EXHIBIT 13
[PEOPLES OHIO LOGO]
Dear Shareholders:
We are proud to report the results of the 2003 fiscal year to you. Peoples Ohio
Financial Corporation (OTC: POHF) was able to achieve continued strong earnings
while carefully repositioning the balance sheet of the bank for success in the
future. It is a significant accomplishment that the 2003 fiscal year was the
second most profitable year in Peoples' 113-year history ... second only to the
last year's (2002) record earnings.
The corporation and the bank performed extremely well... particularly given the
challenges of the struggling general economy, record low interest rate levels,
continued product growth and innovation, and intense competition from other
financial services companies.
[EARNINGS HISTORY CHART]
Total earnings for the 2003 fiscal year were $2,545,000 or $0.33 per diluted
share, as compared to fiscal 2002 earnings of $2,675,000 or $0.35 per diluted
share. Return on equity (ROE) remained strong at 10.07% for fiscal year 2003
compared to 11.8% in fiscal year 2002. Continued low interest rate environment
and the pressure it has put on net interest margins throughout the banking
industry impacted Peoples as well. Net interest income was $8,054,000 for the
year ended June 30,2003 as compared to $8,367,000 reported for the year ended
June 30, 2002. Noninterest income, which continues to be a focus, increased
$132,000, or 8.5%, to $1,693,000 for the year ended June 30, 2003. Increases in
service charges on deposit accounts were partially offset by a decline in
revenue generated from trust operations.
As a top priority, our team worked diligently to restructure the balance
sheet this year. The goal of the corporation and bank was to position the
balance sheet in a manner that would allow us to continue to produce sustainable
earnings for the shareholders without sacrificing service to our customers and
the communities we serve. Strong earnings were maintained while taking advantage
of low interest rate environment to become less dependent on long-term fixed
rate mortgages as a source of interest income in 2003. In order to successfully
accomplish important reorganization in the loan area, several experienced,
capable loan professionals were recruited for the Peoples team. These
individuals bring a high level of expertise in consumer, mortgage, and
commercial lending which is critical for future success. In addition, banking
center managers have been trained to provide lending services at their
individual centers, and thus broadening Peoples loan service capabilities. In
vital support of these services, the technology infrastructure in which Peoples
has been investing over the past several years now enables a seamless,
high-level loan processing capability.
Not only does the technology support impact the lending area, but also those
non-interest income areas such as remittance processing and overdraft privilege
both of which generate substantial fee income. Check imaging, based on
technology introduced last year, also continues to offer customers
[PEOPLES OHIO LOGO]
a more streamlined statement with images of checks. In addition, Peoples
introduced transactional Online Banking this fiscal year which allows customers
to view their account, transfer balances, make loan payments and pay bills
anywhere they have Internet access.
[DIVIDENDS/SHARE CHART]
With a goal of solid sustained earnings for our shareholders while still meeting
customer expectations, Peoples also focused in 2003 fiscal year on strategies to
incrementally increase dividends for shareholders and to execute a stock buyback
process. In keeping with a continued progression of increases, the dividends
approved and issued for 2003 fiscal year represented an almost 40% increase over
the previous year. Peoples Ohio Financial Corporation stock was recently
recognized as one of the Dayton area's top performing stocks by a local business
publication as a result of an increase of 25% in 2003 fiscal year to $4.20 per
share price at June 30, 2003.
In summary, this has been a year of continued strength in earnings and of
positioning the corporation and bank for the future. Significant progress has
been made in adding important customer products/services while increasing
shareholder value. Our current management and staff is probably one of the most
experienced and capable we've ever been able to assemble in the history of the
bank. We believe all of these factors contribute to remaining profitable and
competitive as a financial services organization.
However, success for an independent, local, community business like Peoples also
means remaining true to the basic values with which the organization was
founded. We believe that Peoples has consistently done so. We have become an
integral, contributing part of every community we serve. By being willing to
donate money, to give countless hours of volunteer service, and to create
programs which significantly impact quality of life,. Peoples has demonstrated
again and again what is important. Customers want to do business with us because
we are hospitable and accessible as well as profitable. Shareholders want to
invest because of our personal concern and desire to be responsive as well as
our financial performance. Peoples will continue to have success by remaining
focused on our local community-based values while constantly reinventing
ourselves to meet customer needs and shareholder expectations.
/s/ Ronald B. Scott
Ronald B. Scott
President/CEO
[PEOPLES OHIO LOGO] SELECTED CONSOLIDATED FINANCIAL DATA
At June 30,
2003 2002 2001 2000 1999
--------- --------- ---------- --------- ---------
(In thousands)
BALANCE SHEET DATA:
Total amount of:
Assets $ 207,349 $ 219,922 $ 214,841 $ 205,140 $ 180,056
Loans, net 160,609 201,716 197,483 189,878 167,300
Deposits 117,629 120,447 108,398 109,461 107,073
FHLB advances 63,329 74,174 83,522 74,726 53,918
Stockholder' equity 24,351 23,106 21,002 18,702 15,725
Year ended June 30,
2003 2002 2001 2000 1999
--------- --------- ---------- --------- ---------
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Total interest income $ 13,953 $ 15,918 $ 16,338 $ 14,598 $ 12,387
Total interest expense 5,900 7,551 9,392 7,931 6,231
Net interest income 8,054 8,367 6,946 6,667 6,156
Provisions for loan losses 140 138 - 30 50
Non-interest income 1,693 1,561 1,485 1,374 1,109
Non-interest expense 5,723 5,707 4,737 4,268 3,947
Net income 2,545 2,675 2,421 2,480 2,191
PER SHARE DATA:
Basic earnings $ 0.34 $ 0.36 $ 0.33 $ 0.33 $ 0.30
Diluted earnings 0.33 0.35 0.32 0.31 0.28
Cash dividends 0.09 0.065 0.03 0.03 0.03
Year-end book value 3.27 3.11 2.82 2.52 2.29
Year-end market value 4.20 3.35 3.00 4.13 8.63
KEY RATIOS:
Return on average assets 1.16% 1.23% 1.14% 1.28% 1.35%
Return on average equity 10.07 11.84 11.87 13.62 13.81
Average equity to average assets 11.49 10.38 9.64 9.37 9.74
Net interest margin 3.86 4.02 3.41 3.56 3.95
Efficiency ratio (1) 58.70 57.50 56.20 53.10 54.30
Dividend payout ration (2) 26.47 18.06 9.09 9.09 6.67
- -----------------
(1) Represents noninterest expense as a percentage of the sum of net
interest income and noninterest income.
(2) Represents dividends per share divided by basic earnings per share.
3
[PEOPLES OHIO LOGO] INDEPENDENT ACCOUNTANTS' REPORT
[BKD LLP LOGO]
To the Stockholders and
Board of Directors
Peoples Ohio Financial Corporation
Troy, Ohio
We have audited the accompanying consolidated balance sheets of Peoples Ohio
Financial Corporation as of June 30, 2003 and 2002, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three year period ended June 30, 2003. 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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of Peoples
Ohio Financial Corporation as of June 30, 2003 and 2002, and the results of its
operations and its cash flows for each of the years in the three year period
ended June 30, 2003 in conformity with accounting principles generally accepted
in the United States of America.
[BKD, LLP]
Cincinnati, Ohio
July 31, 2003
4
[PEOPLES OHIO LOGO] CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND 2002
2003 2002
--------------- ---------------
ASSETS
Cash and cash equivalents $ 15,835,436 $ 5,680,517
Held-to-maturity securities (fair value of $824,000 and $1,174,000) 779,425 1,121,139
Available-for-sale securities 16,687,228 --
Loans, net of allowance for loan losses of $862,235 and $882,067 160,608,931 201,716,051
Premises and equipment 4,654,915 4,649,712
Federal Home Loan Bank stock 5,272,800 5,051,600
Interest receivable 867,150 1,059,550
Other assets 2,643,035 643,706
--------------- ---------------
Total assets $ 207,348,920 $ 219,922,275
=============== ===============
LIABILITIES
Deposits $ 117,629,404 $ 120,446,602
FHLB advances 63,328,746 74,174,409
Interest payable 134,575 231,386
Other liabilities 1,274,964 1,494,898
--------------- ---------------
Total liabilities 182,367,689 196,347,295
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
EQUITY FROM ESOP SHARES 630,279 468,719
--------------- ---------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares authorized;
none issued or outstanding
Common stock, no par value
Authorized -- 15,000,000 shares
Issued, 2003 -- 7,583,652 shares, 2002 -- 7,439,650 shares,
less ESOP shares of 150,066 and 139,916 7,433,586 7,299,734
Additional paid-in capital 186,600 203,084
Retained earnings 17,317,411 15,603,443
Accumulated other comprehensive income 56,616 --
Treasury stock, at cost
Common, 2003 -- 155,441 shares (643,261) --
--------------- ---------------
Total stockholders'equity 24,350,952 23,106,261
--------------- ---------------
Total liabilities and stockholders' equity $ 207,348,920 $ 219,922,275
=============== ===============
See Notes to Consolidated Financial Statements
5
[PEOPLES OHIO LOGO] CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
---------------- ----------------- -------------
INTEREST INCOME
Loans receivable $ 13,396,877 $ 15,548,316 $ 15,828,683
Investment securities 206,722 86,713 106,313
Other interest and dividend income 349,588 282.601 403,710
---------------- ----------------- -------------
Total interest income 13,953,187 15,917,630 16,338,706
---------------- ----------------- -------------
INTEREST EXPENSE
Deposits 2,226,509 3,345,544 4,104,961
Borrowings 3,673,164 4,205,509 5,287,390
---------------- ----------------- -------------
Total interest expense 5,899,673 7,551,053 9,392,351
---------------- ----------------- -------------
NET INTEREST INCOME 8,053,514 8,366,577 6,946,355
Provision for loan losses 140,000 138,000 --
---------------- ----------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,913,514 8,228,577 6,946,355
---------------- ----------------- -------------
NON-INTEREST INCOME
Fiduciary activities 673,019 761,310 818,450
Service charges on deposit accounts and other 802,451 612,053 522,154
Net realized loss on sale of available-for-sale
securities (6,597) -- --
Other income 224,224 187,907 144,578
---------------- ----------------- -------------
Total non-interest income 1,693,097 1,561,270 1,485,182
---------------- ----------------- -------------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,761,617 2,739,747 2,244,088
Net occupancy expenses 408,020 409,104 365,116
Equipment expenses 170,332 148,353 126,360
Data processing fees 532,802 413,148 413,405
Professional fees 183,188 404,102 222,778
