's liquidity is a product of its operating, investing and financing
activities. The primary sources of funds are deposits, FHLB borrowings,
prepayments and maturities of outstanding loans, mortgage-backed securities, and
investments. While scheduled payments of loans and mortgage-backed securities
and maturing investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by interest rates, economic
conditions and competition. The Bank utilizes FHLB borrowings to leverage its
capital base and provide funds for lending and to better manage its interest
rate risk.
At June 30, 2001, the Bank had outstanding commitments to extend credit of
$15,017,000 and standby letters of credit of $735,000. As of June 30, 2001,
certificates of deposit scheduled to mature in one year or less totaled
$43,552,000. Based on historical experience, management believes that a
significant portion of maturing deposits will remain with the Bank. Management
anticipates that the Bank will continue to have sufficient funds, through
deposits, borrowings, and normal operations to meet its commitments.
The Bank is required by OTS regulations to meet certain minimum capital
requirements. The following table sets forth certain information regarding the
Bank's compliance with applicable regulatory capital requirements at June 30,
2001.
Amount Percentage of
------ -------------
(in thousands) Applicable Assets
-------------- -----------------
Tangible capital $21,383 10.0%
Tangible capital requirement 3,221 1.5
--------------------------------
Excess $18,162 8.5%
--------------------------------
Core capital $21,383 10.0%
Core capital requirement 6,442 3.0
--------------------------------
Excess $14,941 7.0%
--------------------------------
Total risk-based capital $22,226 16.8%
Risk-based capital requirement 10,588 8.0
--------------------------------
Excess $11,638 8.8%
--------------------------------
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MANAGEMENT'S DISCUSSION AND ANALYSIS / CORPORATE PROFILE
--------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America. These principles require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
The primary assets and liabilities of financial institutions such as the Bank
are monetary in nature. As a result, interest rates have a more significant
impact on the Bank's performance than the effects of general levels of
inflation. Interest rates, however, do not necessarily move in the same
direction or with the same magnitude as the price of goods and services, since
such prices are affected by inflation. In a period of rapidly rising interest
rates, the liquidity and maturity structure of the Bank's assets and liabilities
are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest rates, on
earnings is in the area of noninterest expense. Such expense items as
compensation and benefits and occupancy and equipment costs may be subject to
increases as a result of inflation. An additional effect of inflation is the
possible increase in the dollar value of the collateral securing loans made by
the Bank. The Bank is unable to determine the extent, if any, to which
properties securing the Bank's loans have appreciated in dollar value due to
inflation.
EFFECT OF ACCOUNTING CHANGES
In July 2001, the FASB (Financial Accounting Standards Board) issued Statements
(SFAS) No. 141, "Accounting for Business Combinations" and No. 142, "Accounting
for Goodwill and Intangible Assets". These Statements will have no material
effect on the Bank at this time since it has not been involved in a "business
combination" subject to SFAS No. 141 and does not have goodwill or other
intangible assets subject to SFAS No. 142.
CORPORATE PROFILE
Peoples Savings Bank of Troy was chartered in 1890 as an Ohio mutual building
and savings bank. The Bank is the only independent financial institution
headquartered in Troy, Ohio. The Bank's primary market area is Miami County and
Montgomery County, Ohio and the Bank currently conducts its business from four
offices located in Troy, two offices in Piqua and a new full service office in
Clayton, Ohio. The Bank's deposit accounts are insured by the Savings
Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation
(FDIC). As a savings and loan association, the Bank is required to be a member
of the SAIF fund and remit premiums for deposit insurance to the SAIF fund.
The Bank's principal business historically has consisted of attracting savings
deposits from the general public and applying these funds primarily to the
origination of high-quality residential real estate loans to local borrowers.
The Bank's principal sources of income are interest on mortgage loans and fees
for service charges, as well as interest and dividends on investments. In
addition, the Bank's Trust Department continues to grow and provide a
significant amount of revenue.
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CORPORATE PROFILE / MARKET AND DIVIDEND INFORMATION
--------------------------------------------------------------------------------
The Bank originates residential and multi-family real estate loans for the
purchase, refinance, construction, and development of real property, and also
originates second mortgage loans. The largest percentage of the Bank's mortgage
loans for the past four years has been fixed-rate mortgages. The Bank also
originates adjustable-rate mortgages (ARM's). Mortgage loans generally have a
term of up to thirty years. In addition, the Bank originates consumer loans,
commercial real estate loans, and commercial loans, on a conservative basis,
where more emphasis is placed upon the individual's credit worthiness and less
upon the value of the collateral in making the loan. Consequently, these loans
are more risky than conventional mortgage loans, and as a result, carry a higher
rate of interest to offset that additional risk. Consumer loans are generally
written for terms not to exceed ten years.
The Bank obtains funds for its lending and investment activities through
deposits, payments received from outstanding loans and borrowings from the
Federal Home Loan Bank of Cincinnati (FHLB). The Bank offers several deposit
accounts, including insured money market accounts.
The Bank was the second state charted savings and loan association in Ohio to
establish trust operations when it opened its Trust Department in July 1995.
After only six years of operation, the Trust Department has over $143,000,000 in
assets under management. The Trust Department specializes in personal trust
services and investments.
The Bank currently has six offices located in Miami County, Ohio and a seventh
location was opened this year in Clayton, Ohio and that is located in the
northwest part of Montgomery County. Both counties are in the Greater Dayton
metropolitan statistical area.
