Exhibit 13
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
(GRAPHIC)
2005
Annual Report
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
Your Local Bank
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
WEALTH MANAGEMENT SERVICES
14 Weston Road
Troy, Ohio
937-335-8760
126 High Street
Piqua, Ohio
937-778-2888
8265 North Main Street
Dayton, Ohio
937-454-2200
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
Dear Shareholder:
Peoples Ohio Financial Corporation (OTC: POHF), holding company for Peoples
Savings Bank (Troy-Piqua-Clayton), is pleased to report a strong earnings
performance for Fiscal 2005.
As part of an ongoing strategy, we "grew" the bank while successfully managing
interest rate risk...and, most importantly, returned to our historic role as one
of the top lenders in Troy/ Miami County. In fact, Peoples was recently ranked
ninth (based on loans originated) in a listing of Dayton, Ohio-area mortgage
companies by the Dayton Business Journal.
Over the past few years, Peoples has proactively pursued a strategy to shrink
the bank to mitigate risk of low interest rates and then returned to growth
initiatives with the financial organization better positioned for future
success. Current high loan demand and competitive loan products allowed the Bank
to shift interest-earning assets from investment securities into residential
construction, commercial real estate, and home equity loans without significant
exposure to interest rate risk.
Peoples used a process in Fiscal 2005 which has served us extremely well in the
past...finance developments, then finance the related construction loans and
finally, acquire the resulting consumer loan business. Long-standing
relationships with developers and builders, competitive financing packages and a
strong local economy contributed to our success in growing loan volume and
revenues.
In addition to the emphasis on lending, Peoples also focused on other basics of
community banking like core deposits, wealth management and overall marketing.
As a result, we were able to achieve a sound performance year of steady earnings
improvement and growth.
For year-end Fiscal 2005, total earnings were $1,790,000 or $0.24 per diluted
share, an increase of 9.7% from the $1,631,000, or $0.22 per diluted share,
reported for year-end Fiscal 2004. It is also important to highlight the results
of the fourth quarter/Fiscal 2005, ending June 30, which were $487,000, or $0.07
per diluted share and 50% greater than fourth quarter/Fiscal 2004 earnings of
$322,000 or $0.04 per diluted share.
The overall performance of Peoples has remained high...particularly when
compared to our peer group. When comparing important key indicators like return
on assets (ROA), which was 0.92%, and return on equity (ROE), which was 7.30%,
for Fiscal 2005, Peoples is in the mid-range to high-range in relation to its
peer group.
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
We understand that any progress or success achieved must be measured in terms of
shareholder value...a top priority for both the holding company and for the
bank. Clearly, shares of Peoples Ohio Financial Corporation maintained their
value through Fiscal 2005. We believe that a balanced program of increased
dividends, stock buyback and sustained growth has benefited shareholders this
past fiscal year.
However, future challenges for a small community financial organization are
significant. We know that rising interest rates, costly government oversight,
intense local competition and sustained earnings growth confront us as major
issues. While our current team of directors, management and employees is strong
and very capable, we must work diligently and creatively to provide good basic
products while developing new services to generate interest and non-interest
income.
This is the 115th year of service to customers and community for Peoples. Since
1890, this organization has been the "local bank" and has continually reinvented
itself to be current, innovative and competitive. We are constantly looking to
the future for ways to improve services and profitability...while remembering
that whatever we do must benefit our customers, our communities, and, most
importantly, our shareholders.