State of Ohio franchise taxes 252,880 233,154 208,780
Other expenses 1,413,911 1,359,598 1,156,456
---------------- ----------------- -------------
Total non-interest expenses 5,722,750 5,707,206 4,736,983
---------------- ----------------- -------------
INCOME BEFORE INCOME TAX 3,883,861 4,082,641 3,694,554
Income tax expense 1,338,819 1,407,255 1,273,364
---------------- ----------------- -------------
NET INCOME $ 2,545,042 $ 2,675,386 $ 2,421,190
================ ================= =============
BASIC EARNINGS PER SHARE $ 0.34 $ 0.36 $ 0.33
================ ================= =============
DILUTED EARNINGS PER SHARE $ 0.33 $ 0.35 $ 0.32
================ ================= =============
See Notes to Consolidated Financial Statements
6
[PEOPLES OHIO LOGO] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
COMMON ADDITIONAL OTHER
STOCK PAID-IN RETAINED COMPREHENSIVE TREASURY
AMOUNT CAPITAL EARNINGS INCOME STOCK TOTAL
BALANCES, JULY 1, 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
Net income 2,675,386 2,675,386
Cash dividends
($.065 per share) (483,577) (483,577)
Net change in equity from
ESOP shares (12,750) (74,471) (87,221)
---------- ---------- ----------- -----------
BALANCES, JUNE 30, 2002 7,299,734 203,084 15,603,443 23,106,261
Net income 2,545,042 2,545,042
Change in unrealized gain
(loss) on securities
available for sale, net of
reclassification adjustment -----------
and tax effect $ 56,616 56,616
Total comprehensive
income 2,601,658
Cash dividends
($.090 per share) (679,664) (679,664)
Exercise of stock options 144,002 (30,284) $ 133,974 47,692
Purchase of treasury shares (777,235) (777,235)
Tax benefit of stock options 13,800 13,800
Net change in equity from
ESOP shares (10,150) (151,410) (161,560)
---------- ---------- ----------- ------------- ------------ -----------
BALANCES, JUNE 30, 2003 $7,433,586 $ 186,600 $17,317,411 $ 56,616 $ (643,261) $24,350,952
========== ========== =========== ============= ============ ===========
See Notes to Consolidated Financial Statements
7
[PEOPLES OHIO LOGO] CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
------------ ----------- -----------
OPERATING ACTIVITIES
Net income $ 2,545,042 $ 2,675,386 $ 2,421,190
Items not requiring (providing) cash
Provision for loan losses 140,000 138,000 --
Depreciation and amortization 393,970 337,089 340,400
Amortization of deferred loan fees (120,146) (149,793) (30,776)
Deferred income tax 74,000 107,000 106,000
Investment securities amortization (accretion), net 44,885 1,849 (2,240)
Federal Home Loan Bank stock dividends (221,200) (265,700) (328,600)
Net realized loss on available-for-sale securities 6,597 -- --
Net change in
Interest receivable 192,400 (33,037) (68,681)
Interest payable (96,811) (28,427) (263,793)
Other assets (1,985,529) 264,196 (237,385)
Other liabilities (323,756) 109,952 4,248
------------ ----------- -----------
Net cash provided by operating activities 649,452 3,156,515 1,940,363
------------ ----------- -----------
INVESTING ACTIVITIES
Purchases of available for sale securities (22,020,584) -- --
Proceeds from maturities of available-for-sale securities 210,000 -- --
Proceeds from sale of available-for-sale securities 5,158,116 -- --
Proceeds from maturities of securities held to maturity 341,910 361,306 187,939
Net change in loans 41,087,266 (4,380,127) (7,574,068)
Purchases of premises and equipment (399,173) (792,943) (929,066)
Federal Home Loan Bank stock purchased -- -- (478,200)
------------ ----------- -----------
Net cash provided (used) by investing activities 24,377,535 (4,811,764) (8,793,395)
------------ ----------- -----------
FINANCING ACTIVITIES
Net change in
Interest-bearing demand and savings deposits 4,522,222 18,942,142 4,822,747
Certificates of deposit (7,339,420) (6,893,874) (5,885,375)
Short-term advances -- (30,000,000) --
Proceeds of FHLB advances -- 41,000,000 310,591,027
Repayment of FHLB advances (10,845,663) (20,347,152) (301,795,194)
Cash dividends (679,664) (483,577) (223,190)
Purchase of stock (777,235) -- (304,906)
Proceeds from exercise of stock options 247,692 -- 186,600
------------ ----------- -----------
Net cash provided (used) by financing activities (14,872,068) 2,217,539 7,391,709
------------ ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 10,154,919 562,290 538,677
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,680,517 5,118,227 4,579,550
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 15,835,436 $ 5,680,517 $ 5,118,227
============ =========== ===========
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 5,996,484 $ 7,579,481 $ 9,656,144
Income tax paid 1,164,014 1,321,715 1,220,000
Transfers from loans to other real estate owned -- 158,784 --
See Notes to Consolidated Financial Statements
8
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The accounting and reporting policies of Peoples Ohio Financial
Corporation (Company) and its wholly owned subsidiary, Peoples Savings
Bank of Troy (Bank), conform to accounting principles generally
accepted in the United States of America and reporting practices
followed by the thrift industry. The more significant of the policies
are described below.
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 Company is a savings and loan holding company whose principal
activity is the ownership and management of the Bank. 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses. In
connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities
of three months or less to be cash equivalents. At June 30, 2003 and
2002, cash equivalents consisted of interest-bearing demand deposits.
9
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
SECURITIES
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the
future, are carried at fair value. Realized gains and losses, based on
amortized cost of the specific security, are included in other income.
Unrealized gains and losses are recorded, net of related income tax
effects, in stockholders' equity. Premiums and discounts are amortized
and accreted, respectively, to interest income using the level-yield
method over the period to maturity.
Held-to-maturity securities, which include any security for which the
Bank has the positive intent and ability to hold until maturity, are
carried at historical cost adjusted for amortization of premiums and
accretion of discounts. Premiums and discounts are amortized and
accreted, respectively, to interest income using the level-yield method
over the period to maturity.
Interest and dividends on investments in debt and equity securities are
included in income when earned.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or fair
value, determined using an aggregate basis. Write-downs to fair value
are recognized as a charge to earnings at the time the decline in value
occurs. Forward commitments to sell mortgage loans are acquired to
reduce market risk on mortgage loans in the process of origination and
mortgage loans held for sale. Gains and losses resulting from sales of
mortgage loans are recognized when the respective loans are sold to
investors. Gains and losses are determined by the difference between
the selling price and the carrying amount of the loans sold, net of
discounts collected or paid and considering a normal servicing rate.
Fees received from borrowers to guarantee the funding of mortgage loans
held for sale and fees paid to investors to ensure the ultimate sale of
such mortgage loans are recognized as income or expense when the loans
are sold or when it becomes evident that the commitment will not be
used.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoffs are reported at their
outstanding principal balances adjusted for any charge-offs, the
allowance for loan losses, any deferred fees or costs on originated
loans, and unamortized premiums or discounts on purchased loans.
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Generally, loans are placed on non-accrual status at 90 days past due
and interest is considered a loss, unless the loan is well-secured and
in the process of collection.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
10
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans are collectively evaluated
for impairment. Accordingly, the Bank does not separately identify
individual consumer and residential loans for impairment disclosures.
PREMISES AND EQUIPMENT
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over 30
years for buildings and 3 to 5 years for equipment.
FEDERAL HOME LOAN BANK STOCK
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 HELD FOR SALE
Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the
lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are
included in net expenses from foreclosed assets.
TREASURY STOCK
Treasury stock is stated at cost. Cost is determined based on the average
cost of all shares.
STOCK OPTIONS
At June 30, 2003, the Company has a stock-based employee compensation plan,
which is described more fully in Note 13. The Company accounts for this
plan under the recognition and measurement principles of APB Opinion No.
25, Accounting for Stock Issued to Employees, and related Interpretations.
No stock- based employee compensation cost is reflected in net income, as
all options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the grant date. The
following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair value provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation. The proforma effect on income for 2003 includes the effect of
forfeitures.
11
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
YEAR ENDED JUNE 30
2003 2002 2001
------------------------------------
Net income, as reported $ 2,545 $ 2,675 $ 2,421
Less: Total stock-based employee
compensation cost determined
under the fair value based method,
net of income taxes 6 (129) (169)
--------- --------- ---------
Pro forma net income $ 2,551 $ 2,546 $ 2,252
========= ========= =========
Earnings per share:
Basic - as reported 0.34 0.36 0.33
Basic - pro forma 0.34 0.34 0.30
Diluted - as reported 0.33 0.35 0.32
Diluted - pro forma 0.33 0.33 0.29
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. The Company files consolidated income tax returns with its
subsidiary.
NOTE 2: INVESTMENTS
The amortized cost and approximate fair values of securities are as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
----------------------------------------------
AVAILABLE-FOR-SALE SECURITIES:
June 30, 2003:
U.S. government agencies $ 6,234 $ 78 $ -- $ 6,312
Mortgage-backed securities 1,819 8 -- 1,827
Other securities 8,548 -- -- 8,548
------- ------- ------- -------
$16,601 $ 86 $ 0 $16,687
======= ======= ======= =======
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS (LOSSES) FAIR VALUE
-----------------------------------------------
HELD TO MATURITY SECURITIES:
June 30, 2003:
U.S. Treasury $ 100 $ 4 $ -- $ 104
Mortgage-backed securities 579 38 -- 617
State and political subdivisions 100 3 -- 103
------ ------ ------ ------
$ 779 $ 45 $ 0 $ 824
====== ====== ====== ======
June 30, 2002:
U.S. Treasury $ 100 $ 5 $ -- $ 105
Mortgage-backed securities 921 47 -- 968
State and political subdivisions 100 1 -- 101
------ ------ ------ ------
$1,121 $ 53 $ 0 $1,174
====== ====== ====== ======
12
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities available for sale and held to
maturity at June 30, 2003, 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.
