EXHIBIT 13
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
Peoples Ohio
Financial Corporation
2004
Annual Report
[PEOPLES OHIO FINANCIAL CORPORATION 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
Caven Meats
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
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
Dear Shareholder:
Fiscal 2004 was a year of challenges and opportunities for Peoples Ohio
Financial Corporation (OTC:POHF) and Peoples Savings Bank (Troy-Piqua-Clayton).
As the financial services industry experienced the continuation of an unparalled
interest rate environment, Peoples boldly implemented strategic initiatives
designed to intentionally reposition the bank's balance sheet. Remembering the
historical lessons learned by savings and loan organizations during the adverse
rate environment in the 1980s, we decided to proactively "shrink" the bank in a
controlled, planned way.
A key strategy was to mitigate the effect of the prolonged low interest rate
environment by divesting ourselves of long-term fixed-rate assets (primarily
30-year fixed rate mortgages) in favor of short-term interest-earning assets
(primarily investment securities with weighted-average maturities from 1 to 3
years). Using this approach, Peoples Savings Bank actually adjusted its loan
portfolio to reflect a $50 million reduction over the past two years. We believe
that this strategy reduced the bank's exposure to interest risk and now better
positions the bank as interest rates begin to rise.
During the last quarter of Fiscal 2004, Peoples was already working to
re-establish our historic role as one of the top lenders in Troy and Miami
County. We returned to a strategy which has served us extremely well in the
past...finance housing developments, then finance the related construction
loans, and finally, acquire the consumer mortgage loan business generated by the
newly-constructed housing. Building on long-standing relationships with area
developers and builders, we have aggressively marketed competitive financing
packages and are currently funding 10 major housing developments in Troy and
Miami County. Now working in a rising interest rate environment, we believe that
the strength of the local area economy will contribute to our success in again
growing loan volume and revenue.
Another important area of strategic initiative in Fiscal 2004 was a real focus
on non-interest income, which grew to $2,174,000. This compares to $1,693,000
recorded for the previous fiscal year, reflecting an increase of $481,000 or
28.4%. While it is difficult for small banks to do so, Peoples has been able to
initiate new services which not only greatly benefit customers, but also
generate income for the bank. Such services being offered by Peoples include:
remittance processing; check imaging; check printing (for consumers and
businesses); overdraft privilege; and electronic processing.
The overall level of performance of this financial organization has been very
high in recent years when compared to its peer group. While the Fiscal 2004 year
was an intentionally different one in terms of profitability, our performance
remained competitive. The total earnings for Fiscal 2004 were $1,631,000 or
$0.22 per diluted share as compared to Fiscal 2003 earnings of $2,545,000 or
$0.33 per diluted share. When comparing important key indicators like return on
assets (ROA), which was .82% and return on equity (ROE) which was 6.57%, Peoples
remains in the mid-range to high-range when compared to peers.
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
In addition, shareholder value has remained a top priority. Shares of Peoples
stock, which rose almost 40% in Fiscal 2003, has held a similar value in Fiscal
2004. We believe the continuation of previously implemented program of buying
back stock and increasing dividends has benefited our shareholders
significantly.
As with many financial organizations, Peoples has experienced some turnover in
personnel. As we previously addressed with the loan area, we recruited top-notch
professionals for the trust area. With the expertise now available, the services
of that area are now being expanded to include investment and other wealth
management services. Overall, we believe that our current team of board,
management, and staff is probably the most experienced and capable in the
history of the organization.
It must be noted that we lost an important member of that team with the recent
passing of Bank Board President G. Joseph Reardon. On the board since 1984 and
serving as president since 1989, Joe served and led with dedication, enthusiasm,
and vision. He will be missed and remembered for his service and friendship.
Peoples Ohio Financial Corporation and Peoples Savings Bank will continue to
have success by remaining true to our values as a local financial organization
while continually reinventing ourselves to meet constantly changing customer
needs and market conditions. To remain competitive, we must aggressively market
and brand Peoples...reinforcing the fact that "the local bank" represents an
important difference in the way financial services are provided. As result, we
believe that profitability and shareholder value will be achieved.
/s/ Ronald B. Scott
Ronald B. Scott
President/CEO
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] SELECTED CONSOLIDATED FINANCIAL DATA
At June 30,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------- --------- ---------- ------- ---------
(In thousands)
BALANCE SHEET DATA:
Total amount of:
Assets $193,196 $207,349 $219,922 $214,841 $205,140
Loans, net 150,735 160,609 201,716 197,483 189,878
Deposits 114,223 117,629 120,447 108,398 109,461
FHLB advances 53,295 63,329 74,174 83,522 74,726
Stockholders' equity 24,391 24,351 23,106 21,002 18,702
Year ended June 30,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------- --------- ---------- -------- ---------
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Total interest income $ 11,095 $ 13,953 $ 15,918 $ 16,338 $ 14,598
Total interest expense 4,144 5,900 7,551 9,392 7,931
Net interest income 6,951 8,054 8,367 6,946 6,667
Provision for loan losses 330 140 138 - 30
Non-interest income 2,174 1,693 1,561 1,485 1,374
Non-interest expense 6,420 5,723 5,707 4,737 4,268
Net income 1,631 2,545 2,675 2,421 2,480
PER SHARE DATA:
Basic earnings $ 0.22 $ 0.34 $ 0.36 $ 0.33 $ 0.33
Diluted earnings 0.22 0.33 0.35 0.32 0.31
Cash dividends 0.12 0.09 0.065 0.03 0.03
Year-end book value 3.34 3.27 3.11 2.82 2.52
Year-end market value 4.16 4.20 3.35 3.00 4.13
KEY RATIOS:
Return on average assets 0.82% 1.16% 1.23% 1.14% 1.28%
Return on average equity 6.57 10.07 11.84 11.87 13.62
Average equity to average assets 12.20 11.49 10.38 9.64 9.37
Net interest margin 3.59 3.86 4.02 3.41 3.56
Efficiency ratio (1) 70.36 58.70 57.50 56.20 53.10
Dividend payout ratio (2) 54.55 26.47 18.06 9.09 9.09
- ---------------------------------------
(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 FINANCIAL CORPORATION LOGO] INDEPENDENT ACCOUNTANTS' REPORT
[BKD LLP LOGO]
To the Audit Committee,
Board of Directors and Stockholders
Peoples Ohio Financial Corporation
Troy, Ohio
We have audited the accompanying consolidated balance sheets of Peoples Ohio
Financial Corporation as of June 30, 2004 and 2003, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 referred to above present
fairly, in all material respects, the financial position of Peoples Ohio
Financial Corporation as of June 30, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2004, in conformity with accounting principles generally accepted in
the United States of America.