Sincerely,
/s/ Ronald B. Scott
- -------------------------------------
Ronald B. Scott
President/CEO
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
SELECTED CONSOLIDATED FINANCIAL DATA
At June 30,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(In thousands)
BALANCE SHEET DATA:
Total amount of:
Assets $199,881 $193,196 $207,349 $219,922 $214,841
Loans, net 171,187 150,735 160,609 201,716 197,483
Deposits 126,520 114,223 117,629 120,447 108,398
FHLB advances 46,123 53,295 63,329 74,174 83,522
Stockholders' equity 24,925 24,391 24,351 23,106 21,002
Year ended June 30,
-----------------------------------------------
2004 2004 2003 2002 2001
------- ------- ------- ------- -------
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Total interest income $11,060 $11,095 $13,953 $15,918 $16,338
Total interest expense 3,926 4,144 5,900 7,551 9,392
Net interest income 7,134 6,951 8,054 8,367 6,946
Provision for loan losses 183 330 140 138 --
Non-interest income 2,072 2,174 1,693 1,561 1,485
Non-interest expense 6,405 6,420 5,723 5,707 4,737
Net income 1,790 1,631 2,545 2,675 2,421
PER SHARE DATA:
Basic earnings $ 0.25 $ 0.22 $ 0.34 $ 0.36 $ 0.33
Diluted earnings 0.24 0.22 0.33 0.35 0.32
Cash dividends 0.13 0.12 0.09 0.065 0.03
Year-end book value 3.42 3.34 3.27 3.11 2.82
Year-end market value 4.10 4.16 4.20 3.35 3.00
KEY RATIOS:
Return on average assets 0.92% 0.82% 1.16% 1.23% 1.14%
Return on average equity 7.30 6.57 10.07 11.84 11.87
Average equity to average assets 12.60 12.20 11.49 10.38 9.64
Net interest margin 3.85 3.59 3.86 4.02 3.41
Efficiency ratio (1) 69.57 70.36 58.70 57.50 56.20
Dividend payout ratio (2) 52.00 54.55 26.47 18.06 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)
(BKD LLP LOGO)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and 2004, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 2005. 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, 2005 and 2004, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2005, in conformity with accounting principles generally accepted in
the United States of America.
(BKD, LLP)
Cincinnati, Ohio
August 3, 2005
4
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND 2004
2005 2004
------------ ------------
ASSETS
Cash and cash equivalents $ 8,991,963 $ 10,875,107
Held-to-maturity securities (fair value of $486,000 and $543,000) 460,690 516,429
Available-for-sale securities 3,960,867 15,725,636
Loans, net of allowance for loan losses of $725,090 and
$1,047,887 171,187,044 150,734,679
Premises and equipment 4,053,989 4,399,413
Federal Home Loan Bank stock 5,735,700 5,487,000
Interest receivable 733,000 730,940
Cash surrender value of life insurance 4,362,364 4,196,239
Other assets 395,251 530,095
------------ ------------
Total assets $199,880,869 $193,195,538
============ ============
LIABILITIES
Deposits $126,520,450 $114,223,395
Federal Home Loan Bank advances 46,123,030 53,295,390
Interest payable 156,400 63,091
Other liabilities 1,655,503 756,830
------------ ------------
Total liabilities 174,455,383 168,338,706
------------ ------------
COMMITMENTS AND CONTINGENCIES
EQUITY FROM ESOP SHARES 500,278 465,999
------------ ------------
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 7,461,633 7,471,633
Additional paid-in capital 51,548 24,424
Retained earnings 18,684,404 18,094,209
Accumulated other comprehensive income (loss) (6,455) 1,474
Treasury stock, at cost
Common, 2005 -- 301,843 shares, 2004 -- 287,424 shares (1,265,922) (1,200,907)
------------ ------------
Total stockholders' equity 24,925,208 24,390,833
------------ ------------
Total liabilities and stockholders' equity $199,880,869 $193,195,538
============ ============
See Notes to Consolidated Financial Statements
5
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
2005 2004 2003
----------- ----------- -----------
INTEREST INCOME
Loans receivable $10,388,190 $10,271,265 $13,396,877
Investment securities 340,576 540,678 206,722
Other interest and dividend income 331,173 282,593 349,588
----------- ----------- -----------
Total interest income 11,059,939 11,094,536 13,953,187
----------- ----------- -----------
INTEREST EXPENSE
Deposits 1,336,751 1,241,664 2,226,509
Borrowings 2,589,122 2,902,008 3,673,164
----------- ----------- -----------