MARKET AND DIVIDEND INFORMATION
As of June 30, 2001, the Bank had approximately 697 holders of record of its
common stock. The Bank common stock is traded on the over the counter stock
market under the symbol "PESV." Beginning in January, 1993 S. J. Wolfe Co., a
division of McDonald and Co. began to make a market in The Bank stock. In March,
1995 Sweney Cartwright & Co. became the second market maker in The Bank stock.
Although the Bank does not have knowledge of the prices paid in all
transactions, according to information furnished by brokers who deal in the Bank
Common Stock, the following prices represent the price ranges recorded for the
periods shown.
MARKET PRICE PER SHARE
FISCAL MARKET PRICE CASH
2000 LOW HIGH DIVIDENDS
------------------------------------------------------------------
1st Qtr. $8.00 $9.25 $0.015
2nd Qtr. 6.75 8.00 -
3rd Qtr. 5.25 7.00 0.015
4th Qtr. 3.88 5.25 -
FISCAL MARKET PRICE CASH
2001 LOW HIGH DIVIDENDS
------------------------------------------------------------------
1st Qtr. $3.38 $4.25 $0.015
2nd Qtr. 2.88 4.25 -
3rd Qtr. 3.00 3.88 0.015
4th Qtr. 2.94 3.60 -
Any payment of dividends will be subject to certain restrictions. See Note 11 to
Consolidated Financial Statements.
36
37
BANKING CENTERS/ATMS
MAIN OFFICE
635 South Market Street
Troy, Ohio
937-339-5000
WESTSIDE
1580 West Main Street
Troy, Ohio
937-339-5000
NORTHSIDE
927 North Market Street
Troy, Ohio
937-339-5000
PIQUA
126 High Street
Piqua, Ohio
937-778-2888
ATM
El Sombrero Restaurant
Howard Johnson Motel
I-75 at US 36, Piqua
CLAYTON
8265 North Main Street
Dayton, Ohio
937-454-2200
ATM
Clayton Government Center
Taywood Road
Clayton
ATM
Randolph Plaza Center
N. Main Street
Clayton
TRUST OFFICES
14 Weston Road
Troy, Ohio
937-335-8760
317 North Wayne Street
Piqua, Ohio
937-773-9290
8265 North Main Street
Dayton, Ohio
937-454-2200
[LOGO] Peoples Savings Bank of Troy and Subsidiary
--------------------------------------------------------------------------------
DIRECTORS
G. JOSEPH REARDON
Chairman of the Board
Peoples Savings Bank of Troy
Retired President, Reardon & Associates
A Manufacturing Representative
Troy, Ohio
DONALD COOPER
President
Captor Corporation
Tipp City, Ohio
RONALD B. SCOTT
President and Chief Executive Officer
Peoples Savings Bank of Troy
Troy, Ohio
PETER E. JENKINS
Mayor of the City of Troy
Troy, Ohio
WILLIAM E. LUKENS
President & Majority Owner
Stillwater Technologies, Inc.
A Contract Manufacturing Firm
Troy, Ohio
WILLIAM J.MCGRAW III
Attorney & President
Dungan & LeFevre Co., L.P.A.
Law Firm Which Represents
Peoples Savings Bank of Troy
Troy, Ohio
RICHARD W. KLOCKNER
President
Klockner &Associates
A Civil Engineering Company
Troy, Ohio
JAMES S. WILCOX
Vice President of Finance
PMI Food Equipment
Troy, Ohio
THOMAS E. ROBINSON
Retired Executive
Troy, Ohio
--------------------------------------------------------------------------------
OFFICERS OF PEOPLES SAVINGS BANK OF TROY
RONALD B. SCOTT
President &
Chief Executive Officer
MARK A. DOUGLAS
Vice President
Finance/Lending
PHIL M. JONES
Vice President/Trust Division
LINDA A. DANIEL
Vice President
Marketing/Administration
RICHARD K. BENDER
Vice President/Operations
SANDRA L. JONES
Assistant Vice President
TERESA E. MERS
Assistant Vice President
MARY E. CLEVENGER
Assistant Vice President
DAVID E. BLACKMORE
Assistant Vice President
ANNETTE L. GLADMAN
Assistant Vice President
MARK R. WALTERSHEIDE
Trust Officer
CORNELIA E. TINKLER
Trust Officer
ROGER J. BORCHERS
Trust Operations Officer
--------------------------------------------------------------------------------
ADVISORY DIRECTORS
RICHARD W. WALLACE
Executive Vice President
Hartzell Fan, Inc.
Piqua, Ohio
DOUGLAS HAINES
President
Buckeye Mutual Insurance Group
Piqua, Ohio
TONY WENDELN
CPA/CEO
Murray, Wells, Wendeln
& Robinson, CPAs, Inc.
Piqua, Ohio
DR. KENNETH YOWELL
President
Edison Community College
Piqua, Ohio
DIRECTOR EMERITUS
WILLIAM E. EICKHOFF
Retired President
Peoples Director 1977-1996
--------------------------------------------------------------------------------
LEGAL COUNSEL
Dungan & LeFevre Co., LPA
210 West Main Street
Troy, Ohio 45373
Vorys, Sater, Seymour and Pease LLP
52 East Gay Street
PO Box 1008
Columbus, Ohio 43216-1008
AUDITORS
BKD LLP
312 Walnut Street, Suite 3000
P.O. Box 5367
Cincinnati, OH45201-5367
--------------------------------------------------------------------------------
FORM 10-K AND OTHER FINANCIAL INQUIRIES
The Bank's annual report on Form 10-K will be furnished upon request without
charge. Shareholders, analysts and others seeking this and other requests for
information referring to stock, annual shareholders' meetings and related
matters, please contact:
RONALD B. SCOTT
President & Chief Executive Officer
Peoples Savings Bank of Troy
635 South Market
Troy, Ohio 45373 - 937/339-5000
TRANSFER AGENT AND REGISTAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572