/s/ BKD, LLP
Cincinnati, Ohio
August 4, 2004
4
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
2004 2003
------------- -------------
ASSETS
Cash and cash equivalents $ 10,875,107 $ 15,835,436
Held-to-maturity securities (fair value of $543,000 and $824,000) 516,429 779,425
Available-for-sale securities 15,725,636 16,687,228
Loans, net of allowance for loan losses of $1,047,887 and $862,235 150,734,679 160,608,931
Premises and equipment 4,399,413 4,654,915
Federal Home Loan Bank stock 5,487,000 5,272,800
Interest receivable 730,940 867,150
Cash surrender value of life insurance 4,196,239 --
Other assets 530,095 2,643,035
------------- -------------
Total assets $ 193,195,538 $ 207,348,920
============= =============
LIABILITIES
Deposits $ 114,223,395 $117, 629,404
FHLB advances 53,295,390 63,328,746
Interest payable 63,091 134,575
Other liabilities 756,830 1,274,964
------------- -------------
Total liabilities 168,338,706 182,367,689
------------- -------------
COMMITMENTS AND CONTINGENCIES
EQUITY FROM ESOP SHARES 465,999 630,279
------------- -------------
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 -- 7,583,652 shares 7,471,633 7,433,586
Additional paid-in capital 24,424 186,600
Retained earnings 18,094,209 17,317,411
Accumulated other comprehensive income 1,474 56,616
Treasury stock, at cost
Common, 2004 -- 287,424 shares, 2003 -- 155,441 shares (1,200,907) (643,261)
------------- -------------
Total stockholders' equity 24,390,833 24,350,952
------------- -------------
Total liabilities and stockholders' equity $ 193,195,538 $ 207,348,920
============= =============
See Notes to Consolidated Financial Statements
5
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
INTEREST INCOME
Loans receivable $ 10,271,265 $ 13,396,877 $ 15,548,316
Investment securities 540,678 206,722 86,713
Other interest and dividend income 282,593 349,588 282,601
------------ ------------ ------------
Total interest income 11,094,536 13,953,187 15,917,630
------------ ------------ ------------
INTEREST EXPENSE
Deposits 1,241,664 2,226,509 3,345,544
Borrowings 2,902,008 3,673,164 4,205,509
------------ ------------ ------------
Total interest expense 4,143,672 5,899,673 7,551,053
------------ ------------ ------------
NET INTEREST INCOME 6,950,864 8,053,514 8,366,577
Provision for loan losses 329,901 140,000 138,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 6,620,963 7,913,514 8,228,577
------------ ------------ ------------
NON-INTEREST INCOME
Fiduciary activities 559,441 673,019 761,310
Service charges on deposit accounts and other 1,126,369 802,451 612,053
Net realized gain (loss) on sale
of available-for-sale securities 67,738 (6,597) --
Increase in cash surrender value
of life insurance 198,628 8,768 --
Other income 221,958 215,456 187,907
------------ ------------ ------------
Total non-interest income 2,174,134 1,693,097 1,561,270
------------ ------------ ------------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,915,187 2,761,617 2,739,747
Net occupancy expenses 449,861 408,020 409,104
Equipment expenses 153,627 170,332 148,353
Data processing fees 636,512 532,802 413,148
Professional fees 404,837 224,644 404,102
Advertising expenses 155,857 111,217 146,744
State of Ohio franchise taxes 282,380 252,880 233,154
Other expenses 1,421,992 1,261,238 1,212,854
------------ ------------ ------------
Total non-interest expenses 6,420,253 5,722,750 5,707,206
------------ ------------ ------------
INCOME BEFORE INCOME TAX 2,374,844 3,883,861 4,082,641
Income tax expense 744,038 1,338,819 1,407,255
------------ ------------ ------------
NET INCOME $ 1,630,806 $ 2,545,042 $ 2,675,386
============ ============ ============
BASIC EARNINGS PER SHARE $ 0.22 $ 0.34 $ 0.36
============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.22 $ 0.33 $ 0.35
============ ============ ============
See Notes to Consolidated Financial Statements
6
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
ACCUMULATED
COMMON ADDITIONAL OTHER
STOCK PAID-IN RETAINED COMPREHENSIVE TREASURY
AMOUNT CAPITAL EARNINGS INCOME STOCK TOTAL
----------- ----------- ----------- ------------- ------------ ------------
BALANCES, JULY 1, 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
($.09 per share) (679,664) (679,664)
Exercise of stock options 144,002 (30,284) $ 133,974 247,692
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
Net income 1,630,806 1,630,806
Change in unrealized gain
(loss) on securities
available for sale, net of
reclassification adjustment
and tax effect (55,142) (55,142)
------------
Total comprehensive
income 1,575,664
Cash dividends
($.12 per share) (880,419) (880,419)
Exercise of stock options (186,600) (99,822) 547,544 261,122
Purchase of treasury shares (1,105.190) (1,105,190)
Tax benefit of stock options 24,424 24,424
Net change in equity from
ESOP shares 38,047 126,233 164,280
----------- ----------- ----------- ------------- ------------ ------------
BALANCES, JUNE 30, 2004 $ 7,471,633 $ 24,424 $18,094,209 $ 1,474 $ (1,200,907) $ 24,390,833
=========== =========== =========== ============= ============ ============
See Notes to Consolidated Financial Statements
7
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 1,630,806 $ 2,545,042 $ 2,675,386
Items not requiring (providing) cash
Provision for loan losses 329,901 140,000 138,000
Depreciation and amortization 389,845 393,970 337,089
Amortization of deferred loan fees (184,836) (120,146) (149,793)
Deferred income tax 106,000 74,000 107,000
Investment securities amortization, net 126,050 44,885 1,849
Federal Home Loan Bank stock dividends (214,200) (221,200) (265,700)
Net realized (gain) loss on available-for-sale securities (67,738) 6,597 --
Increase in cash surrender value of life insurance (196,239) -- --
Net change in
Interest receivable 136,210 192,400 (33,037)
Interest payable (71,484) (96,811) (28,427)
Other assets 2,137,364 (1,985,529) 264,196
Other liabilities (595,728) (323,756) 109,952
------------ ------------ ------------
Net cash provided by operating activities 3,525,951 649,452 3,156,515
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of available for sale securities (19,373,945) (22,020,584) --
Proceeds from maturities of available-for-sale securities 953,476 210,000 --
Proceeds from sale of available-for-sale securities 19,240,005 5,158,116 --
Proceeds from maturities of securities held to maturity 263,192 341,910 361,306
Net change in loans 9,729,187 41,087,266 (4,380,127)
Purchases of premises and equipment (134,343) (399,173) (792,943)
Purchase of life insurance contracts (4,000,000) -- --
------------ ------------ ------------
Net cash provided (used) by investing activities 6,677,572 24,377,535 (4,811,764)
------------ ------------ ------------
FINANCING ACTIVITIES
Net change in
Interest-bearing demand and savings deposits 8,098,991 4,522,222 18,942,142
Certificates of deposit (11,505,000) (7,339,420) (6,893,874)
Short-term advances -- (30,000,000)
Proceeds of FHLB advances 62,500,000 -- 41,000,000
Repayment of FHLB advances (72,533,356) (10,845,663) (20,347,152)
Cash dividends (880,419) (679,664) (483,577)
Purchase of stock (1,105,190) (777,235) --
Proceeds from exercise of stock options 261,122 247,692 --
------------ ------------ ------------
Net cash provided (used) by financing activities (15,163,852) (14,872,068) 2,217,539
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,960,329) 10,154,919 562,290
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 15,835,436 5,680,517 5,118,227
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,875,107 $ 15,835,436 $ 5,680,517
============ ============ ============
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 4,215,156 $ 5,996,484 $ 7,579,481
Income tax paid 744,279 1,164,014 1,321,715
Transfers from loans to other real estate owned -- -- 158,784
See Notes to Consolidated Financial Statements
8
[PEOPLES OHIO FINANCIAL CORPORATION 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, 2004 and 2003, cash equivalents consisted of interest-bearing
demand deposits.
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.
9
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
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.
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
10
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
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, 2004, 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 2004 and
2003 includes the effect of forfeitures.
11
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
YEAR ENDED JUNE 30
2004 2003 2002
--------- --------- ---------
Net income, as reported $ 1,631 $ 2,545 $ 2,675
Less: Total stock-based employee
compensation cost determined
under the fair value based method,
net of income taxes (37) 6 (129)
--------- --------- ---------
Pro forma net income $ 1,594 $ 2,551 $ 2,546
========= ========= =========
Earnings per share:
Basic - as reported 0.22 0.34 0.36
Basic - pro forma 0.22 0.34 0.34
Diluted - as reported 0.22 0.33 0.35
Diluted - pro forma 0.21 0.33 0.33
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: 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 3: RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash and/or on
deposit with the Federal Reserve Bank. The reserve required at June
30, 2004 was $300,000.
12
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 4: 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, 2004:
U.S. government agencies $ 11,361 $ 41 $ (5) $ 11,397
Mortgage-backed securities 4,363 -- (34) 4,329
---------------- ---------------- ---------------- ----------------
$ 15,724 $ 41 $ (39) $ 15,726
================ ================ ================ ================
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 $ -- $ 16,687
================ ================ ================ ================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
HELD TO MATURITY SECURITIES:
June 30, 2004:
U.S. government agencies $ 104 $ 1 $ -- $ 105
Mortgage-backed securities 312 24 -- 336
State and political subdivisions 100 2 -- 102
---------------- ---------------- ---------------- ----------------
$ 516 $ 27 $ -- $ 543
================ ================ ================ ================
June 30, 2003:
U.S. Treasury $ 100 $ 4 $ -- $ 104
Mortgage-backed securities 579 38 -- 617
State and political subdivisions 100 3 -- 103
---------------- ---------------- ---------------- ----------------
$ 779 $ 45 $ -- $ 824
================ ================ ================ ================
The amortized cost and fair value of securities available for sale
and held to maturity at June 30, 2004, 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.