AVAILABLE FOR SALE HELD TO MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------------------------------------------
Within one year $ -- $ -- $ 100 $ 104
One to five years 6,234 6,312 -- --
Five to ten years -- -- -- --
After ten years -- -- 100 103
------- ------- ------- -------
6,234 6,312 200 207
Mortgage-backed securities 1,819 1,827 579 617
Other securities (on demand with
contractual maturities from
2018 to 2023) 8,548 8,548 -- --
------- ------- ------- -------
Totals $16,601 $16,687 $ 779 $ 824
======= ======= ======= =======
The book value of securities pledged as collateral, to secure public deposits
and for other purposes, amounted to $8,712,000 at June 30, 2003 and $910,115 at
June 30, 2002.
Gross losses of $6,597 resulting from sales of available-for-sale securities
were realized for 2003.
NOTE 3: 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 stock of the Bank would be exchanged for one share of
stock of the holding company. The Bank would thereafter be a wholly-owned
subsidiary of the holding company. Peoples Ohio Financial Corporation was
incorporated on July 20, 2001 and the transaction with the Bank was
consummated January 31, 2002. The reorganization was accounted for in a
manner similar to a pooling of interests.
NOTE 4: 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, 2003 was
$200,000.
13
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES
2003 2002
------------------------
Mortgage loans on existing real estate
Residential single family units $ 115,175 $ 149,612
Other residential and commercial 25,021 27,055
--------- ---------
Total real estate loans 140,196 176,667
Construction loans 12,802 14,660
Commercial business 5,573 5,529
Consumer 2,452 5,146
Home improvement 4,772 5,774
Deposit and other loans 290 470
--------- ---------
166,085 208,246
Deferred loan fees (209) (132)
Undisbursed portion of loans (4,405) (5,516)
Allowance for loan losses (862) (882)
--------- ---------
Total loans $ 160,609 $ 201,716
========= =========
2003 2002 2001
---------------------------------------
Allowance for loan losses
Balances, July 1 $ 882 $ 843 $ 888
Provision for losses 140 138 --
Recoveries on loans 29 12 6
Loans charged off (189) (111) (51)
--------- --------- ---------
Balances, June 30 $ 862 $ 882 $ 843
========= ========= =========
Impaired loans totaled $1,125,000 and $0 at June 30, 2003 and 2002,
respectively. An allowance for loan losses of $11,000 relates to impaired
loans of $375,000 at June 30, 2003. At June 30, 2003, impaired loans of
$750,000 had no related allowance for loan losses.
Interest of $50,000 was recognized on average impaired loans of $1,123,000
for 2003. Interest of $64,000 was recognized on impaired loans on a cash
basis during 2003.
At June 30, 2003 and 2002, accruing loans delinquent 90 days or more
totaled $2,559,000 and $637,000, respectively. Non-accruing loans at June
30, 2003 and 2002 were $634,000 and $352,000, respectively.
14
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 6: PREMISES AND EQUIPMENT
2003 2002
--------------------
Land $ 955 $ 955
Buildings 4,858 4,589
Equipment 3,663 3,600
------- -------
Total cost 9,476 9,144
Accumulated depreciation (4,821) (4,494)
------- -------
Net premises and equipment $ 4,655 $ 4,650
======= =======
NOTE 7: DEPOSITS
2003 2002
---------------------
Noninterest bearing accounts $ 5,815 $ 7,111
NOW accounts 21,700 26,314
Super NOW accounts 1,095 500
Passbook accounts 20,823 20,302
Money market accounts 26,763 17,448
Certificates and other time deposits of $100,000 or more 15,035 15,666
Other certificates and time deposits 26,398 33,106
-------- --------
Total deposits $117,629 $120,447
======== ========
Certificates and other time deposits maturing
in years ending June 30
2004 $ 30,890
2005 4,181
2006 1,702
2007 2,250
2008 2,410
--------
$ 41,433
========
15
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 8: LONG-TERM DEBT
2003 2002
-------------------
Federal Home Loan Bank advances, fixed and variable rates,
due at various dates through May 1, 2017 $63,329 $74,174
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 prepayment.
Maturities in years ending June 30
2004 $ 16,034
2005 24,404
2006 4,920
2007 1,548
2008 4,786
Thereafter 11,637
---------
$ 63,329
=========
The Bank has unused letters of credit with the Federal Home Loan Bank
aggregating $30,362,000 expiring at various dates from September 2003
through December 2004.
NOTE 9: INCOME TAX
2003 2002 2001
----------------------------
Income tax expense
Currently payable $1,265 $1,300 $1,167
Deferred income taxes 74 107 106
------ ------ ------
Income tax expense $1,339 $1,407 $1,273
====== ====== ======
Reconciliation of federal statutory to actual
tax expense
Federal statutory income tax at 34% $1,321 $1,388 $1,256
Other 18 19 17
------ ------ ------
Actual tax expense $1,339 $1,407 $1,273
====== ====== ======
16
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
A cumulative net deferred tax liability is included in other liabilities.
The components of the liability are as follows:
2003 2002
----------------
DEFERRED TAX ASSETS
Allowance for loan losses $ 251 $ 218
Organizational costs 18 23
Other 1 2
----- -----
Total assets 270 243
----- -----
DEFERRED TAX LIABILITIES
FHLB stock (653) (578)
Depreciation (131) (105)
Unrealized gain on available for sale securities (30) --
----- -----
Total liabilities (814) (683)
----- -----
$(544) $(440)
===== =====
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.
NOTE 10: OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income components and related taxes were as follows:
2003
--------
Unrealized gains (losses) on securities available for sale $ 79,185
Reclassification for realized amount included in income (6,597)
--------
Other comprehensive income (loss), before tax effect 85,782
Tax expense 29,166
--------
Other comprehensive income $ 56,616
========
17
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 11: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of June 30, 2003 and
2002, that the Bank meets all capital adequacy requirements to which it is
subject.
As of June 30, 2003, the most recent notification from Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the Bank's category.
TO BE WELL-CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------
As of June 30, 2003
Total Risk-Based Capital
(to Risk-Weighted Assets) $24,715 17.6% $11,213 8.0% $14,016 10.0%
Tier I Capital
(to Risk-Weighted Assets) 23,853 17.0% 5,606 4.0% 8,410 6.0%
Core Capital
(to Adjusted Total Assets) 23,853 11.6% 8,250 4.0% 10,313 5.0%
Tangible Capital
(to Adjusted Total Assets) 23,853 11.6% 3,094 1.5%
As of June 30, 2002
Total Risk-Based Capital
(to Risk-Weighted Assets) $24,717 16.4% $12,051 8.0% $15,064 10.0%
Tier I Capital
(to Risk-Weighted Assets) 23,836 15.8% 6,026 4.0% 9,039 6.0%
Core Capital
(to Adjusted Total Assets) 23,836 10.8% 8,803 4.0% 11,003 5.0%
Tangible Capital
(to Adjusted Total Assets) 23,836 10.8% 3,301 1.5%
18
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
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, 2003, total regulatory capital of the Bank
was $23,853,000, of which approximately $5,724,000 was potentially
available for distribution to the Company.
NOTE 12: 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:
2003 2002
--------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 985 $ 848
Service cost 93 88
Interest cost 68 59
Actuarial loss (6) (2)
Benefits paid (53) (8)
------- -------
Benefit obligation at end of year 1,087 985
------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 480 595
Actual return on plan assets 30 (107)
Employer contributions 201 --
Benefits paid (53) (8)
------- -------
Fair value of plan assets at end of year 658 480
------- -------
Funded status (429) (505)
Unrecognized net actuarial loss 390 406
Unrecognized prior service cost (41) (48)
Unrecognized transition liability 26 29
------- -------
Accrued benefit cost $ (54) $ (118)
======= =======
2003 2002 2001
-----------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 93 $ 88 $ 74
Interest cost 68 59 51
Actual return on plan assets 30 107 354
Net amortization and deferral (54) (147) (441)
----- ----- -----
Net periodic benefit cost $ 137 $ 107 $ 38
===== ===== =====
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%
19
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
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 $49,749 for 2003, $40,079 for 2002 and $39,357 for 2001.
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 Company records compensation expense equal to the cash
contributions to the Plan. Dividends on ESOP shares (all allocated) are recorded
as a reduction of retained earnings. The cash contributions to the plan in 2003,
2002 and 2001 were $51,000, $40,000 and $40,000, 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 150,066 and 139,916 at June 30, 2003 and 2002. Under
certain circumstances, the ESOP may be obligated to repurchase allocated ESOP
shares. The Company is obligated at the option of each beneficiary to repurchase
ESOP shares upon the beneficiary's termination or after retirement. 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, 2000 $ 136 $ 424 $ 560
Net change in equity from ESOP shares (9) (170) (179)
----- ----- -----
Balances, June 30, 2001 127 254 381
Net change in equity from ESOP shares 13 75 88
----- ----- -----
Balances, June 30, 2002 140 329 469
Net change in equity from ESOP shares 10 151 161
----- ----- -----
Balances, June 30, 2003 $ 150 $ 480 $ 630
===== ===== =====
20
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 13: RELATED PARTY TRANSACTIONS
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, 2002 $ 2,844
Changes in composition of related parties 501
New loans, including renewals 137
Payments, etc., including renewals (143)
-------
Balances, June 30, 2003 $ 3,339
=======
NOTE 14: 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 exercisable ratably over three years (prior to 2003, options granted
were fully exercisable at the date of grant). Under the Bank's stock option
plan for nonemployee 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 2003, the Bank granted options for 44,500 shares of
the Company's common stock. The exercise price of each option, which has a
ten-year life, was equal to the market price of the Company'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:
2003 2002 2001
-----------------------------------
Risk-free interest rates 5.0% 5.2% 5.7 to 5.8%
Dividend yields 2.20% .88 to 1.99% .88%
Volatility factors of expected market price of common stock 25% 29% to 37% 35%
Weighted-average expected life of the options 10 years 10 years 10 years
21
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
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, 2003,
2002 and 2001.