Total interest expense 3,925,873 4,143,672 5,899,673
----------- ----------- -----------
NET INTEREST INCOME 7,134,066 6,950,864 8,053,514
Provision for loan losses 183,065 329,901 140,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 6,951,001 6,620,963 7,913,514
----------- ----------- -----------
NONINTEREST INCOME
Fiduciary activities 470,906 559,441 673,019
Service charges on deposit accounts and other 1,138,395 1,126,369 802,451
Service charges derived from automatic teller
machines 190,793 165,255 163,457
Net realized gain (loss) on sale of
available-for-sale securities 0 67,738 (6,597)
Increase in cash surrender value of life insurance 183,876 198,628 8,768
Other income 88,397 56,703 51,999
----------- ----------- -----------
Total noninterest income 2,072,367 2,174,134 1,693,097
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 2,971,687 2,915,187 2,761,617
Net occupancy expenses 435,067 449,861 408,020
Director fees 189,260 150,500 150,000
Equipment expenses 134,898 153,627 170,332
Data processing fees 677,532 636,512 532,802
Professional fees 337,716 404,837 224,644
Advertising expenses 148,972 155,857 111,217
State of Ohio franchise taxes 300,000 282,380 252,880
Other expenses 1,210,300 1,271,492 1,111,238
----------- ----------- -----------
Total noninterest expenses 6,405,432 6,420,253 5,722,750
----------- ----------- -----------
INCOME BEFORE INCOME TAX 2,617,936 2,374,844 3,883,861
Income tax expense 827,628 744,038 1,338,819
----------- ----------- -----------
NET INCOME $ 1,790,308 $ 1,630,806 $ 2,545,042
=========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.25 $ 0.22 $ 0.34
=========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.24 $ 0.22 $ 0.33
=========== =========== ===========
See Notes to Consolidated Financial Statements
6
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
ACCUMLUATED
COMMON ADDITIONAL OTHER
STOCK PAID-IN RETAINED COMPREHENSIVE TREASURY
AMOUNT CAPITAL EARNINGS INCOME (LOSS) STOCK TOTAL
---------- ---------- ----------- ------------- ----------- -----------
BALANCES, JULY 1, 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 ($.12 per share) (880,419) (880,419)
Exercise of stock options (186,600) (99,822) 547,544 261,122
Purchase of treasury shares (1,105,190) (1,105,190)
Tax benefit of stock options 24,424 24,424
Net change in equity from
ESOP shares 38,047 126,233 164,280
---------- --------- ----------- -------- ----------- -----------
BALANCES, JUNE 30, 2004 7,471,633 24,424 18,094,209 1,474 (1,200,907) 24,390,833
Net income 1,790,308 1,790,308
Change in unrealized gain (loss)
on securities available for sale,
net of tax effect (7,929) (7,929)
-----------
Total comprehensive income 1,782,379
Cash dividends ($.13 per share) (944,134) (944,134)
Exercise of stock options (231,700) 437,137 205,437
Purchase of treasury shares (502,152) (502,152)
Tax benefit of stock options 27,124 27,124
Net change in equity from
ESOP shares (10,000) (24,279) (34,279)
---------- --------- ----------- -------- ----------- -----------
BALANCES, JUNE 30, 2005 $7,461,633 $ 51,548 $18,684,404 $ (6,455) $(1,265,922) $24,925,208
========== ========= =========== ======== =========== ===========
See Notes to Consolidated Financial Statements
7
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
2005 2004 2003
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 1,790,308 $ 1,630,806 $ 2,545,042
Items not requiring (providing) cash
Provision for loan losses 183,065 329,901 140,000
Depreciation and amortization 372,613 389,845 393,970
Amortization of deferred loan fees (219,933) (184,836) (120,146)
Deferred income tax 171,000 106,000 74,000
Investment securities amortization, net 36,609 126,050 44,885
Federal Home Loan Bank (FHLB) stock dividends (248,700) (214,200) (221,200)
Net realized (gain) loss on available-for-sale securities 0 (67,738) 6,597
Increase in cash surrender value of life insurance (166,125) (196,239) --
Net change in
Interest receivable (2,060) 136,210 192,400
Interest payable 93,309 (71,484) (96,811)
Other assets 436,223 2,137,364 (1,985,529)
Other liabilities 731,757 (595,728) (323,756)
------------ ------------ ------------
Net cash provided by operating activities 3,178,066 3,525,951 649,452