13
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
AVAILABLE FOR SALE HELD TO MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ----------- -----------
One to five years $ 3,861 $ 3,857 $ 104 $ 105
Five to ten years 7,500 7,540 -- --
After ten years -- -- 100 102
----------- ----------- ----------- -----------
11,361 11,397 204 207
Mortgage-backed securities 4,363 4,329 312 336
----------- ----------- ----------- -----------
Totals $ 15,724 $ 15,726 $ 516 $ 543
=========== =========== =========== ===========
The book value of securities pledged as collateral, to secure public
deposits and for other purposes, amounted to $11,863,000 at June 30,
2004 and $8,712,000 at June 30, 2003.
Gross gains of $67,738 resulting from sales of available-for-sale
securities were realized for 2004. Gross losses of $6,597 resulting
from sales of available-for-sale securities were realized for 2003.
The tax expense (benefit) for net gains and losses on securities
transactions for 2004 and 2003 was $23,000 and $(2,000),
respectively.
Certain investments in debt securities are reported in the financial
statements at an amount less than their historical cost. Total fair
value of these investments at June 30, 2004, was $6,173,000, which
is approximately 38% of the fair value of the Company's investment
portfolio. These declines primarily resulted from recent increases
in market interest rates.
Based on evaluation of available evidence, including recent changes
in market interest rates and information obtained from regulatory
filings, management believes the declines in fair value for these
securities are temporary.
Should the impairment of any of these securities become other than
temporary, the cost basis of the investment will be reduced and the
resulting loss recognized in net income in the period the
other-than-temporary impairment is identified.
Securities with unrealized losses at June 30, 2004 were as follows:
Less than 12 Months 12 Months or Longer Total
-------------------------- ------------------------ --------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
----------- ----------- ---------- ---------- ----------- -----------
AVAILABLE FOR SALE
SECURITIES:
U.S. government
agencies $ 1,845 $ (5) $ -- $ -- $ 1,845 $ (5)
Mortgage-backed
securities 4,328 (34) -- -- 4,328 (34)
----------- ----------- --------- --------- ----------- -----------
$ 6,173 $ (39) $ -- $ -- $ 6,173 $ (39)
=========== =========== ========= ========= =========== ===========
14
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES
2004 2003
-------------- --------------
Mortgage loans on existing real estate
Residential single family units $ 104,471 $ 115,175
Other residential and commercial 27,582 25,021
-------------- --------------
Total real estate loans 132,053 140,196
Construction loans 8,473 12,802
Commercial business 6,714 5,573
Consumer 2,282 2,452
Home improvement 6,016 4,772
Deposit and other loans 264 290
-------------- --------------
155,802 166,085
Deferred loan fees (177) (209)
Undisbursed portion of loans (3,842) (4,405)
Allowance for loan losses (1,048) (862)
-------------- --------------
Total loans $ 150,735 $ 160,609
============== ==============
2004 2003 2002
----------- -------------- --------------
Allowance for loan losses
Balances, July 1 $ 862 $ 882 $ 843
Provision for losses 330 140 138
Recoveries on loans 21 29 12
Loans charged off (165) (189) (111)
----------- -------------- --------------
Balances, June 30 $ 1,048 $ 862 $ 882
=========== ============== ==============
Impaired loans totaled $899,000 and $1,125,000 at June 30, 2004 and
2003, respectively. An allowance for loan losses of $438,000 and
$11,000 relates to impaired loans of $899,000 and $375,000 at June
30, 2004 and 2003, respectively. At June 30, 2003, impaired loans of
$750,000 had no related allowance for loan losses.
Interest of $18,576 and $50,000 was recognized on average impaired
loans of $1,087,000 and $1,123,000 for 2004 and 2003, respectively.
Interest of $1,076 and $64,000 was recognized on impaired loans on a
cash basis during 2004 and 2003, respectively.
At June 30, 2004 and 2003, accruing loans delinquent 90 days or more
totaled $565,000 and $2,559,000, respectively. Non-accruing loans at
June 30, 2004 and 2003 were $683,000 and $634,000, respectively.
15
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 6: PREMISES AND EQUIPMENT
2004 2003
------------ ------------
Land $ 955 $ 955
Buildings 4,864 4,858
Equipment 3,792 3,663
------------ ------------
Total cost 9,611 9,476
Accumulated depreciation (5,212) (4,821)
------------ ------------
Net premises and equipment $ 4,399 $ 4,655
============ ============
NOTE 7: DEPOSITS
2004 2003
------------ ------------
Noninterest bearing accounts $ 12,672 $ 5,815
NOW accounts 19,964 21,700
Super NOW accounts 1,463 1,095
Passbook accounts 23,850 20,823
Money market accounts 26,346 26,763
Certificates and other time deposits of $100,000 or more 9,231 15,035
Other certificates and time deposits 20,697 26,398
------------ ------------
Total deposits $ 114,223 $ 117,629
============ ============
Certificates and other time deposits maturing
in years ending June 30
2005 $ 20,822
2006 2,106
2007 3,545
2008 2,553
2009 902
------------
$ 29,928
============
16
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 8: LONG-TERM DEBT
2004 2003
------------- ------------
Federal Home Loan Bank advances, fixed and variable rates,
due at various dates through May 1, 2022 $ 53,295 $ 63,329
============= ============
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
2005 $ 30,404
2006 4,919
2007 1,548
2008 5,097
2009 873
Thereafter 10,454
-------------
$ 53,295
=============
The Bank has unused letters of credit with the Federal Home Loan
Bank aggregating $26,766,333 expiring at various dates from July
2004 through May 2009.
NOTE 9: INCOME TAX
2004 2003 2002
------------ ------------- ------------
Income tax expense
Currently payable $ 638 $ 1,265 $ 1,300
Deferred income taxes 106 74 107
------------ ------------- ------------
Income tax expense $ 744 $ 1,339 $ 1,407
============ ============= ============
Reconciliation of federal statutory to actual
tax expense
Federal statutory income tax at 34% $ 807 $ 1,321 $ 1,388
Life insurance (67) - -
Other 4 18 19
------------ ------------- ------------
Actual tax expense $ 744 $ 1,339 $ 1,407
============ ============= ============
17
[PEOPLES OHIO FINANCIAL CORPORATION 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:
2004 2003
---- ----
DEFERRED TAX ASSETS
Allowance for loan losses $ 356 $ 251
Organizational costs 13 18
Other 11 1
------- -------
Total assets 380 270
------- -------
DEFERRED TAX LIABILITIES
FHLB stock (725) (653)
Depreciation (174) (131)
Prepaid expenses (101) --
Unrealized gain on available for sale securities (1) (30)
------- -------
Total liabilities (1,001) (814)
------- -------
$ (621) $ (544)
======= =======
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:
2004 2003
---- ----
Unrealized gains (losses) on securities available for sale $(16) $ 79
Reclassification for realized amount included in income 67 (7)
---- ----
Other comprehensive income (loss), before tax effect (83) 86
Tax expense (credit) (28) 29
---- ----
Other comprehensive income (loss) $(55) $ 57
==== ====
18
[PEOPLES OHIO FINANCIAL CORPORATION 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, 2004
and 2003, that the Bank meets all capital adequacy requirements to which
it is subject.
As of June 30, 2004, 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, 2004
Total Risk-Based Capital (to
Risk- Weighted Assets) $23,085 18.9% $ 9,776 8.0% $12,220 10.0%
Tier I Capital (to Risk- Weighted Assets) 22,037 18.0% 4,888 4.0% 7,332 6.0%
Core Capital (to Adjusted Total Assets) 22,037 11.6% 7,625 4.0% 9,531 5.0%
Tangible Capital (to Adjusted Total Assets) 22,037 11.6% 2,859 1.5%
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%
19
[PEOPLES OHIO FINANCIAL CORPORATION 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, 2004, total regulatory capital of
the Bank was $22,037,000, of which approximately $1,459,000 was
potentially available for distribution to the Company.
NOTE 12: EMPLOYEE BENEFIT PLANS
The Bank has a noncontributory defined benefit pension plan covering all
employees who meet the eligibility requirements. The Bank's funding policy
is to make the minimum annual contribution that is required by applicable
regulations, plus such amounts as the Bank may determine to be appropriate
from time to time. The Bank expects to contribute $120,000 to the plan
next year.