EMPLOYEES:
2003 2002 2001
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------------------------------------------------------------------
Outstanding, beginning of year 756,802 $ 3.39 692,302 $3.40 740,057 $ 3.42
Granted 29,500 3.43 64,500 3.33 108,745 3.94
Exercised (150,481) 1.30 -- -- (92,000) 2.03
Forfeited/expired (76,298) 5.88 -- -- (64,500) 6.57
------- ------- -------
Outstanding, end of year 559,523 3.62 756,802 3.39 692,302 3.40
======= ======= =======
Options exercisable at year end 530,023 3.63 756,802 3.39 692,302 3.40
Weighted-average fair value of
options granted during the year 1.13 1.61 2.03
As of June 30, 2003, the employee options outstanding and exercisable are
as follows:
OUTSTANDING AND EXERCISABLE
WEIGHTED-AVERAGE
REMAINING
RANGE OF CONTRACTUAL LIFE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER (MONTHS) EXERCISE PRICE
- -----------------------------------------------------------------------
$0.01 to $1.00 50,200 6 $ 1.00
$1.01 to $2.50 173,400 17 1.79
$2.51 to $5.00 213,058 70 3.50
$5.01 to $7.50 60,540 62 6.81
$7.50 to $10.00 62,325 74 8.13
-------
559,523 47 3.62
=======
22
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
DIRECTORS:
2003 2002 2001
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ----------------------------------------------------------------------------------------------
Outstanding, beginning of year 205,884 $ 3.38 190,884 $ 3.35 166,884 $ 3.42
Granted 15,000 3.43 15,000 3.77 24,000 2.94
Exercised (27,080) 1.90 -- -- -- --
------- ------- -------
Outstanding, end of year 193,804 3.59 205,884 3.38 190,884 3.35
======= ======= =======
Options exercisable at year end 178,804 3.61 205,884 3.38 190,884 3.35
Weighted-average fair value of
options granted during the year 1.13 1.71 1.50
As of June 30, 2003, the directors options outstanding and exercisable are
as follows
OUTSTANDING AND EXERCISABLE
WEIGHTED-AVERAGE
REMAINING
RANGE OF CONTRACTUAL LIFE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER (MONTHS) EXERCISE PRICE
- -----------------------------------------------------------------------
$0.01 to $1.00 6,000 6 $ 1.00
$1.01 to $2.50 75,304 31 1.91
$2.51 to $5.00 67,500 87 3.30
$5.01 to $7.50 45,000 70 7.19
-------
193,804 59 3.59
=======
23
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 15: EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
YEAR ENDED JUNE 30, 2003
WEIGHTED-
AVERAGE PER-SHARES
INCOME SHARE AMOUNT
-----------------------------
BASIC EARNINGS PER SHARE
Income available to common stockholders $2,545 7,538,334 $ 0.34
EFFECT OF DILUTIVE SECURITIES
Stock options 180,865
---------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $2,545 7,719,199 $ 0.33
====== ========= ======
Options to purchase 252,246 shares of common stock at $3.88 to $8.13 per
share were outstanding at June 30, 2003, 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, 2002
WEIGHTED-
AVERAGE PER-SHARES
INCOME SHARE AMOUNT
BASIC EARNINGS PER SHARE
Income available to common stockholders $2,675 7,439,650 $ 0.36
EFFECT OF DILUTIVE SECURITIES
Stock options 250,945
---------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $2,675 7,690,595 $ 0.35
====== ========= ======
Options to purchase 316,300 shares of common stock at $3.88 to $8.13 per
share were outstanding at June 30, 2002, 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.
24
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
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.
NOTE 16: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Bank's financial
instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which method involves
significant judgments by management and uncertainties. Fair value is the
estimated amount at which financial assets or liabilities could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Because no market exists for certain of these
financial instruments and because management does not intend to sell these
financial instruments, the Bank does not know whether the fair values shown
below represent values at which the respective financial instruments could
be sold individually or in the aggregate.
JUNE 30, 2003 JUNE 30, 2002
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------------------------------------
Financial assets
Cash and cash equivalents $ 15,835 $ 15,835 $ 5,681 $ 5,681
Available for sale securities 16,687 16,687
Held-to-maturity securities 779 824 1,121 1,174
Loans, net of allowance for loan losses 160,609 172,144 201,716 212,005
Stock in FHLB 5,273 5,273 5,052 5,052
Interest receivable 867 867 1,060 1,060
Financial liabilities
Deposits 117,629 118,476 120,447 121,302
FHLB advances 63,329 67,285 74,174 78,143
Interest payable 135 135 231 231
25
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments.
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount approximates fair
value.
INVESTMENT SECURITIES
Fair values for investment securities equal quoted market prices, if
available. If quoted market prices are not available, fair value is
estimated based on quoted market prices of similar securities.
LOANS
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. Loans
with similar characteristics were aggregated for purposes of the
calculations. The carrying amount of accrued interest approximates its fair
value.
DEPOSITS
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the
reporting date, i.e., their carrying amount. The fair value of
fixed-maturity time deposits is estimated using a discounted cash flow
calculation that applies the rates currently offered for deposits of
similar remaining maturities. The carrying amount of accrued interest
payable approximates its fair value.
FHLB ADVANCES
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT, LETTERS OF CREDIT AND LINES OF CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms
of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of letters of credit and lines of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate or
otherwise settle the obligations with the counterparties at the reporting
date.
NOTE 17: COMMITMENTS AND CREDIT RISK
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 a portion of the
commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. Each
customer's creditworthiness is evaluated on a case-by-case basis. The
amount of collateral obtained, if deemed necessary, is based on
management's credit evaluation of the counterparty. Collateral held varies,
but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate.
26
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
At June 30, 2003 and 2002, the Bank had outstanding fixed-rate commitments
to originate loans aggregating approximately $0 and $5,516,000,
respectively. The commitments extended over varying periods of time with
the majority being disbursed within a one-year period.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers.
The Bank had total outstanding letters of credit amounting to $296,000 and
$383,000, at June 30, 2003 and 2002, respectively, with terms ranging from
4 months to 2 years.
Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may
expire without being drawn upon, the total unused lines do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, commercial real estate and
residential real estate. Management uses the same credit policies in
granting lines of credit as it does for on-balance-sheet instruments.
At June 30, 2003, the Bank had granted unused lines of credit to borrowers
aggregating approximately $2,114,000 and $7,843,000 for commercial lines
and open-end consumers lines, respectively. At June 30, 2002, unused lines
of credit to borrowers aggregated approximately $2,630,000 for commercial
lines and $8,451,000 for open-end consumer lines.
27
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 18: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial
position, results of operations and cash flows of the Company:
CONDENSED BALANCE SHEETS
2003 2002
----------------
ASSETS
Cash $ 41 $ --
Loans 1,011 --
Investment in common stock of Bank subsidiary 23,909 23,835
Other assets 20 $ --
------- -------
Total assets $24,981 $23,835
======= =======
LIABILITIES -- advance from Bank subsidiary $ -- $ 260
EQUITY FROM ESOP SHARES 630 469
STOCKHOLDERS' EQUITY 24,351 23,106
------- -------
Total liabilities and stockholders' equity $24,981 $23,835
======= =======
CONDENSED STATEMENTS OF INCOME
2003 2002 2001
-----------------------
INCOME
Dividends from Bank subsidiary $2,543 $ 483 $ --
EXPENSES -- other 21 -- --
------ ------ ------
INCOME BEFORE INCOME TAX AND
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 2,522 483 --
INCOME TAX BENEFIT (7) -- --
------ ------ ------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARY 2,529 483 --
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY 16 2,192 2,421
------ ------ ------
NET INCOME $2,545 $2,675 $2,421
====== ====== ======
28
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENTS OF CASH FLOWS
2003 2002 2001
---------------------------
OPERATING ACTIVITIES
Net income $ 2,545 $ 2,675 $ 2,421
Items not requiring (providing) cash (24) (2,675) (2,421)
------- ------- -------
Net cash provided by (used in) by operating activities 2,521 -- --
------- ------- -------
INVESTING ACTIVITIES--NET CHANGE IN LOANS (1,011) -- --
------- ------- -------
FINANCING ACTIVITIES
Advances from Bank subsidiary 2,283 483 --
Repayment of advances from Bank subsidiary (2,543) -- --
Purchase of stock (777) -- --
Proceeds from exercise of stock options 248 -- --
Cash dividends (680) (483) --
------- ------- -------
Net cash provided by (used in) financing activities (1,469) -- --
------- ------- -------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 41 -- --
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR -- -- --
------- ------- -------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 41 $ 0 $ 0
======= ======= =======
29
[PEOPLES OHIO LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 19: SELECTED QUARTERLY DATA (UNAUDITED)
The following tables summarize selected quarterly results of operations for
2003 and 2002.
JUNE 30, 2003 SEPTEMBER DECEMBER MARCH JUNE
--------- -------- ------ ------
Interest and dividend income $ 3,878 $ 3,665 $3,452 $3,109
Interest expense 1,683 1,558 1,400 1,259
--------- -------- ------ ------
Net interest income 2,195 2,107 2,052 1,850
Provision for loan losses 45 35 30 30
--------- -------- ------ ------
Net interest income after provision for loan losses 2,150 2,072 2,022 1,820
Noninterest income 381 408 408 496
Noninterest expense 1,452 1,500 1,442 1,479
--------- -------- ------ ------
Income before income tax 1,079 980 988 837
Income tax expense 372 338 341 288
--------- -------- ------ ------
Net income $ 707 $ 642 $ 647 $ 549
========= ======== ====== ======
Earnings per share
Basic $ 0.09 $ 0.08 $ 0.09 $ 0.07
Diluted 0.09 0.08 0.08 0.07
Dividends per share 0.045 -- 0.045 --
JUNE 30, 2002 SEPTEMBER DECEMBER MARCH JUNE
--------- -------- ------ ------
Interest and dividend income $ 4,043 $ 4,053 $3,912 $3,910
Interest expense 2,105 1,969 1,780 1,697
--------- -------- ------ ------
Net interest income 1,938 2,084 2,132 2,213
Provision for loan losses 2 6 18 112
--------- -------- ------ ------
Net interest income after provision for loan losses 1,936 2,078 2,114 2,101
Noninterest income 384 399 387 391
Noninterest expense 1,360 1,470 1,388 1,489
--------- -------- ------ ------
Income before income tax 960 1,007 1,113 1,003
Income tax expense 331 347 384 346
--------- -------- ------ ------
Net income $ 629 $ 660 $ 729 $ 657
========= ======== ====== ======
Earnings per share
Basic $ 0.08 $ 0.09 $ 0.10 $ 0.09
Diluted 0.08 0.09 0.09 0.09
Dividends per share 0.03 -- 0.035 --
30
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
Peoples Ohio Financial Corporation (the "Company") is based in west central Ohio
and is the parent company of Peoples Savings Bank of Troy (the "Bank"). The
Company was formed during the year ended June 30, 2002 to provide various
benefits to the Bank, as well as, to take advantage of a more effective
structure for expanded financial activities. The Bank, a state chartered savings
bank, was originally chartered in 1890. The Bank is primarily engaged in
attracting deposits from Miami and northern Montgomery counties and originating
mortgage loans throughout those same areas. In addition to traditional banking
services, the Bank provides full trust services through its trust department.