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of available for sale securities 0 (19,373,945) (22,020,584)
Proceeds from calls and maturities of available-for-sale
securities 11,717,133 953,476 210,000
Proceeds from sale of available-for-sale securities 0 19,240,005 5,158,116
Proceeds from maturities of securities held to maturity 54,752 263,192 341,910
Net change in loans (20,689,752) 9,729,187 41,087,266
Purchases of premises and equipment (27,189) (134,343) (399,173)
Purchase of life insurance contracts 0 (4,000,000) --
------------ ------------ ------------
Net cash provided (used) by investing activities (8,945,056) 6,677,572 24,377,535
------------ ------------ ------------
FINANCING ACTIVITIES
Net change in
Interest-bearing demand and savings deposits 1,555,467 8,098,991 4,522,222
Certificates of deposit 10,741,588 (11,505,000) (7,339,420)
Proceeds of FHLB advances 68,232,000 62,500,000 --
Repayment of FHLB advances (75,404,360) (72,533,356) (10,845,663)
Cash dividends (944,134) (880,419) (679,664)
Purchase of treasury stock (502,152) (1,105,190) (777,235)
Proceeds from exercise of stock options 205,437 261,122 247,692
------------ ------------ ------------
Net cash provided (used) by financing activities 3,883,846 (15,163,852) (14,872,068)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,883,144) (4,960,329) 10,154,919
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,875,107 15,835,436 5,680,517
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,991,963 $ 10,875,107 $ 15,835,436
============ ============ ============
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 3,832,564 $ 4,215,156 $ 5,996,484
Income tax paid $ 455,000 $ 744,279 $ 1,164,014
Transfers from loans to other real estate owned $ 274,255 $ -- $ --
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 (the "Company") and its wholly owned subsidiary, Peoples
Savings Bank of Troy (the "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, 2005 and
2004, cash equivalents consisted of interest-bearing demand deposits.
9
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
SECURITIES
Available-for-sale securities, which include any security for which
the Company has no immediate plan to sell but which may be sold in the
future, are carried at fair value. Realized gains and losses, based on
amortized cost of the specific security, are included in noninterest
income. Unrealized gains and losses are recorded, net of related
income tax effects, in stockholders' equity. Premiums and discounts
are amortized and accreted, respectively, to interest income using the
level-yield method over the period to maturity.
Held-to-maturity securities, which include any security for which the
Bank has the positive intent and ability to hold until maturity, are
carried at historical cost adjusted for amortization of premiums and
accretion of discounts. Premiums and discounts are amortized and
accreted, respectively, to interest income using the level-yield
method over the period to maturity.
Interest and dividends on investments in debt and equity securities
are included in income when earned.
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
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
10
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
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 the 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
The Company has stock-based employee and non-employee director compensation
plans, which are described more fully in Note 13. The Company accounts for
these plans 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 these 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
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)
STOCK OPTIONS
YEAR ENDED JUNE 30
------------------------
2005 2004 2003
------ ------ ------
Net income, as reported $1,790 $1,631 $2,545
Less: Total stock-based employee
compensation cost determined
under the fair value based method,
net of income taxes (50) (37) 6
------ ------ ------
Pro forma net income $1,740 $1,594 $2,551
====== ====== ======
Earnings per share:
Basic - as reported 0.25 0.22 0.34
Basic - pro forma 0.24 0.22 0.34
Diluted - as reported 0.24 0.22 0.33
Diluted - pro forma 0.24 0.21 0.33
ADVERTISING COSTS
Advertising costs are expensed as incurred.