The Bank uses a June 30 measurement date for the plan. Information about
the plan's funded status and pension cost follows:
PENSION BENEFITS
2004 2003
---- ----
Change in benefit obligation
Beginning of year $ 1,087 $ 985
Service cost 95 93
Interest cost 77 68
Actuarial gain (loss) 23 (6)
Benefits paid (100) (53)
------- -------
End of year 1,182 1,087
------- -------
Change in fair value of plan assets
Beginning of year 658 480
Actuarial return on plan assets 41 30
Employer contribution 154 201
Benefits paid (100) (53)
------- -------
End of year 753 658
------- -------
Funded status (429) (429)
Unrecognized net actuarial loss 402 390
Unrecognized prior service cost (11) (15)
------- -------
Accrued benefit cost $ (38) $ (54)
======= =======
Accumulated benefit obligation $ 879 $ 789
======= =======
Intangible asset $ -- $ --
======= =======
Accumulated other comprehensive income $ -- $ --
======= =======
Weighted-average assumptions used to determine
benefit obligation
Discount rate 7% 7%
Rate of compensation increase 4% 4%
20
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
2004 2003 2002
---- ---- ----
Weighted-average assumptions used to
determine benefit cost
Discount rate 7% 7% 7%
Expected return on plan assets 8% 8% 8%
Rate of compensation increase 4% 4% 4%
Components of net periodic benefit cost
Service cost $ 95 $ 93 $ 88
Interest cost 77 68 59
Expected return on plan assets (44) (30) 107
Amortization of prior service cost (4) (4) (4)
Recognized net actuarial loss 13 10 (143)
----- ----- -----
Net periodic benefit cost $ 137 $ 137 $ 107
===== ===== =====
The Bank has estimated the long-term rate of return on plan assets based
primarily on historical returns on plan assets, adjusted for changes in
target portfolio allocations and recent changes in long-term interest
rates based on publicly available information.
At June 30, 2004, the following benefit payments, which reflect expected
future service, as appropriate, are expected to be paid in each of the
years indicated:
PENSION BENEFITS
----------------
2005 $ 15
2006 18
2007 22
2008 23
2009 30
2010-2014 346
Plan assets are held by a bank-administered trust fund, which invests the
plan assets in accordance with the provisions of the plan agreement. The
plan agreement permits investment of up to 100% of the plan assets in
common stocks, corporate bonds and debentures, U.S. Government securities,
and other specified investments. The plan may invest in certain derivative
securities.
Asset allocation is primarily based on a strategy to provide a combination
of long-term growth and current income.
Plan assets are re-balanced quarterly. At June 30, 2004 and 2003, plan
assets by category are as follows:
2004 2003
---- ----
Cash 1.6% 12.1%
Equity securities -- 43.2
Corporate debt securities 7.9 7.5
U.S. Government debt securities -- 37.2
Mutual funds 90.4 --
Other 0.1 --
----- -----
100.0% 100.0%
===== =====
21
[PEOPLES OHIO FINANCIAL CORPORATION 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 $55,519 for 2004, $49,749 for 2003 and
$40,079 for 2002.
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 2004, 2003 and 2002 were $29,000, $51,000 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, and 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
112,019 and 150,066 at June 30, 2004 and 2003. 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, 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
Net change in equity from ESOP shares (38) (126) (164)
----- ----- -----
Balances, June 30, 2004 $ 112 $ 354 $ 466
===== ===== =====
22
[PEOPLES OHIO FINANCIAL CORPORATION 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, 2003 $ 3,339
Changes in composition of related parties 23
New loans, including renewals 335
Payments, etc., including renewals (462)
-------
Balances, June 30, 2004 $ 3,235
=======
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 non-employee directors, at each year's annual
meeting of shareholders, there shall be granted automatically to each
outside director, the option to purchase 1,500 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 2004, the Bank granted options for 76,500
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:
2004 2003 2002
---- ---- ----
Risk-free interest rates 5.0% 5.0% 5.2%
Dividend yields 2.20% 2.20% .88% to 1.99%
Volatility factors of expected market
price of common stock 17% 25% 29% to 37%
Weighted-average expected life of the
options 10 years 10 years 10 years
23
[PEOPLES OHIO FINANCIAL CORPORATION 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, 2004,
2003 and 2002.
EMPLOYEES:
2004 2003 2002
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------- ------ ----- ------ ----- ------ -----
Outstanding, beginning
of year 559,523 $ 3.63 756,802 $ 3.39 692,302 $ 3.40
Granted 61,500 4.15 29,500 3.43 64,500 3.33
Exercised (97,120) 1.91 (150,481) 1.30 -- --
Forfeited/expired (29,070) 7.10 (76,298) 5.88 -- --
------- -------- -------
Outstanding, end of year 494,833 3.80 559,523 3.62 756,802 3.39
======= ======== =======
Options exercisable at
year end 404,133 3.79 530,023 3.63 756,802 3.39
Weighted-average fair value
of options granted during
the year 1.11 1.13 1.61
As of June 30, 2004, the employee options outstanding and exercisable are
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING LIFE(MONTHS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ------------ -------------- ----------- --------------
$1.01 to $2.50 156,000 14.3 $1.78 156,000 $1.78
$2.51 to $5.00 242,368 80.4 3.66 151,668 3.22
$5.01 to $7.50 47,340 49.0 6.81 47,340 6.81
$7.50 to $10.00 49,125 62.0 8.13 49,125 8.13
------- -------
494,833 3.80 404,133 3.79
======= =======
24
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
DIRECTORS:
2004 2003 2002
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ---------------------------- -------- ---------- -------- --------- ------- ---------
Outstanding, beginning
of year 193,804 $ 3.59 205,884 $ 3.38 190,884 $ 3.35
Granted 15,000 4.15 15,000 3.43 15,000 3.77
Exercised (34,500) 2.17 (27,080) 1.90 -- --
-------- -------- -------
Outstanding, end of year 174,304 3.92 193,804 3.59 205,884 3.38
======== ======== =======
Options exercisable at
year end 144,304 3.96 178,804 3.61 205,884 3.38
Weighted-average fair
value of options granted
during the year 1.11 1.13 1.71
As of June 30, 2004, the directors options outstanding and exercisable are
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING LIFE(MONTHS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- --------------------- ---------------- ----------- ----------------
$1.01 to $2.50 57,304 17.5 $1.89 57,304 $1.89
$2.51 to $5.00 72,000 83.2 3.49 42,000 3.11
$5.01 to $7.50 45,000 58.4 7.18 45,000 7.18
------- -------
174,304 3.92 144,304 3.96
======= =======
25
[PEOPLES OHIO FINANCIAL CORPORATION 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, 2004
WEIGHTED-
AVERAGE PER-SHARE
INCOME SHARE AMOUNT
-------- --------- ---------
BASIC EARNINGS PER SHARE
Income available to common
stockholders $ 1,631 7,356,046 $ 0.22
EFFECT OF DILUTIVE SECURITIES
Stock options 156,849
---------
DILUTED EARNINGS PER SHARE
Income available to common
stockholders and assumed
conversions $ 1,631 7,512,895 $ 0.22
======== ========= ========
Options to purchase 141,465 shares of common stock at $6.81 to $8.13 per
share were outstanding at June 30, 2004, 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, 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.
26
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
YEAR ENDED JUNE 30, 2002
WEIGHTED-
AVERAGE PER-SHARE
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.
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, 2004 JUNE 30, 2003
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Financial assets
Cash and cash equivalents $ 10,875 $ 10,875 $ 15,835 $ 15,835
Available for sale securities 15,726 15,726 16,687 16,687
Held-to-maturity securities 516 543 779 824
Loans, net of allowance
for loan losses 150,734 155,568 160,609 172,144
Stock in FHLB 5,487 5,487 5,273 5,273
Interest receivable 731 731 867 867
Cash surrender value of life
insurance 4,196 4,196
Financial liabilities
Deposits 114,223 116,936 117,629 118,476
FHLB advances 53,295 54,721 63,329 67,285
Interest payable 63 63 135 135
27
[PEOPLES OHIO FINANCIAL CORPORATION 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, STOCK IN FHLB, AND CASH SURRENDER VALUE OF LIFE
INSURANCE
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 the 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.