All references to the Company include the Bank unless otherwise indicated.
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report may include certain
forward-looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the composition or quality of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. A further description of the risks and uncertainties to the business are
included in detail in Item 1, "Business" of the Company's 2003 Form 10-K. The
Company does not undertake - and specifically disclaims any obligation--to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
reporting practices followed within the thrift industry. The application of
these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information available as of the date of the financial statements; as this
information changes, the financial statements could reflect different estimates,
assumptions, and judgments.
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements. These policies, along with
the disclosures presented in the other financial statement notes and in this
financial review, provide information on how significant assets and liabilities
are valued in the financial statements and how those values are determined.
Of these significant policies, management believes the allowance for loan losses
policy is a critical accounting policy that requires the most significant
estimates and assumptions used in the preparation of the consolidated financial
statements. The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective, as it requires estimates
that are susceptible to significant revision as more information becomes
available. The use of different estimates or assumptions could produce different
provision for loan losses. Refer to the discussion of the allowance for loan
losses set forth below and Note 1 to the consolidated financial statements for a
description of management's estimation process and methodology relating to the
allowance for loan losses.
31
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--COMPARISON OF YEARS ENDED JUNE
30, 2003 AND 2002
The Company reported earnings of $2,545,000 for the year ended June 30, 2003, a
decline of $130,000, or 4.9% from the $2,675,000 reported for the same period in
2002. Basic earnings per share decreased $0.02, or 5.6% from $0.36 for the year
ended June 30, 2002 to $0.34 for the year ended June 30, 2003. Diluted earnings
per share decreased $0.02, or 5.7% from $0.35 for the year ended June 30, 2002
to $0.33 for the year ended June 2003. The Company's return on average assets
was 1.16% for 2003 compared to 1.23% for 2002 and the return on average equity
was 10.07% for 2003, compared to 11.84% for 2002.
The decline in earnings during 2003 was a result of a decline in net interest
income of $313,000, or 3.7% from $8,367,000 reported for the year ended June 30,
2002 to $8,054,000 for the year ended June 30, 2003. This increase was partially
offset by an increase in noninterest income of $132,000 or 8.5%, from $1,561,000
reported for the year ended June 30, 2002 to $1,693,000 for the year ended June
30, 2003.
NET INTEREST INCOME was $8,054,000 for the year ended June 30, 2003, $313,000,
or 3.7% lower than the $8,367,000 reported for the year ended June 30, 2002.
This decline was the result of the continued low interest rate environment and
the pressure it has placed on net interest margins throughout the banking
industry. Total interest income was $13,953,000 for the year ended June 30,
2003, a decline of $1,965,000, or 12.3% from the $15,918,000 reported during the
year ended June 30, 2002, due to lower average loans outstanding coupled with
lower interest rates. The decline in interest income was partially offset by a
$1,651,000, or 21.9% decline in interest expense during the same period,
primarily due to depositors shifting their deposits from higher rate
certificates of deposit to lower rate demand deposit and savings accounts.
Interest income was $13,953,000 for the year ended June 30, 2003, a decrease of
$1,965,000, or 12.3% from $15,918,000 for the year ended June 30 2002. As
illustrated in the accompanying average balance sheet, this decline was entirely
attributable to a decline in interest income earned on loans. Interest income
earned on loans was $13,397,000 for the year ended June 30, 2003, $2,151,000, or
13.8% less than the $15,548,000 earned for the year ended June 30, 2002. With
long-term interest rates at or near record low levels throughout the year,
management chose to curtail the Bank's mortgage originations rather than expose
the Bank to what it believed to be unacceptable levels of interest rate risk. As
a result, average loans outstanding during the year decreased $17,286,000, or
8.6% from $200,649,000 for the year ended June 30, 2002 to $183,363,000 for the
year ended June 30, 2003. The average yield earned on those loans declined 44
basis points from 7.75% for the year ended June 30, 2002 to 7.31% for the year
ended June 30, 2003. This decline in yield was attributable to the local
market's reaction to the Federal Reserve Bank's (the Fed) reductions in
short-term interest rates throughout fiscal 2002 and fiscal 2003 and their
effect on interest rates in general. Note, the interest rates the Company
charges its borrowers and pays its depositors are significantly influenced by
these rates.
The decline in interest income earned on loans was partially offset by increases
in interest income on investment securities and other interest and dividend
income as management invested a portion of the proceeds from loan repayments in
short-term investments and interest bearing accounts at other financial
institutions. Accordingly, interest income on investment securities increased
$120,000, from $87,000 for the year ended June 30, 2002 to $207,000 for the year
ended June 30, 2003. In addition, other interest and dividend income increased
$67,000, from $283,000 for the year ended June 30, 2002 to $350,000 for the year
ended June 30, 2003.
32
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest expense was $5,900,000 for the year ended June 30, 2003, a decrease of
$1,651,000, or 21.9% from $7,551,000 for the year ended June 30 2002, as
interest expense paid on certificates of deposit, savings accounts and FHLB
advances declined significantly in comparison to the previous year. Interest
expense on certificates of deposit was $1,364,000, $1,052,000, or 43.5% lower
than the $2,416,000 recorded in the year ended June 30, 2002. As illustrated in
the accompanying average balance sheet, the average balance of certificates of
deposit declined by $16,176,000, from $53,687,000 for the year ending June 30,
2002 to $37,511,000 for the year ending June 30, 2003. In addition, the average
rate paid on those certificates of deposit decreased by 86 basis points, from
4.50% during 2002 to 3.64% during 2003. Interest expense on savings accounts was
$268,000, $115,000 or 30.0% lower than the $383,000 recorded in the year ended
June 30, 2002. As illustrated in the accompanying average balance sheet, the
average balance of savings accounts increased by $10,056,000, from $18,219,000
for the year ending June 30, 2002 to $28,275,000 for the year ending June 30,
2003. This increase was more than offset by a decline in the interest rate paid
on those accounts, the average rate paid on savings accounts decreased by 115
basis points, from 2.10% during 2002 to 0.95% during 2003. Interest expense on
FHLB advances was $3,673,000, $533,000 or 12.7% lower than the $4,206,000
recorded in the year ended June 30, 2002. Also illustrated in the accompanying
average balance sheet, the average balance of FHLB advances declined by
$7,199,000, from $79,088,000 for the year ended June 30, 2002 to $71,889,000 for
the year ended June 30, 2003. In addition, the average rate paid on those FHLB
advances decreased by 21 basis points, from 5.32% during 2002 to 5.11% during
2003. These declines were somewhat offset by a slight increase in interest
expense on the Company's demand deposit accounts as depositors chose to invest
proceeds from maturing certificates into short-term accounts. Accordingly, the
average balance of the Company's interest-bearing NOW and money market accounts
increased $13,304,000, from $35,117,000 for the year ended June 30, 2002, to
$48,421,000 for the year ended June 30, 2002
33
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
AVERAGE BALANCE SHEET
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, (Dollar Amounts in Thousands)
-----------------------------------------------------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Interest-earning assets:
Interest-earning demand
deposits $ 10,985 $ 128 1.17% $ 1,144 $ 17 1.49% $ 1,446 $ 75 5.19%
Investment securities 9,392 207 2.20 1,256 87 6.93 1,551 106 6.83
Loans, including
nonaccrual loans 183,363 13,397 7.31 200,649 15,548 7.75 196,338 15,828 8.06
Federal Home Loan Bank, stock 5,139 221 4.30 4,897 266 5.43 4,468 329 7.36
-------- -------- -------- -------- -------- --------
Total interest-earning
assets 208,879 13,953 6.68 207,946 15,918 7.65 203,803 16,338 8.02
Noninterest earning assets 11,052 -------- 9,785 -------- 7,839 --------
-------- -------- --------
Total assets $219,931 $217,731 $211,642
======== ======== ========
Liabilities and
stockholders'equity:
Interest-bearing liabilities:
NOW and money market
accounts $ 48,421 $ 595 1.23% $ 35,117 547 1.56% $ 21,964 $ 437 1.99%
Savings accounts 28,275 268 0.95 18,219 383 2.10 14,133 314 2.22
Certificates of deposit 37,511 1,364 3.64 53,687 2,416 4.50 55,514 3,354 6.04
-------- -------- -------- -------- -------- --------
Total interest-bearing
deposits 114,207 2,227 1.95 107,023 3,346 3.13 91,611 4,105 4.48
Federal Home Loan Bank,
advances 71,889 3,673 5.11 79,088 4,206 5.32 85,088 5,287 6.21
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 186,096 5,900 3.17 186,111 7,552 4.06 176,699 9,392 5.32
-------- -------- -------- -------- -------- --------
Other liabilities 8,559 9,018 14,546
-------- -------- --------
Stockholder's equity,
including equity from
ESOP shares 25,276 22,602 20,397
-------- -------- --------
Total liabilities and
stockholders' equity $219,931 $217,731 $211,642
======== ======== ========
Net interest-earning assets $ 22,783 $ 21,835 $ 27,104
======== ======== ========
Net interest rate spread (1) $ 8,053 3.51% $ 8,366 3.59% $ 6,946 2.70%
======== ======== ========
Net interest margin (2) 3.86% 4.02% 3.41%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 112.24% 111.73% 115.34%
======== ======== ========
(1) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
34
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
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
----------------------------------------------------------------------------------
2003 vs 2002 2002 vs 2001
----------------------------------------------------------------------------------
Increase (Decrease) Due to Total Increase (Decrease) Due to Total
-------------------------- Increase -------------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
----------------------------------------------------------------------------------
Interest-earning assets:
Demand deposits $ 115 $ (4) $ 111 $ (13) $ (45) $ (58)
Investment securities 216 (96) 120 (20) 1 (19)
Loans (1,293) (858) (2,151) 343 (623) (280)
FHLB, stock 13 (58) (45) 29 (92) (63)
----------------------------------------------------------------------------------
Total interest-earning
assets (949) (1,016) (1,965) 338 (758) (420)
----------------------------------------------------------------------------------
Interest-bearing liabilities:
NOW and money market
accounts 179 (131) 48 220 (110) 110
Savings 153 (268) (115) 87 (18) 69
Certificates of deposit (643) (409) (1,052) (107) (831) (938)
FHLB advances (372) (161) (533) (355) (726) (1,081)
----------------------------------------------------------------------------------
Total interest-bearing
liabilities (683) (969) (1,652) (155) (1,685) (1,840)
----------------------------------------------------------------------------------
Increase (decrease) in net
interest income $ (267) $ (46) $ (313) $ 493 $ 927 $ 1,420
==================================================================================
THE PROVISION FOR LOAN LOSSES was $140,000 for the year ended June 30, 2003
compared to $138,000 for the same period in 2002. The provision for both periods
reflects management's analysis of the Company's loan portfolio based on
information that is currently available to it at such time. In particular,
management considers the level of non-performing loans and potential problem
loans. Total charge-offs for 2003 were $189,000 compared to $111,000 during
2002. The charge-offs recorded in both periods related to several loans. While
the Company's management believes that the allowance for loan losses is
sufficient based upon information currently available to it, no assurances can
be made that future events, conditions, or regulatory directives will not result
in increased provisions for loan losses which may adversely effect income.