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: 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, 2005 was
$200,000.
12
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 3: 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, 2005:
U.S. government agencies $ 1,850 $ $ (7) $ 1,843
Mortgage-backed securities 2,121 -- (3) 2,118
------- --- ---- -------
$ 3,971 $ $(10) $ 3,961
======= === ==== =======
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) $15,776
======= === ==== =======
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- -----------
HELD TO MATURITY SECURITIES:
June 30, 2005:
U.S. government agencies $103 $ 3 $-- $106
Mortgage-backed securities 257 19 -- 276
State and political
subdivisions 101 3 -- 104
---- --- --- ----
$461 $25 $-- $486
==== === === ====
June 30, 2004:
U.S. Treasury $104 $ 1 $-- $105
Mortgage-backed securities 312 24 -- 336
State and political
subdivisions 100 2 -- 102
---- --- --- ----
$516 $27 $-- $543
==== === === ====
The amortized cost and fair value of securities available for sale and held to
maturity at June 30, 2005, 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 $1,850 $1,843 $103 $106
After ten years -- -- 101 104
------ ------ ---- ----
Mortgage-backed securities 1,850 1,843 204 210
2,121 2,118 257 276
------ ------ ---- ----
Totals $3,971 $3,961 $461 $486
====== ====== ==== ====
The carrying value of securities pledged as collateral, to secure public
deposits and for other purposes, amounted to $3,959,000 at June 30, 2005 and
$11,863,000 at June 30, 2004.
There were no sales of securities during 2005. Gross gains and losses of $67,738
and $(6,597) resulting from sales of available-for-sale securities were realized
for 2004 and 2003. The tax expense (benefit) for net gains and losses on
securities 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, 2005, was $3,961,000, which is approximately 89% 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, 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, were as follows:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
----------------------- ----------------------- -----------------------
UNREALIZED UNREALIZED UNREALIZED
JUNE 30, 2005 FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
- ------------- ---------- ---------- ---------- ---------- ---------- ----------
AVAILABLE FOR SALE SECURITIES:
U.S. government agencies $ -- $-- $1,843 $(7) $1,843 $ (7)
Mortgage-backed securities 2,118 (3) -- -- $2,118 (3)
------ --- ------ --- ------ ----
$2,118 $(3) $1,843 $(7) $3,961 $(10)
====== === ====== === ====== ====
14
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
JUNE 30, 2004 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)
====== ==== === === ====== ====
Note 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
2005 2004
-------- --------
Mortgage loans on existing real estate
Residential single family units $111,985 $100,629
Other residential and commercial 29,952 27,582
-------- --------
Total real estate loans 141,937 128,211
Construction loans 18,281 12,315
Commercial business 6,805 6,714
Consumer 1,681 2,282
Home improvement 8,598 6,016
Deposit and other loans 187 264
-------- --------
177,489 155,802
Deferred loan fees (84) (177)
Undisbursed portion of loans (5,493) (3,842)
Allowance for loan losses (725) (1,048)
-------- --------
Total loans $171,187 $150,735
======== ========
2005 2004 2003
------ ------ -----
Allowance for loan losses
Balances, July 1 $1,048 $ 862 $ 882
Provision for losses 183 330 140
Recoveries on loans 19 21 29
Loans charged off (525) (165) (189)
------ ------ -----
Balances, June 30 $ 725 $1,048 $ 862
====== ====== =====
At June 30, 2005, impaired loans were $227,000 and had no related allowance
for loan losses. At June 30, 2004, impaired loans were $899,000 and had a
related allowance for loan losses of $438,000.
Interest of $5,534 and $18,576 was recognized on average impaired loans of
$577,000 and $1,087,000 for 2005 and 2004, respectively. Interest of $4,844
and $1,076 was recognized on impaired loans on a cash basis during 2005 and
2004, respectively.