28
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
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.
At June 30, 2004 and 2003, the Bank had outstanding commitments to
originate loans aggregating approximately $4,524,000 and $0, respectively.
The commitments extended over varying periods of time with the majority
being disbursed within a one-year period. Loan commitments at fixed rates
of interest amounted to $3,838,000 and $0 at June 30, 2004 and 2003,
respectively, with the remainder at floating market rates.
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 $2,449,000
and $296,000, at June 30, 2004 and 2003, 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, 2004, the Bank had granted unused lines of credit to borrowers
aggregating approximately $4,384,000 and $7,811,000 for commercial lines
and open-end consumers lines, respectively. At June 30, 2003, unused lines
of credit to borrowers aggregated approximately $2,114,000 for commercial
lines and $7,843,000 for open-end consumer lines.
29
[PEOPLES OHIO FINANCIAL CORPORATION 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
2004 2003
---------- ----------
ASSETS
Cash $ 196 $ 41
Loans 2,070 1,011
Investment in common stock of Bank subsidiary 22,038 23,909
Advances to Bank subsidiary 506 --
Other assets 47 20
---------- ----------
Total assets $ 24,857 $ 24,981
========== ==========
EQUITY FROM ESOP SHARES $ 466 630
STOCKHOLDERS' EQUITY 24,391 24,351
---------- ----------
Total liabilities and stockholders' equity $ 24,857 $ 24,981
========== ==========
CONDENSED STATEMENTS OF INCOME
2004 2003 2002
---------- ---------- ----------
INCOME
Dividends from Bank subsidiary $ 3,457 $ 2,543 $ 483
Interest income 108 -- --
---------- ---------- ----------
3,565 2,543 483
EXPENSES -- Other 119 21 --
---------- ---------- ----------
INCOME BEFORE INCOME TAX AND
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARY 3,466 2,522 483
INCOME TAX BENEFIT -- (7) --
---------- ---------- ----------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF
SUBSIDIARY 3,446 2,529 483
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY (1,815) 16 2,192
---------- ---------- ----------
NET INCOME $ 1,631 $ 2,545 $ 2,675
========== ========== ==========
30
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENTS OF CASH FLOWS
2004 2003 2002
---------- ---------- ----------
OPERATING ACTIVITIES
Net income $ 1,631 $ 2,545 $ 2,675
Items not requiring (providing) cash 1,813 (24) (2,675)
---------- ---------- ----------
Net cash provided by
operating activities 3,444 2,521 --
---------- ---------- ----------
INVESTING ACTIVITIES--NET CHANGE
IN LOANS (1,059) (1,011) --
---------- ---------- ----------
FINANCING ACTIVITIES
Advances from (to) Bank subsidiary (506) 2,283 483
Repayment of advances from
Bank subsidiary -- (2,543) --
Purchase of stock (1,105) (777) --
Proceeds from exercise of stock options 261 248 --
Cash dividends (880) (680) (483)
---------- ---------- ----------
Net cash used in
financing activities (2,230) (1,469) --
---------- ---------- ----------
NET CHANGE IN CASH 155 41 --
CASH AT BEGINNING OF YEAR 41 -- --
---------- ---------- ----------
CASH END OF YEAR $ 196 $ 41 $ --
========== ========== ==========
31
[PEOPLES OHIO FINANCIAL CORPORATION 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 2004 and 2003.
JUNE 30, 2004 SEPTEMBER DECEMBER MARCH JUNE
--------- -------- -------- --------
Interest and dividend income $ 2,911 $ 2,760 $ 2,751 $ 2,673
Interest expense 1,138 1,043 1,008 955
--------- -------- -------- --------
Net interest income 1,773 1,717 1,743 1,718
Provision for loan losses 30 30 40 230
--------- -------- -------- --------
Net interest income after provision for
loan losses 1,743 1,687 1,703 1,488
Noninterest income 524 525 534 591
Noninterest expense 1,510 1,623 1,664 1,623
--------- -------- -------- --------
Income before income tax 757 589 573 456
Income tax expense 243 198 169 134
--------- -------- -------- --------
Net income $ 514 $ 391 $ 404 $ 322
========= ======== ======== ========
Earnings per share
Basic $ 0.07 $ 0.05 $ 0.06 $ 0.04
Diluted 0.07 0.05 0.05 0.04
Dividends per share 0.06 -- 0.06 --
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 --
Additional provision for loan losses in the fourth quarter of 2004
resulted from management's normal review of loan quality.
32
[PEOPLES OHIO FINANCIAL CORPORATION 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 2004 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.
Allowance for Loan Losses - The allowance for loan losses provides coverage for
probable losses inherent in the Company's loan portfolio. Management evaluates
the adequacy of the allowance for credit losses each quarter based on changes,
if any, in underwriting activities, the loan portfolio composition (including
product mix and geographic, industry or customer-specific concentrations),
trends in loan performance, regulatory guidance and economic factors. This
evaluation is inherently subjective, as it requires the use of significant
management estimates. Many factors can affect management's estimates of specific
and expected losses, including volatility of default probabilities, rating
migrations, loss severity and economic and political conditions. The allowance
is increased through provisions charged to operating earnings and reduced by net
charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans.
33
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
The allowance for credit losses relating to impaired loans is based on the
loan's observable market price, the collateral for certain collateral-dependent
loans, or the discounted cash flows using the loan's effective interest rate.
Regardless of the extent of the Company's analysis of customer performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio. This is due to several factors
including inherent delays in obtaining information regarding a customer's
financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses for larger
non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogenous groups of loans are among other factors. The Company
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Company's evaluation of imprecision
risk associated with the commercial and consumer allowance levels and the
estimated impact of the current economic environment.
Other 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.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--COMPARISON OF YEARS ENDED JUNE
30, 2004 AND 2003
The Company reported earnings of $1,631,000 for the year ended June 30, 2004, a
decline of $914,000, or 35.9% from the $2,545,000 reported for the same period
in 2003. Basic earnings per share decreased $0.12, or 35.3% from $0.34 for the
year ended June 30, 2003 to $0.22 for the year ended June 30, 2004. Diluted
earnings per share decreased $0.11, or 33.3% from $0.33 for the year ended June
30, 2003 to $0.22 for the year ended June 30, 2004. The Company's return on
average assets was 0.82% for 2004 compared to 1.16% for 2003 and the return on
average equity was 6.57% for 2004, compared to 10.07% for 2003.
The decline in earnings during 2004 was a result of a decline in net interest
income of $1,103,000, or 13.7% from $8,054,000 reported for the year ended June
30, 2003 to $6,951,000 for the year ended June 30, 2004. This decrease was
partially offset by an increase in noninterest income of $481,000 or 28.4%, from
$1,693,000 reported for the year ended June 30, 2003 to $2,174,000 for the year
ended June 30, 2004.
NET INTEREST INCOME was $6,951,000 for the year ended June 30, 2004, $1,103,000,
or 13.7% lower than the $8,054,000 reported for the year ended June 30, 2003.
This decline was the result of lower average net interest bearing assets
outstanding during 2004 ($20,661,000) in comparison to average net interest
bearing assets outstanding during 2003 ($22,783,000) coupled with the continued
low interest rate environment and the pressure it has placed on net interest
margins throughout the banking industry. Total interest income was $11,095,000
for the year ended June 30, 2004, a decline of $2,858,000, or 20.5% from the
$13,953,000 reported during the year ended June 30, 2003, due to lower average
loans outstanding coupled with lower interest rates. The decline in interest
income was partially offset by a $1,756,000, or 29.8% 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
accounts.
34
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest income was $11,095,000 for the year ended June 30, 2004, a decrease of
$2,858,000, or 20.5% from $13,953,000 for the year ended June 30 2003. As
illustrated in the accompanying average balance sheet, this decline was
attributable to both a decline in the average amount of loans outstanding, and a
decline in interest income earned on loans. Interest income earned on loans was
$10,271,000 for the year ended June 30, 2004, $3,126,000, or 23.3% less than the
$13,397,000 earned for the year ended June 30, 2003. 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 $28,864,000, or 15.7% from
$183,363,000 for the year ended June 30, 2003 to $154,499,000 for the year ended
June 30, 2004. The average yield earned on those loans declined 66 basis points
from 7.31% for the year ended June 30, 2003 to 6.65% for the year ended June 30,
2004. 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 2003 and fiscal 2004 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. In addition other
interest and dividend income decreased $67,000 from $350,000 for the year ended
June 30, 2003 to $283,000 for the year ended June 30, 2004.