NONINTEREST INCOME totaled $1,693,000 for the year ended June 30, 2003,
$132,000, or 8.5%, higher than the $1,561,000 recorded for the year ended June
30, 2002. This increase was primarily attributable to fees related to services
provided to deposit customers which increased $190,000, from $612,000 for the
year ended June 30, 2002 to $802,000 for the year ended June 30, 2003 which was
largely attributable to the migration from certificates of deposit to demand
deposit accounts previously mentioned and an increase in other noninterest
income of $36,000, from $188,000 for the year ended June 30, 2002 to $224,000
for the year ended June 30, 2003, which was largely attributable to fees earned
from transactions initiated by non-deposit customers at the Bank's ATM's. These
increases were partially offset by a decline in revenue generated by the Bank's
trust department of $88,000 from $761,000 for the year ended June 30, 2002 to
$673,000 for the year ended June 30, 2003. The reduction in trust department
revenue was the result of a decline in "average assets under management" related
to the downturn in the financial markets.
35
[PEOPLE OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
NONINTEREST EXPENSE remained fairly stable at $5,723,000 for the year ended June
30, 2003, $16,000 or 0.3% higher than the $5,707,000 reported for the year ended
June 30, 2002, as increased data processing fees and other expenses were offset
by a decline in professional fees.
Data processing expense totaled $533,000 for 2003 and $413,000 for 2002, an
increase of $120,000 or 29.1%. This increase was primarily attributable to
$25,000 increase in computer maintenance expense, a $30,000 increase in software
expense and a $58,000 increase in depreciation.
Professional fees expenses were $183,000 for the year ended June 30, 2003,
$221,000 or 54.7% less than the $404,000 reported for the year ended June 30,
2002. Legal fees decreased $126,000 from $178,000 during 2002 to $52,000 during
2003 while audit and accounting fees decreased $43,000, from $130,000 to
$87,000. The decline in professional fees was primarily attributable to expenses
incurred during the formation of the Company during fiscal 2002 and the ongoing
regulatory reporting subsequent to its formation coupled with the Company
assuming much of the responsibility for its regulatory filings rather than
outsourcing it to its professional advisors during fiscal 2003.
Other expenses remained fairly stable at $1,414,000 for the year ended June 30,
2003, $54,000 or 4.0% greater than the $1,360,000 reported for the year ended
June 30, 2002. While this increase was attributable to small increases in
several miscellaneous expense categories, increases in employee education, State
of Ohio examination fees, organization dues and credit card and merchant related
processing fees contributed to the majority of the increase during 2003.
INCOME TAX EXPENSE Total income tax expense was $1,339,000 (an effective tax
rate of 34.5%) for the year ended June 30, 2003, compared to $1,407,000 (an
effective tax rate of 34.5%) during the year ended June 30, 2002.
FINANCIAL CONDITION
Total consolidated assets of the Company at June 30, 2003 were $207,349,000,
compared to $219,922,000 at June 30, 2002, a decrease of $12,573,000 or 5.7%.
NET LOANS declined $41.1 million or 20.4%, from $201.72 million at June 30,
2002, to $160.61 million at June 30, 2003. The following table illustrates
changes in the Bank's loan portfolio by category at June 30 of each year
presented.
BALANCE JUNE 30, BALANCE JUNE 30, CHANGE CHANGE
2003 2002 ($'S) (%)
---- ---- ----- ---
Residential single family mortgages $ 115,175 $ 149,612 $ (34,437) (23.0)%
Other residential and commercial mortgages 25,021 27,055 (2,034) (7.5)
----------- --------- ---------- -----
140,196 176,667 (36,471) (20.6)
Construction 12,802 14,660 (1,858) (12.7)
Commercial business 5,573 5,529 44 1.0
Consumer 2,452 5,146 (2,694) (52.4)
Home Improvement 4,772 5,774 (1,002) (17.4)
Deposit and other 290 470 (180) (38.3)
----------- --------- ---------- -----
166,085 208,246 (42,161) (20.2)
Deferred loan fees (209) (132) (77) (58.3)
Undisbursed portion of loans (4,405) (5,516) 1,111 20.1
Allowance for loan losses (862) (882) 20 2.3
----------- --------- ---------- -----
Total loans, net $ 160,609 $ 201,716 $ (41,107) 20.4 %
----------- --------- ---------- -----
36
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
While the Bank continues to be a strong residential lender throughout the
communities in which it operates, as previously mentioned, management chose to
curtail the Bank's mortgage originations rather than expose the Bank to what it
believed to be unacceptable levels of interest rate risk. As a result, mortgage
loans outstanding decreased $36,471,000 or 20.6%, from $176,667,000 for the year
ended June 30, 2002 to $140,196,000 for the year ended June 30, 2003. The
balance of the decline in loans from 2002 to 2003 was attributable to smaller
declines in nearly all remaining categories of loans.
THE ALLOWANCE FOR LOAN LOSSES decreased from $882,000 at June 30, 2002 to
$862,000 at June 30, 2003 as a result of net charge offs of $160,000, which were
partially offset by a provision for loan losses of $140,000. The 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 regarding the
impact of economic conditions on the portfolio.
The following table compares non-performing loans, which are loans past due 90
days or more and non-accruing loans, at June 30, 2003 and 2002, respectively
June 30, June 30,
2003 2002
---- ----
Non-accrual $ 634,000 $ 352,000
Past due 90+ and still accruing 2,559,000 637,000
----------- -----------
Total non-performing loans $ 3,193,000 $ 989,000
----------- -----------
Non-performing loans increased $2,204,000, from $989,000 at June 30, 2002, to
$3,193,000 at June 30, 2003. This increase can be broken down as follows;
$859,000 in the 1-4 family mortgage portfolio, $267,000 in the commercial real
estate loan portfolio, $375,000 in the construction loan portfolio and $747,000
in the commercial business loan portfolio. The increase in non-performing 1-4
mortgage loans is attributable to 7 relationships (two of which have been placed
on non-accrual) in which the Bank is secured by first mortgages on single-family
residences. The increase in non-performing commercial real estate loans is
attributable to one relationship which has been placed on non-accrual and is
secured by a first mortgage on a single-family rental property. The Bank has
specifically reserved $25,000 against this loan. The increase in non-performing
construction loans is attributable to one relationship and is secured by a first
mortgage loan on a business property. The Bank has specifically reserved $11,000
against this loan. The increase in non-performing commercial business loans is
attributable to one relationship (two loans) with a local manufacturer and is
secured by all business assets. Subsequent to June 30, 2003, the borrower made
payments sufficient to bring both loans current and is no longer considered
non-performing. Management is working closely with these borrowers to bring
these loans current. The ratio of the Company's allowance for loan losses to
non-performing loans was 27.0% and 89.2% at June 30, 2003 and 2002,
respectively. Management believes that the problems with these loans are
isolated and not indicative of the loan portfolio in total.
FEDERAL HOME LOAN BANK STOCK increased $221,000 or 4.40%, from $5.05 million at
June 30, 2002, to $5.27 million at June 30, 2003. This increase was entirely the
result of stock dividends received during 2003.
INTEREST RECEIVABLE declined from $1.06 million at June 30, 2002 to $867,000 at
June 30, 2003. This decline was almost entirely attributable to declining
interest rates. While interest earning assets remained fairly stable from June
30, 2002 to June 30, 2003, the shift from longer term interest bearing assets
(loans) to lower yielding short-term investments and interest-bearing cash
equivalents coupled with lower overall interest rates, resulted in a 97 basis
point decline in the average rate earned on those assets from 7.65% for the year
ended June 30, 2002 to 6.68% for the year ended June 30, 2003.
37
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
DEPOSITS decreased $2.82 million or 2.3%, from $120.45 million at June 30, 2002
to $117.63 million at June 30, 2003. The following table illustrates changes in
the various types of deposits at June 30 of each year presented.
BALANCE BALANCE
JUNE 30, JUNE 30, CHANGE CHANGE
2003 2002 ($'S) (%)
-------- ----------- ------------ ------
Noninterest bearing accounts $ 5,815 $ 7,111 $ (1,296) (18.2)%
NOW accounts 21,700 26,314 (4,614) (17.5)
Super NOW accounts 1,095 500 595 119.0
Passbook accounts 20,823 20,302 521 2.6
Money market accounts 26,763 17,448 9,315 53.4
Certificates of deposit 41,433 48,772 (7,339) (15.0)
-------- ----------- ------------ ------
Total deposits $117,629 $ 120,447 $ (2,818) (2.3)%
Increases in Super NOW, passbook and money market accounts were primarily
attributable to customers transferring proceeds from maturing certificates of
deposit into these accounts. While the $4.6 million decline in NOW accounts was
almost entirely attributable to timing differences related to one public funds
depositor.
FHLB ADVANCES declined by $10.85 million or 14.5%, from $74.17 million at June
30,2002, to $63.33 million at June 30, 2003 as the Bank used proceeds generated
from repayments on loans to fund maturing advances.
OTHER LIABILITIES decreased by $220,000 or 14.5%, from $1.49 million at June 30,
2002, to $1.27 million at June 30, 2003. This decrease was primarily
attributable to a $211,000 decline in advance payments by borrowers from June
30, 2002 to June 30, 2003, which is consistent with the decline in single family
mortgages during that same time frame.