At June 30, 2005 and 2004, accruing loans delinquent 90 days or more
totaled $334,000 and $565,000, respectively. Non-accruing loans at June 30,
2005 and 2004 were $415,000 and $683,000, respectively.
15
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 5: PREMISES AND EQUIPMENT
2005 2004
------- -------
Land $ 955 $ 955
Buildings 4,864 4,864
Equipment 3,819 3,792
------- -------
Total cost 9,638 9,611
Accumulated depreciation (5,584) (5,212)
------- -------
Net premises and equipment $ 4,054 $ 4,399
======= =======
NOTE 6: DEPOSITS
2005 2004
-------- --------
Noninterest bearing accounts $ 14,620 $ 12,672
NOW accounts 19,752 19,964
Super NOW accounts 1,271 1,463
Passbook accounts 24,049 23,850
Money market accounts 26,158 26,346
Certificates and other time deposits of $100,000 or more 16,280 9,231
Other certificates and time deposits 24,390 20,697
-------- --------
Total deposits $126,520 $114,223
======== ========
Certificates and other time deposits maturing in years
ending June 30
2006 $ 24,081
2007 10,971
2008 3,406
2009 841
2010 1,341
Thereafter 30
--------
$ 40,670
========
16
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 7: LONG-TERM DEBT
2005 2004
------- -------
Federal Home Loan Bank advances, fixed and variable rates,
due at various dates through May 1, 2022 $46,123 $53,295
======= =======
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
2006 $ 4,996
2007 3,649
2008 5,166
2009 8,888
2010 11,706
Thereafter 11,718
-------
$46,123
=======
The Bank has unused letters of credit with the Federal Home Loan Bank
aggregating $31,050,000 at June 30, 2005, and expiring at various dates
from July 2005 through March 2010.
NOTE 8: INCOME TAX
2005 2004 2003
---- ---- ------
Income tax expense
Currently payable $657 $638 $1,265
Deferred income taxes 171 106 74
---- ---- ------
Income tax expense $828 $744 $1,339
==== ==== ======
Reconciliation of federal statutory to
actual tax expense
Federal statutory income tax at 34% $890 $807 $1,321
Life insurance (63) (67) --
Other 1 4 18
---- ---- ------
Actual tax expense $828 $744 $1,339
==== ==== ======
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:
2005 2004
------- -------
DEFERRED TAX ASSETS
Allowance for loan losses $ 247 $ 356
Organizational costs 8 13
Unrealized loss on available for sale securities 3 --
Other 7 11
------- -------
Total assets 265 380
------- -------
DEFERRED TAX LIABILITIES
FHLB stock (810) (725)
Depreciation (147) (174)
Prepaid expenses (98) (101)
Unrealized gain on available for sale securities -- (1)
------- -------
Total liabilities (1,055) (1,001)
------- -------
$ (790) $ (621)
======= =======
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 9: OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income components and related taxes were as follows:
2005 2004 2003
---- ---- ----
Unrealized gains (losses) on securities
available for sale $(12) $(16) $79
Reclassification for realized amount
included in income -- 67 (7)
---- ---- ---
Other comprehensive income (loss),
before tax effect (12) (83) 86
Tax expense (credit) (4) (28) 29
---- ---- ---
Other comprehensive income (loss) $ (8) $(55) $57
==== ==== ===
18
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 10: 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 and 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, 2005 and
2004, that the Bank meets all capital adequacy requirements to which it is
subject.
As of June 30, 2005, 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 UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ----------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
As of June 30, 2005
Total Risk-Based Capital
(to Risk-Weighted Assets) $24,353 18.1% $10,773 8.0% $13,466 10.0%
Tier I Capital
(to Risk-Weighted Assets) 23,628 17.5% 5,386 4.0% 8,079 6.0%
Core Capital
(to Adjusted Total Assets) 23,628 11.9% 7,958 4.0% 9,948 5.0%
Tangible Capital
(to Adjusted Total Assets) 23,628 11.9% 2,984 1.5%
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%
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, 2005, total regulatory capital of the Bank
was $23,653,000, none of which was available for distribution to the
Company without prior regulatory approval.