These declines in interest income were partially offset by an increase in
interest income on investment securities 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 $334,000, from $207,000 for the year ended June
30, 2003 to $541,000 for the year ended June 30, 2004.
Interest expense was $4,144,000 for the year ended June 30, 2004, a decrease of
$1,756,000, or 29.8% from $5,900,000 for the year ended June 30 2003, as
interest expense paid on all interest bearing liabilities declined fairly
significantly in comparison to the previous year. As in the prior year,
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 $11,761,000, from $48,421,000 for the year
ended June 30, 2003, to $60,182,000 for the year ended June 30, 2004. However,
the increase in average balance was more than offset by a 67 basis point decline
in the rate paid on interest-bearing NOW and money market accounts from 1.23%
during 2003 to 0.56% during 2004. Interest expense on savings accounts was
$62,000, $206,000 or 76.9% lower than the $268,000 recorded in the year ended
June 30, 2003. As illustrated in the accompanying average balance sheet, the
average balance of savings accounts decreased by $3,013,000, from $28,275,000
for the year ending June 30, 2003 to $25,262,000 for the year ending June 30,
2004. In addition, the average rate paid on savings accounts decreased by 70
basis points, from 0.95% during 2003 to 0.25% during 2004. Interest expense on
certificates of deposit was $844,000, $520,000, or 38.1% lower than the
$1,364,000 recorded in the year ended June 30, 2003. As illustrated in the
accompanying average balance sheet, the average balance of certificates of
deposit declined by $3,501,000, from $37,511,000 for the year ending June 30,
2003 to $34,010,000 for the year ending June 30, 2004. In addition, the average
rate paid on those certificates of deposit decreased by 116 basis points, from
3.64% during 2003 to 2.48% during 2004. Interest expense on FHLB advances was
$2,902,000, $771,000 or 21.0% lower than the $3,673,000 recorded in the year
ended June 30, 2003. Also illustrated in the accompanying average balance sheet,
the average balance of FHLB advances declined by $15,253,000, from $71,889,000
for the year ended June 30, 2003 to $56,636,000 for the year ended June 30,
2004. The average rate paid on those FHLB advances remained stable at 5.12%.
35
[PEOPLES OHIO FINANCIAL CORPORATION 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)
----------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------ ------------------------------ ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- ------ --------- -------- ------ --------- -------- ------
Assets:
Interest-earning assets:
Interest-earning demand
deposits $ 15,406 $ 78 0.51% $ 10,985 $ 128 1.17% $ 1,144 $ 17 1.49%
Investment securities 18,471 541 2.93 9,392 207 2.20 1,256 87 6.93
Loans, including
nonaccrual loans 154,499 10,271 6.65 183,363 13,397 7.31 200,649 15,548 7.75
Federal Home Loan Bank,
stock 5,317 205 3.86 5,139 221 4.30 4,897 266 5.43
--------- -------- --------- -------- --------- --------
Total interest-earning
assets 193,694 11,095 5.73 208,879 13,953 6.68 207,946 15,918 7.65
-------- -------- --------
Noninterest earning assets 5,804 11,052 9,787
--------- --------- ---------
Total assets $ 199,498 $ 219,931 $ 217,731
========= ========= =========
Liabilities and
stockholders' equity:
Interest-bearing liabilities:
NOW and money
market accounts $ 60,182 $ 336 0.56 $ 48,421 $ 595 1.23% $ 35,117 547 1.56
Savings accounts 25,262 62 0.25 28,275 268 0.95 18,219 383 2.10
Certificates of deposit 34,010 844 2.48 37,511 1,364 3.64 53,687 2,416 4.50
--------- -------- --------- -------- --------- --------
Total interest-
bearing deposits 119,454 1,242 1.04 114,207 2,227 1.95 107,023 3,346 3.13
Federal Home Loan
Bank, advances 56,636 2,902 5.12 71,889 3,673 5.11 79,088 4,206 5.32
--------- -------- --------- -------- --------- --------
Total interest-bearing
liabilities 173,033 4,144 2.35 186,096 5,900 3.17 186,111 7,552 4.06
--------- -------- --------- -------- --------- --------
Other liabilities 8,559 8,559 9,018
--------- --------- ---------
Stockholder's equity,
including equity from
ESOP shares 24,841 25,276 22,602
--------- --------- ---------
Total liabilities and
stockholders' equity $ 199,498 $ 219,931 $ 217,731
========= ========= =========
Net interest-earning
assets $ 20,661 $ 22,783 $ 21,835
========= ========= =========
Net interest rate spread (1) $ 6,951 3.37% $ 8,053 3.51% $ 8,366 3.59%
======== ======== ========
Net interest margin (2) 3.59% 3.86% 4.02%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 111.94% 112.24% 111.73%
========= ========= =========
(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.
36
[PEOPLES OHIO FINANCIAL CORPORATION 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
--------------------------------------------------------------------------
2004 vs 2003 2003 vs 2002
------------------------------------ ------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- -------- --------- -------- -------- ---------
Interest-earning assets:
Demand deposits $ 39 $ (89) $ (50) $ 115 $ (4) $ 111
Investment securities 249 85 334 216 (96) 120
Loans (1,988) (1,138) (3,126) (1,293) (858) (2,151)
FHLB, stock 7 (23) (16) 13 (58) (45)
-------- -------- --------- -------- -------- ---------
Total interest-earning
assets (1,693) (1,165) (2,858) (949) (1,016) (1,965)
-------- -------- --------- -------- -------- ---------
Interest-bearing liabilities:
NOW and money market
accounts 120 (379) (259) 179 (131) 48
Savings (26) (180) (206) 153 (268) (115)
Certificates of deposit (118) (402) (520) (643) (409) (1,052)
FHLB advances (782) 11 (771) (372) (161) (533)
-------- -------- --------- -------- -------- ---------
Total interest-bearing
liabilities (806) (950) (1,756) (683) (969) (1,652)
-------- -------- --------- -------- -------- ---------
Increase (decrease) in net
interest income $ (887) $ (215) $ (1,102) $ (267) $ (46) $ (313)
======== ======== ========= ======== ======== =========
THE PROVISION FOR LOAN LOSSES was $330,000 for the year ended June 30, 2004
compared to $140,000 for the same period in 2003. 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 2004 were $165,000 compared to $189,000 during
2003. 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 $2,174,000 for the year ended June 30, 2004,
$481,000, or 28.4%, higher than the $1,693,000 recorded for the year ended June
30, 2003. This increase was primarily attributable to fees related to services
provided to deposit customers which increased $324,000, from $802,000 for the
year ended June 30, 2003 to $1,126,000 for the year ended June 30, 2004 which
was largely attributable to an increase in the number and average balances of
transaction accounts from 2003 to 2004 as depositors shifted deposits from
certificates of deposit to shorter-term demand accounts. In addition, the cash
surrender value of life insurance generated $199,000 in noninterest income
during the year ended June 30, 2004. The Bank did not own any life insurance
37
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
prior to fiscal 2004. These increases were partially offset by a decline in
revenue generated by the Bank's trust department of $114,000 from $673,000 for
the year ended June 30, 2003 to $559,000 for the year ended June 30, 2004. While
the average trust assets remained stable ( $130.1 million during 2004 compared
to $129.0 during 2003), a larger portion of those assets were held in custody
and agency accounts which typically generate lower fees than traditional trust
accounts.
NONINTEREST EXPENSE was $6,420,000 for the year ended June 30, 2004, $697,000 or
12.2% higher than the $5,723,000 reported for the year ended June 30, 2003, as
the Company experienced increases in salary and employee benefits, net occupancy
expense, data processing fees, professional fees, and advertising expense during
fiscal 2004.
Salaries and employee benefits totaled $2,915,000 for 2004 and $2,762,000 for
2003, an increase of $153,000 or 5.5% and were the result of normal salary
increases.