TOTAL STOCKHOLDERS'EQUITY increased $1.25 million or 5.4%, from $23.11 million
at June 30, 2002, to $24.35 million at June 30, 2003. The following table
illustrates changes in stockholders'equity from June 30, 2002 to June 30, 2003.
Total stockholders'equity, June 30, 2002 $ 23,106
Net income 2,545
Unrealized gain on securities AFS 57
Cash dividends ($0.09 per share) (680)
Exercise of stock options 248
Tax benefit related to exercise of options 14
Purchase of treasury shares (777)
Net change in equity from ESOP shares (162)
-----------
Total stockholders' equity, June 30, 2003 $ 24,351
===========
As the table indicates, the increase was primarily the result of $2.55 million
in net income for the year ended June 30, 2003 coupled with $248,000 in equity
raised through the exercise of stock options. These increases were partially
offset by $680,000 in dividends paid to the Company's stockholders, $777,000 in
purchases of treasury stock and $162,000 related to the net change in equity
related to the Company's ESOP.
38
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--COMPARISON OF YEARS ENDED JUNE
30, 2002 AND 2001
The Company reported earnings of $2,675,000 for the year ended June 30, 2002, an
increase of $254,000, or 10% above the $2,421,000 reported for the same period
in 2001. Basic earnings per share increased $0.03 or 9.1% from $0.33 for the
year ended June 30, 2001 to $0.36 for the year ended June 30, 2002. Diluted
earnings per share increased $0.03, or 9.4% from $0.32 for the year ended June
30, 2001 to $0.35 for the year ended June 30, 2002. The Company's return on
average assets was 1.23% for 2002 compared to 1.14% for 2001 and the return on
average equity was 11.84% for 2002 compared to 11.87% for 2001.
Earnings were higher in 2002 as a result of an increase in net interest income
of $1,421,000, or 20%, from $6,946,000 reported for the year ended June 30, 2001
to $8,367,000 for the year ended June 30, 2002. This increase was partially
offset by an increase in noninterest expense of $970,000 or 20.5%, from
$4,737,000 reported for the year ended June 30, 2001 to $5,707,000 for the year
ended June 30, 2002.
NET INTEREST INCOME was $8,367,000 for the year ended June 30, 2002, $1,421,000,
or 20% higher than the $6,946,000 reported for the year ended June 30, 2001.
This increase was attributable to a $1,840,000, or 1.0% decline in interest
expense that was partially offset by a $420,000 decline in interest income
earned during the year ended June 30, 2002. These declines were the result of
the general decline in market interest rates occurring throughout fiscal 2001
and fiscal 2002. Note, the Federal Reserve Bank's (the Fed") "Open Market
Committee" which establishes the Federal funds rate and the discount rate,
lowered these key interest rates a total of 14 times from July 1, 2000 through
June 30, 2002. The interest rates the Company charges its borrowers and pays its
depositors is significantly influenced by these rates.
Interest income was $15,918,000 for the year ended June 30, 2002, a decrease of
$420,000 or 2.6%, from $16,338,000 for the year ended June 30 2001, as interest
income earned on all categories of earning assets declined in comparison to the
previous year. As illustrated in the accompanying average balance sheet, this
decline was primarily attributable to a decline in interest income earned on
loans. Interest income earned on loans was $15,548,000 for the year ended June
30, 2002, $280,000 or 1.8% less than the $15,828,000 earned for the year ended
June 30, 2001. Lower interest rates made borrowing attractive and contributed to
the growth in the average balance of loans outstanding during the year. As a
result, average loans outstanding during the year increased $4,311,000 or 2.2%,
from $196,338,000 for the year ended June 30, 2001 to $200,649,000 for the year
ended June 30, 2002. The average yield earned on those loans declined 31 basis
points from 8.06% for the year ended June 30, 2001 to 7.75% for the year ended
June 30, 2002. This decline in yield was attributable to the local market's
reaction to the Fed's previously mentioned rate reductions.
Interest expense was $7,552,000 for the year ended June 30, 2002, a decrease of
$1,840,000, or 19.6% from $9,392,000 for the year ended June 30 2001, as
interest expense paid on certificates of deposit and FHLB advances declined
significantly in comparison to the previous year. Interest expense on
certificates of deposit was $2,416,000, $938,000 or 28.0% lower than the
$3,354,000 recorded in the year ended June 30, 2001. As illustrated in the
accompanying average balance sheet, the average balance of certificates of
deposit declined by $1,827,000, from $55,514,000 for the year ending June 30,
2001 to $53,687,000 for the year ending June 30, 2002. In addition, the average
rate paid on those certificates of deposit decreased by 154 basis points, from
6.04% during 2001 to 4.50% during 2002. Interest expense on FHLB advances was
$4,206,000, $1,081,000 or 20.4% lower than the $5,287,000 recorded in the year
ended June 30, 2001. Also illustrated in the accompanying average balance
sheet, the average balance of FHLB advances declined by $6,000,000, from
$85,088,000 for the year ended June 30, 2001 to $79,088,000 for the year ended
June 30, 2002. In addition, the average rate paid on those FHLB advances
decreased by 89 basis points, from 6.21% during 2001 to 5.32% during 2002.
39
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
These declines were somewhat offset by slight increases in interest expense on
the Company's demand deposit and savings accounts as depositors chose to invest
proceeds from maturing certificates in these short-term accounts. Accordingly,
the average balance of the Company's interest-bearing NOW and money market
accounts increased $13,153,000, from $21,964,000 for the year ended June 30,
2001, to $35,117,000 for the year ended June 30, 2002, while the average balance
of the Company's savings accounts increased $4,086,000 during the same period.
THE PROVISION FOR LOAN LOSSES was $138,000 for the year ended June 30, 2002
compared to $0 for the same period in 2001. The provision for both periods
reflects management's analysis of the Company's loan portfolio based on
information that is currently available to it at such time. In particular,
management considers the level of non-performing loans and potential problem
loans. Total charge-offs for 2002 were $111,000 compared to $51,000 during 2001.
The charge-offs recorded in both periods related to several loans. While Company
management believes that the allowance for loan losses is sufficient based on
information currently available to it, no assurances can be made that future
events, conditions, or regulatory directives will not result in increased
provisions for loan losses which may adversely effect income.
NONINTEREST INCOME totaled $1,561,000 for the year ended June 30, 2002, $76,000,
or 5.1%, higher than the $1,485,000 recorded for the year ended June 30, 2001.
This increase was primarily attributable to fees related to the introduction of
a new service, remittance processing, during the year ended June 30, 2002 which
generated $76,000 in fee income, as well as an increase in fees related to
services provided to deposit customers of $90,000, from $522,000 for the year
ended June 30, 2001 to $612,000 for the year ended June 30, 2002. These
increases were partially offset by a decline in revenue generated by the Bank's
trust department of $57,000 from $818,000 for the year ended June 30, 2001 to
$761,000 for the year ended June 30, 2002. The reduction in trust department
revenue was a result a decline in "assets under management" related to the
downturn in the financial markets.
NONINTEREST EXPENSE was $5,707,000 for the year ended June 30, 2002, $970,000 or
20.5% higher than the $4,737,000 reported for the year ended June 30, 2001. The
increase was primarily attributable to increases in salaries and employee
benefits, net occupancy expenses and professional fees during the year.
Salaries and employee benefits totaled $2,740,000 for 2002 and $2,244,000 for
2001, an increase of $496,000 or 22.1%. In addition to normal salary increases,
2002 was the first full year of operation of the Bank's Clayton branch and its 5
full time employees, which was opened in January of 2001, $114,000 was
attributable to expenses related to the Company's defined benefit plan which
were $179,000 for 2002 compared to $62,000 for 2001, and $60,000 was
attributable to expenses related to employee health insurance which was $204,000
for 2002 compared to $146,000 for 2001.
Net occupancy expenses were $409,000 for the year ended June 30, 2002, $44,000
or 12.1% higher than the $365,000 reported for the year ended June 30, 2001. The
increase was primarily attributable the Bank's Clayton branch being in operation
for all of fiscal 2002, as compared to six months during fiscal 2001 as well as
small increases in several occupancy related expenses during the year ended
2002.
Professional fees expenses were $404,000 for the year ended June 30, 2002,
$181,000 or 81.2% higher than the $223,000 reported for the year ended June 30,
2001. Legal fees increased $104,000, from $74,000 during 2001 to $178,000 during
2002 while audit and accounting fees increased $56,000, from $74,000 to
$130,000. The increase in professional fees was primarily attributable to the
formation of the Company during 2002 and the increased regulatory filing
requirements.
40
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAX EXPENSE Total income tax expense was $1,407,000 (an effective tax
rate of 34.5%) for the year ended June 30, 2002, compared to $2,421,000 (an
effective tax rate of 34.5%) during the year ended June 30, 2001.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Company's interest rate risk management function
is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Company's business
focus, operating environment, capital and liquidity requirements and performance
objectives, establish asset concentration guidelines and manage the risk
consistent with Board-approved guidelines. Through such management, the Company
seeks to reduce the vulnerability of its operations to changes in interest rates
and to manage the ratio of interest rate sensitive assets to interest rate
sensitive liabilities within specified maturities or repricing dates. The
Company's Board of Directors has established an Asset/Liability Committee
consisting of management officers, which is responsible for reviewing the
Company's asset/liability policies and interest rate risk position. Such
committee generally meets on a quarterly basis, and at other times as dictated
by market conditions, and reports to the Board of Directors after each such
meeting.
The Company's interest rate risk strategy primarily consists of: (i) emphasizing
the attraction and retention of core deposits, which tend to be a more stable
source of funding, (ii) emphasizing the organization of adjustable rate mortgage
loan products and short-term commercial loans, the origination of which is
largely dependent on the market demand for such loans, (iii) when market
conditions are favorable and in consideration of the regulatory requirements
relating to required levels of residential loans which must be maintained by the
Bank, selling fixed-rate one-to-four-family mortgage loans, (iv) investing
primarily in short-term U.S. Government securities and mortgage-backed
securities, and (v) using FHLB advances as a funding source when rates on FHLB
advances compare favorably to local competitive deposit rates. As a traditional
thrift lender, the Company has a significant amount of its earning assets
invested in fixed-rate mortgages with contractual maturities greater than one
year. At June 30, 2003 an aggregate of $154.85 million, or 74.7% of total
assets, were invested in such assets.