NOTE 11: 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 $152,000 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
----------------
2005 2004
------ ------
Change in benefit obligation
Beginning of year $1,182 $1,087
Service cost 97 95
Interest cost 84 77
Actuarial loss 29 23
Benefits paid (50) (100)
------ ------
End of year 1,342 1,182
------ ------
Change in fair value of plan assets
Beginning of year 753 658
Actuarial return on plan assets 55 41
Employer contribution 174 154
Benefits paid (50) (100)
------ ------
End of year 932 753
------ ------
Funded status (410) (429)
Unrecognized net actuarial loss 415 402
Unrecognized prior service cost (7) (11)
------ ------
Accrued benefit cost (2) $ (38)
====== ======
Accumulated benefit obligation 1,026 $ 879
====== ======
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)
2005 2004 2003
---- ---- ----
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 $ 97 $ 95 $ 93
Interest cost 84 77 68
Expected return on plan assets (55) (44) (30)
Amortization of prior service cost (4) (4) (4)
Recognized net actuarial loss 17 13 10
---- ---- ----
Net periodic benefit cost $139 $137 $137
==== ==== ====
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.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid as of June 30, 2005:
PENSION BENEFITS
----------------
2006 $ 15
2007 19
2008 21
2009 26
2010 35
2011-2015 564
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, 2005 and 2004, plan assets by
category are as follows:
2005 2004
----- -----
Cash 12.6% 1.6%
Corporate debt securities -- 7.9
Mutual funds 87.3 90.4
Other 0.1 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 $51,214 for 2005, $55,519 for 2004 and $49,749 for
2003.
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 2005, 2004 and 2003 were $40,000, $29,000 and
$51,000, 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, was 122,019 and
112,019 at June 30, 2005 and 2004. 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. At June 30, 2005, the
fair value of all shares subject to the repurchase obligation is $500,278.
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, 2002 $1140 $ 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
Net change in equity from ESOP shares 10 24 34
----- ----- -----
Balances, June 30, 2005 $ 122 $ 378 $ 500
===== ===== =====
22
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 12: 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 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, 2004 $3,235
New loans, including renewals 1,070
Payments, etc., including renewals (942)
------
Balances, June 30, 2005 $3,363
======
NOTE 13: 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 2005, the Bank granted options for 58,500 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:
2005 2004 2003
-------- -------- --------
Risk-free interest rates 5.0% 5.0% 5.0%
Dividend yields 3.10% 2.20% 2.20%
Volatility factors of expected market
price of common stock 7% 17% 25%
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, 2005,
2004 and 2003.
EMPLOYEES:
2005 2004 2003
------------------- ------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------- ------- --------- ------- --------- -------- ---------
Outstanding, beginning of year 494,833 $3.79 559,523 $3.63 756,802 $3.39
Granted 45,000 4.20 61,500 4.15 29,500 3.43
Exercised (59,900) 1.67 (97,120) 1.91 (150,481) 1.30
Forfeited/expired (280) 5.07 (29,070) 7.10 (76,298) 5.88
------- ------- --------
Outstanding, end of year 479,653 4.11 494,833 3.80 559,523 3.62
======= ======= ========
Options exercisable at year end 344,053 4.15 404,133 3.79 530,023 3.63
Weighted-average fair value
of options granted during the year 0.60 1.11 1.13
As of June 30, 2005, 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 96,100 8.0 $1.85 96,100 $1.85
$2.51 to $5.00 287,183 75.3 3.73 151,583 3.50
$5.01 to $7.50 47,280 37.0 6.81 47,280 6.81
$7.50 to $10.00 49,090 50.0 8.13 49,090 8.13
------- -------
479,653 4.11 344,053 4.15
======= =======
24
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
DIRECTORS:
2005 2004 2003
------------------- ------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------- ------- --------- ------- --------- ------- ---------