Net occupancy expense totaled $450,000 for 2004 and $408,000 for 2003, an
increase of $42,000 or 10.3%. This increase was primarily attributable to
remodeling of the Bank's main office and Piqua locations, which were completed
early in fiscal 2004.
Data processing fees totaled $637,000 for 2004 and $533,000 for 2003, an
increase of $104,000 or 19.5%. This increase was primarily attributable to
periodic maintenance of the Bank's processing hardware.
Professional fees expenses were $405,000 for the year ended June 30, 2004,
$180,000 or 80.0% greater than the $225,000 reported for the year ended June 30,
2003. This increase was attributable to $147,000 in fees associated with trust
specific audit and consulting services and $21,000 in other consulting services
neither of which were incurred during fiscal 2003. The balance of the increase
was due to overall increases in professional fees.
Advertising totaled $156,000 for 2004 and $111,000 for 2003, an increase of
$45,000 or 40.5%. This increase was primarily attributable to a timing
difference. The Bank takes great pride in being the primary sponsor of the Miami
County Homebuilder's Association, "Homarama." In previous years, this event took
place during September, however, during calendar 2004, the event was held during
May. Accordingly, the Bank incurred approximately $30,000 of expense related to
sponsoring this event twice during fiscal 2004. The balance of the increase was
due to overall increases in advertising costs.
Other expenses were $1,422,000 for the year ended June 30, 2004, $161,000 or
12.8% more than the $1,261,000 reported for the year ended June 30, 2003. This
increase was attributable to $103,000 in fees related to developing new products
and services not incurred during fiscal 2003, and a $35,000 increase in fees
related to collection activities. The balance of the increase was due to overall
increases in other expense items.
INCOME TAX EXPENSE Total income tax expense was $744,000 (an effective tax rate
of 31.3%) for the year ended June 30, 2004, compared to $1,339,000 (an effective
tax rate of 34.5%) during the year ended June 30, 2003.
FINANCIAL CONDITION
Total consolidated assets of the Company at June 30, 2004 were $193,196,000,
compared to $207,349,000 at June 30, 2003, a decrease of $14,153,000 or 6.8%.
NET LOANS declined $9.87 million or 6.1%, from $160.61 million at June 30, 2003,
to $150.74 million at June 30, 2004. The following table illustrates changes in
the Bank's loan portfolio by category at June 30 of each year presented.
38
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
BALANCE JUNE 30, BALANCE JUNE 30, CHANGE CHANGE
2004 2003 ($'S) (%)
---------------- ---------------- --------- -------
Residential single family mortgages $ 104,471 $ 115,175 $ (10,704) (9.3)%
Other residential and commercial mortgages 27,582 25,021 (2,561) 10.2%
--------- --------- ---------
Total mortgage loans 132,053 140,196 (8,143) (5.8%)
Construction 8,473 12,802 (4,329) (33.8%)
Commercial business 6,714 5,573 1,141 20.5%
Consumer 2,282 2,452 (170) (6.9%)
Home Improvement 6,016 4,772 1,244 26.1%
Deposit and other 264 290 (26) (9.0%)
--------- --------- ---------
Gross loans 155,802 166,085 (10,283) (6.2%)
Deferred loan fees (177) (209) 32 15.3%
Undisbursed portion of loans (3,842) (4,405) 563 12.8%
Allowance for loan losses (1,048) (862) (186) (21.6%)
--------- --------- ---------
Total loans, net $ 150,735 $ 160,609 $ (9,874) (6.1)%
========= ========= =========
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 $8,143,000 or 5.8%, from $140,196,000 for the year
ended June 30, 2003 to $132,053,000 for the year ended June 30, 2004. The
balance of the decline in loans from 2003 to 2004 was attributable to a
$4,329,000 decline in construction loans which was partially offset by increases
in commercial business and home improvement loans of $1,141,000 and $1,244,000,
respectively.
THE ALLOWANCE FOR LOAN LOSSES increased from $862,000 at June 30, 2003 to
$1,048,000 at June 30, 2004 as a result of provisions for loan losses of
$330,000, which were partially offset by net charge offs of $144,000. 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, 2004 and 2003, respectively
June 30, June 30,
2004 2003
Non-accrual $ 683,000 $ 634,000
Past due 90+ and still accruing 565,000 2,559,000
---------- ----------
Total non-performing loans $1,248,000 $3,193,000
========== ==========
Non-performing loans decreased $1,945,000, from $3,193,000 at June 30, 2003, to
$1,248,000 at June 30, 2004. This decrease can be broken down as follows;
$1,205,000 in the 1-4 family mortgage portfolio, $744,000 in the commercial
business loan portfolio. The decline in non-performing 1-4 mortgage loans
represents a decline of 12 mortgages from 19 1-4 mortgage loans past-due 90 days
or more to 7. The Bank is secured by first mortgages on each of these
single-family residences. The decrease in non-performing commercial loans is
attributable to one relationship (two loans) which was brought current during
the year and continues to perform. Management is working closely with all
delinquent borrowers to bring their loans current.
39
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
The ratio of the Company's allowance for loan losses to non-performing loans was
84.0% and 27.0% at June 30, 2004 and 2003, respectively. The increase in the
allowance as a percentage of non-performing loans is attributable to
management's decision to increase the reserve for loan loss related to two
specific credits (both are secured by first mortgages) by approximately $200,000
during year ended June 30, 2004. 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 $220,000 or 4.21%, from $5.27 million at
June 30, 2003, to $5.49 million at June 30, 2004. This increase was entirely the
result of stock dividends received during 2004.
INTEREST RECEIVABLE declined from $867,000 at June 30, 2003 to $731,000 at June
30, 2004. This decline was attributable to both a reduction in interest-earning
assets and a decline in the interest rate earned on those assets. Average
interest earning assets declined from $208,879,000 during the year ended June
30, 2003 to $193,694,000 during the year ended June 30, 2004. 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 95 basis point decline in the average rate earned
on those assets from 6.68% for the year ended June 30, 2003 to 5.73% for the
year ended June 30, 2004.
CASH SURRENDER VALUE OF LIFE INSURANCE increased from $0 at June 30, 2003, to
$4,196,000 at June 30, 2004. In June 2003, both the Company's and Bank's Board
of Directors authorized the purchase of life insurance on several key executives
in an effort to protect the Bank against projected increases in employee benefit
costs and to help mitigate the costs associated with replacing key members of
management in the event of their untimely death. It should be noted that no
additional benefits were provided by the Company or Bank to these executives as
a result of this transaction.
DEPOSITS decreased $3.41 million or 2.9%, from $117.63 million at June 30, 2003
to $114.22 million at June 30, 2004. The following table illustrates changes in
the various types of deposits at June 30 of each year presented.
JUNE 30, JUNE 30, CHANGE CHANGE -
2004 2003 ($'S) (%)
-------- -------- -------- --------
Noninterest bearing accounts $ 12,672 $ 5,815 $ 6,857 117.9%
NOW accounts 19,964 21,700 (1,736) (8.0)%
Super NOW accounts 1,463 1,095 368 33.6%
Passbook accounts 23,850 20,823 3,027 14.5%
Money market accounts 26,346 26,763 (417) 1.6%
Certificates of deposit 29,928 41,433 (11,505) (27.8)%
-------- -------- --------
Total deposits $114,223 $117,629 $ (3,406) (2.9)%
======== ======== ========
Increases in noninterest bearing accounts and, passbook and accounts were
primarily attributable to customers transferring proceeds from maturing
certificates of deposit into these accounts. While the $1.7 million decline in
NOW accounts was almost entirely attributable to timing differences related to
one public funds depositor.
FHLB ADVANCES declined by $10.03 million or 15.8%, from $63.33 million at June
30,2003, to $53.30 million at June 30, 2004 as the Bank used proceeds generated
from repayments on loans to fund maturing advances.
OTHER LIABILITIES decreased by $513,000 or 40.4%, from $1.27 million at June 30,
2003, to $757,000 at June 30, 2004. This decrease was primarily attributable to
a $387,000 decline in advance payments by borrowers from June 30, 2003 to June
30, 2004, which is consistent with the decline in single family mortgages during
that same time frame.
40
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
TOTAL STOCKHOLDERS' EQUITY was virtually unchanged at $24.39 million at June 30,
2004. The following table illustrates the changes in stockholders' equity from
June 30, 2003 to June 30, 2004.