The following table sets forth the change in net portfolio values of the Bank's
interest-earning assets and interest-bearing liabilities at June 30, 2003,
assuming changes in interest rates. The assumptions used to prepare this table
are the latest available by the OTS in assessing the interest rate sensitivity
of thrift institutions.
Change in Net Portfolio
Change in Interest Rate Value - Dollars Change in Net Portfolio
(Basis Points) (000's) Value - Percent
-------------- ------- ---------------
+300 $(3,811) (13)%
+200 (1,573) (5)
+100 2 0
0 - -
-100 (1,164) (4)
41
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
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,
prepayment 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.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY AND THE BANK
Recent legislation repealed the Office of Thrift Supervision's (the OTS) minimum
liquidity ratio requirement for the Bank. Regulations now require the Bank to
maintain sufficient liquidity to ensure its safe and sound operation. The Bank's
regulatory liquidity was 18.00% and 5.58% at June 30, 2003 and 2002,
respectively. The primary source of funding for the Company is dividend payments
from the Bank. Dividend payments by the Bank are used by the Company to meet
operating expenses and pay dividends to its stockholders.
The Bank's liquidity is a product of its operating, investing and financing
activities. The primary investment activity of the Bank is the origination of
mortgage loans and to a lesser extent commercial and consumer loans. 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. The sole investment of the
Company is its investment in the Bank's stock.
At June 30, 2003, the Bank had no outstanding commitments to originate loans,
unused lines of credit of $2,114,000 and standby letters of credit of $296,000.
As of June 30, 2003, certificates of deposit scheduled to mature in one year or
less totaled $30,890,000. 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. At June 30, 2002, the Bank exceeded all of its regulatory capital
requirements with tangible and tier 1 capital both at $23,853,000 or 11.6% of
adjusted total assets, and risk-based capital at $24,715,000 or 17.6% of
risk-weighted assets. The required minimum ratios 1.5% for tangible capital to
adjusted total assets, 4.0% for tier 1 capital to adjusted total assets and 8.0%
for risk-based capital to risk-weighted assets. See "Regulatory Matters" in the
accompanying notes to the consolidated financial statements for the Bank's
capital calculations as of June 30, 2003 and 2002.
The Bank's most liquid assets are cash and cash equivalents. The level of cash
and cash equivalents is dependent on the Bank's operating, financing lending and
investing activities during any given period. At June 30, 2003, the Bank's cash
and cash equivalents totaled $15,835,000. The Company's and Bank's future
short-term requirements for cash are not expected to significantly change.
However, in the event that the Bank should require funds in excess of its
ability to generate them internally, additional sources of funds are available,
including additional FHLB advances. With no parent company debt and sound
capital levels, the Company should have many options available for satisfying
its longer-term cash needs such as borrowing funds, raising equity capital and
issuing trust preferred securities.
42
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
Management is not aware of any current recommendations or government proposals
which, if implemented would have a material effect on the Company's liquidity,
capital resources or operations.
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.
IMPACT OF CURRENT ACCOUNTING ISSUES
Accounting for Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which amends SFAS No. 123, "Accounting
for Stock-Based Compensation". This statement provides the alternative methods
of transition for a voluntary change to a fair-value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The expanded annual disclosure requirements and the transition provisions
are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. SFAS No. 148
is not expected to have a material effect on the Company's consolidated
financial position or results of operations.
43
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
Accounting Guarantees of Indebtedness of Others
In November 2002, the FASB issued Financial Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires guarantor
entity, at the inception of a guarantee covered by the measurement provisions of
the interpretation, to record a liability for the fair value of the obligation
undertaken in issuing a guarantee, and also expands the related disclosures. The
provisions of initial recognition are effective for guarantees issued or
modified after December 31, 2002. Management believes that the adoption of FIN
45 will not have a significant impact on the Company's consolidated financial
statements.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities". FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive majority of the
entity's residual returns, or both. FIN 46 also requires disclosures about
variable interest entities that a company is not required to consolidate, but in
which it has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. FIN
46 is not expected to have a material effect on the Company's consolidated
financial statements.
Derivative Instruments and Hedging Activities
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain embedded derivative, and for hedging activities under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement amends SFAS No. 133 to reflect the decisions made as part of the
Derivatives Implementation Group (DIG) and in other FASB projects or
deliberations. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. Adoption of this standard is not expected to have a material effect on
the Company's consolidated financial statements.
Financial Instruments with Characteristics of Both Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This Statement
establishes standards for how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Adoption of this standard did not have a
material effect on the Company's consolidated financial statements.
44
[PEOPLES OHIO LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
MARKET AND DIVIDEND INFORMATION
As of June 30, 2003, the Company had approximately 700 holders of record of its
common stock. The Company's common stock is traded on the over-the-counter stock
market under the symbol "POHF." Sweeney Cartwright & Co. and Robert W. Baird,
Investments act as market makers for the Company's stock. Although the
Company does not have knowledge of the prices paid in all transactions,
according to information furnished by brokers who deal in the Company's common
stock, the following price ranges recorded for the periods shown.
MARKET PRICE PER SHARE (1)
MARKET PRICE
------------ CASH
LOW HIGH DIVIDENDS
------ ------ ---------
FISCAL
2003
1st Qtr. $ 3.11 $ 3.70 $ 0.045
2nd Qtr. 3.35 3.70 --
3rd Qtr. 3.62 4.10 0.045
4th Qtr. 4.00 4.25 --
FISCAL
2002
1st Qtr. $ 2.85 $ 3.92 $ 0.030
2nd Qtr. 3.21 4.68 --
3rd Qtr. 3.07 3.71 0.035
4th Qtr. 3.07 3.85 --
(1) Any payment of dividends will be subject to certain restrictions.
See Note 11 to Consolidated Financial Statements.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes the Company's equity compensation plans as of
June 30, 2003:
Number of Securities
Remaining Available for
Number of Securities Weighted Average Future Issuance Under
to be Issued Upon Exercise Price of Equity Compensation Plans
Exercise of Options Outstanding Options (excluding securities included in first column)
-------------------- ------------------- -----------------------------------------------
Equity compensation
plans approved by
shareholders 753,327 555,500
Equity compensation
plans not approved
by shareholders -- -- --
------- -------
Total 753,327 555,500
======= =======
45
[PEOPLES OHIO LOGO] DIRECTORS AND OFFICERS
PEOPLES OHIO FINANCIAL CORPORATION
DIRECTORS
DONALD COOPER-CHAIRMAN
President
Captor Corporation
Tipp City, Ohio
RONALD B. SCOTT
President and Chief Executive Officer
Peoples Savings Bank of Troy
Troy, Ohio
RICHARD W. KLOCKNER
President
Klockner & Associates
A Civil Engineering Company
Troy, Ohio
WILLIAM J. MCGRAW III
Attorney & President
Dungan & LeFevre Co., L.P.A.
Troy, Ohio
(Law Firm Which Represents
Peoples Ohio Financial Corporation)
THOMAS E. ROBINSON
Retired Executive
Troy, Ohio
JAMES S. WILCOX
Retired Chief Financial Officer
PMI Food Equipment Group
Troy, Ohio
PEOPLES SAVINGS BANK OF TROY
DIRECTORS
G. JOSEPH REARDON-CHAIRMAN
Retired President, Reardon & Associates
Manufacturing Representative
Troy, Ohio
RONALD B. SCOTT
President and Chief Executive Officer
Peoples Savings Bank of Troy
Troy, Ohio
DOUGLAS HAINES
President
Buckeye Mutual Insurance Group
Piqua, Ohio
PETER E. JENKINS
Mayor of the City of Troy
Troy, Ohio.
WILLIAM J. MCGRAW III
Attorney & President
Dungan & LeFevre Co., L.P.A.
Troy, Ohio
(Law Firm Which Represents
Peoples Savings Bank of Troy)
WILLIAM E. LUKENS
President & Majority Owner
Stillwater Technologies, Inc
A Contract Manufacturing Firm
Troy, Ohio
THOMAS E. ROBINSON
Retired Executive
Troy, Ohio
JAMES S. WILCOX
Retired Chief Financial Officer
PMI Food Equipment Group
Troy, Ohio
RICHARD W. WALLACE
President
Hartzell Fan, Inc
Piqua, Ohio
OFFICERS
RONALD B. SCOTT
President &
Chief Executive Officer
RICHARD J. DUTTON
Vice President
Chief Financial Officer
B. ANNE MERCER
Vice President
Chief Lending Officer
PHILLIP JONES
Vice President
Trust Division
LINDA A. DANIEL
Vice President
Marketing/Administration
RICHARD K. BENDER
Vice President
Technology/Operations
ANNETTE L. GLADMAN
Assistant Vice President
MARK R. WALTERSHEIDE
Trust Officer
CORNELIA E. TINKLER
Trust Officer
ROGER J. BORCHERS
Trust Operations Officer
46
[PEOPLES OHIO LOGO] DIRECTORS AND OFFICERS (continued)
ADVISORY DIRECTORS
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 W. Main Street
Troy, Ohio 45373
Squire, Sanders & Dempsey L.L.P.
Huntington Center
41 South High Street
Columbus, Ohio 43215
AUDITORS
BKD, LLP
312 Walnut Street, Suite 300
P.O. Box 5367
Cincinnati, Ohio 45201-5367
FORM 10-K AND OTHER FINANCIAL INQUIRIES
The Bank's annual report on Form 10K will be furnished upon request without
charge. Shareholders, analysts and others seeking this and other requests for
information referring to stock, annual shareholders' meeting and related
matters, please contact:
RONALD B. SCOTT RICHARD J. DUTTON TRANSFER AGENT AND REGISTRAR
President / CEO Vice-President / CFO Registrar and Transfer Company
Peoples Savings Bank of Troy Peoples Savings Bank of Troy 10 Commerce Drive
635 S. Market Street 635 S. Market Street Cranford, New Jersey 07016-3572
Troy, Ohio 45373 Troy, Ohio 45373
47
[PEOPLES OHIO LOGO] PEOPLES SAVINGS
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
ATM
Goodrich Corporation
Employee Area
Troy, Ohio
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
126 High Street
Piqua, Ohio
937-773-9290
8265 North Main Street
Dayton, Ohio
937-454-2200