Total stockholders' equity, June 30, 2003 $ 24,351
Net income 1,631
Change in the unrealized gain on securities AFS (55)
Cash dividends ($0.12 per share) (880)
Exercise of stock options 261
Tax benefit related to exercise of options 24
Purchase of treasury shares (1,105)
Net change in equity from ESOP shares 164
--------
Total stockholders' equity, June 30, 2004 $ 24,391
========
As the table indicates, the Company earned $1.63 million in net income for the
year ended June 30, 2004 and raised an additional $261,000 through the exercise
of stock options. These increases were partially offset by $880,000 in dividends
paid to the Company's stockholders and $1,105,000 in purchases of treasury
stock.
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 30, 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
41
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
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.
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.
42
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
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 form 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.
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 fees 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 39.7% less 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.
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.
43
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
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 origination 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, 2004 an aggregate of $53.30 million, or 27.6% 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, 2004,
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 $ (5,689) (19)%
+200 (3,367) (11)
+100 (1,307) (4)
0 - -
-100 (370) (1)
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 16.00% and 18.00% at June 30, 2004 and 2003,
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
44
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
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 primary investment of the Company is its investment in
the Bank's stock.
At June 30, 2004, the Bank had outstanding commitments to originate mortgage
loans of $4,524,000, unused lines of credit of $12,195,000 and standby letters
of credit of $2,449,000. As of June 30, 2004, certificates of deposit scheduled
to mature in one year or less totaled $20,822,000.
The following table presents additional information about the Company's unfunded
commitments as of June 30, 2004, which by their terms have contractual maturity
dates subsequent to June 30, 2004:
2005 2006 2007 2008 2009 There-after Totals
------ ---- ------ ---- ---- ----------- --------
Unfunded commitments:
Letters of credit $ 437 $ 3 $2,009 $ - $ - $ - $ 2,449
Lines of credit 2,659 675 1,898 598 274 6,091 12,195
The following table presents additional information about the Company's
contractual obligations as of June 30, 2004, which by their terms have
contractual maturity and/or termination dates subsequent to June 30, 2004:
2005 2006 2007 2008 2009 There-after Totals
------- ------ ------ ------ ---- ----------- -------
Contractual Obligations:
Certificates of deposit $20,822 $2,106 $3,545 $2,553 $902 $ - $29,928
FHLB advances 30,404 4,919 1,548 5,097 873 10,454 53,295
Management believes that adequate liquidity is available to meet all known
contractual obligations and unfunded commitments, including loan commitments and
reasonable borrower, depositor, and creditor requirements over the next twelve
months.
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, 2004, the Bank's cash
and cash equivalents totaled $10,875,000. 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.
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.
The Bank is required by OTS regulations to meet certain minimum capital
requirements. At June 30, 2004, the Bank exceeded all of its regulatory capital
requirements with tangible and tier 1 capital both at $22,037,000 or 11.6% of
adjusted total assets, and risk-based capital at $23,085,000 or 18.9% 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
45
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 2004 and 2003.
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, 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
In June 2003, the SEC issued its Final Rule regarding the reporting requirements
of Section 404 of the Sarbanes-Oxley Act of 2002, "Management's Report on
Internal Control over Financial Reporting and Certification of Disclosure in
Exchange Act Periodic Reports" (Section 404). Section 404 requires public
companies to develop and maintain a comprehensive process for assessing the
effectiveness of the company's internal control of financial reporting, and to
issue a report on that assessment. Section 404 will be effective for the Company
beginning with its June 30, 2006, fiscal year end reporting. The interim
disclosure provisions are effective for interim periods beginning after June 30,
2006. The Company has been unable to determine the impact the implementation of
Section 404 is expected to have on the Company's consolidated financial position
or results of operations.
46
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
MARKET AND DIVIDEND INFORMATION
As of June 30, 2004, the Company had approximately 700 shareholders 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 prices paid on all transactions, according to
information furnished by brokers who deal in the Company's common stock, the
following prices represent the price ranges recorded for the periods shown.
MARKET PRICE PER SHARE (1)
MARKET PRICE
------------------ CASH
LOW HIGH DIVIDENDS
----- ------ ---------
FISCAL
2004
1st Qtr. $4.15 $ 4.40 $ 0.060
2nd Qtr. 4.12 4.40 -
3rd Qtr. 4.15 4.20 0.060
4th Qtr. 4.16 4.20 -
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 -
(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, 2004:
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 669,137 $ 3.83 479,000
Equity compensation
plans not approved by
shareholders -- --
------- -------
Total 669,137 479,000
======= =======
47
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] DIRECTORS
PEOPLES OHIO FINANCIAL CORPORATION
DIRECTORS
DONALD COOPER-CHAIRMAN RICHARD W. KLOCKNER THOMAS E. ROBINSON
President President Retired Executive
Captor Corporation Klockner & Associates Troy, Ohio
Tipp City, Ohio A Civil Engineering Company
Troy, Ohio
RONALD B. SCOTT WILLIAM J. McGRAW III JAMES S. WILCOX
President and Chief Executive Officer Attorney & President Retired Chief Financial Officer
Peoples Savings Bank of Troy Dungan & LeFevre Co., L.P.A. PMI Food Equipment Group
Troy, Ohio Troy, Ohio Troy, Ohio
(Law Firm Which Represents
Peoples Ohio Financial Corporation)
PEOPLES SAVINGS BANK
DIRECTORS
IN MEMORIAM PETER E. JENKINS THOMAS E. ROBINSON
Manager of the Miami County Fair Retired Executive
G. JOSEPH REARDON-CHAIRMAN Troy, Ohio Troy, Ohio
Retired President, Reardon & Associates
Manufacturing Representative
Troy, Ohio
RONALD B. SCOTT WILLIAM J. MCGRAW III JAMES S. WILCOX
President and Chief Executive Officer Attorney & President Retired Chief Financial Officer
Peoples Savings Bank of Troy Dungan & LeFevre Co., L.P.A. PMI Food Equipment Group
Troy, Ohio Troy, Ohio Troy, Ohio
(Law Firm Which Represents
Peoples Savings Bank of Troy)
DOUGLAS HAINES WILLIAM E. LUKENS RICHARD W. WALLACE
President President & Majority Owner President
Buckeye Mutual Insurance Group Stillwater Technologies, Inc Hartzell Fan, Inc
Piqua, Ohio A Contract Manufacturing Firm Piqua, Ohio
Troy, Ohio
ADVISORY DIRECTORS DIRECTOR EMERITUS
Tony Wendeln Dr. Kenneth Yowell William E. Eickhoff
CPA/CEO President Retired President
Murray, Wells, Wendeln Edison Community College Peoples Director 1977-1996
Robinson, CPAs, Inc. Piqua, Ohio
Piqua, Ohio
48
[PEOPLES OHIO FINANCIAL CORPORATION LOGO] OFFICERS
OFFICERS
RONALD B. SCOTT JOHN A. WANNEMACHER LISA E. SCHELIN
President & Vice-President/Attorney Assistant Vice-President
Chief Executive Officer Wealth Management Services Administrative Officer
RICHARD J. DUTTON MICHAEL D. REED LINDA J. PITTENGER
Vice-President Investment Officer Assistant Vice-President
Chief Financial Officer Wealth Management Services Compliance Officer
B. ANNE MERCER RICHARD B. FISHER ANNETTE L. GLADMAN
Vice-President Administration Officer Assistant Vice-President
Chief Lending Officer Wealth Management Services Data Processing Officer
RICHARD K. BENDER ROGER J. BORCHERS CHARLOTTE A. STEPHENSON
Vice-President Operations Officer Assistant Vice-President
Technology/Operations Wealth Management Services Finance Officer
LINDA A. DANIEL
Vice-President
Marketing/Administration
LEGAL COUNSEL AUDITORS
Dungan & LeFevre Co., LPA Squire, Sanders & Dempsey L.L.P. BKD, LLP
210 W. Main Street Huntington Center 312 Walnut Street, Suite 300
Troy, Ohio 45373 41 South High Street P.O. Box 5367
Columbus, Ohio 43215 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
[PEOPLES OHIO FINANCIAL CORPORATION LOGO]
635 South Market Street - Troy, Ohio 45373
Tel: (937) 339-5000 - Fax (937) 339-3297
www.YourLocalBank.com