Outstanding, beginning of year 174,304 $3.92 193,804 $3.59 205,884 $3.38
Granted 13,500 4.20 15,000 4.15 15,000 3.43
Exercised (44,484) 2.37 (34,500) 2.17 (27,080) 1.90
Forfeited/expired (7,500) 6.58 -- -- -- --
------- ------- -------
Outstanding, end of year 135,820 4.31 174,304 3.92 193,804 3.59
======= ======= =======
Options exercisable at year end 95,320 4.47 144,304 3.96 178,804 3.61
Weighted-average fair value of
options granted during the year 0.60 1.11 1.13
As of June 30, 2005, 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 29,320 8.7 $1.94 29,320 $1.94
$2.51 to $5.00 67,500 82.6 3.68 27,000 3.31
$5.01 to $7.50 39,000 46.5 7.19 39,000 7.19
------- ------
135,820 4.31 95,320 4.47
======= ======
25
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 14: EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
YEAR ENDED JUNE 30, 2005
------------------------------
WEIGHTED-
AVERAGE PER-SHARE
INCOME SHARE AMOUNT
------ --------- ---------
BASIC EARNINGS PER SHARE
Income available to common
stockholders $1,790 7,271,874 $0.25
EFFECT OF DILUTIVE SECURITIES
Stock options 98,826
---------
DILUTED EARNINGS PER SHARE
Income available to common
stockholders and assumed conversions $1,790 7,370,700 $0.24
====== ========= =====
Options to purchase 265,470 shares of common stock at $4.15 to $8.13 per
share were outstanding at June 30, 2005, 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, 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.
26
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
YEAR ENDED JUNE 30, 2003
------------------------------
WEIGHTED-
AVERAGE PER-SHARE
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.
NOTE 15: 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, 2005 JUNE 30, 2004
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Financial assets
Cash and cash equivalents $ 8,992 $ 8,992 $ 10,875 $ 10,875
Available for sale securities 3,961 3,961 15,726 15,726
Held-to-maturity securities 461 486 516 543
Loans, net of allowance
for loan losses 171,187 188,666 150,735 155,568
Stock in FHLB 5,736 5,736 5,487 5,487
Interest receivable 733 733 731 731
Financial liabilities
Deposits 126,520 128,877 114,223 116,936
FHLB advances 46,123 46,857 53,295 54,721
Interest payable 156 156 63 63
Commitments to extend credit,
letters of credit and
lines of credit -- -- -- --
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 AND STOCK IN FHLB
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 AND INTEREST RECEIVABLE
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 interest receivable approximates its
fair value.
DEPOSITS AND INTEREST PAYABLE
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 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 16: 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, 2005 and 2004, the Bank had outstanding fixed-rate commitments
to originate loans aggregating approximately $16,014,000 and $4,524,000,
respectively. The commitments extended over varying periods of time with
the majority being disbursed within a one-year period.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers.
The Bank had total outstanding letters of credit amounting to $3,300,000
and $2,449,000, at June 30, 2005 and 2004, 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, 2005, the Bank had granted unused lines of credit to borrowers
aggregating approximately $4,612,000 and $8,826,000 for commercial lines
and open-end consumers lines, respectively. At June 30, 2004, unused lines
of credit to borrowers aggregated approximately $4,384,000 for commercial
lines and $7,811,000 for open-end consumer lines.
From time to time certain due from bank accounts are in excess of federally
insured limits.
29
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 17: 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
2005 2004
------- -------
ASSETS
Cash $ 313 $ 196
Loans 929 2,070
Investment in common stock of Bank subsidiary 23,622 22,038
Advances to Bank subsidiary 463 506
Other assets 98 47
------- -------
Total assets $25,425 $24,857
======= =======
EQUITY FROM ESOP SHARES $ 500 $ 466
STOCKHOLDERS' EQUITY 24,925 24,391
------- -------
Total liabilities and stockholders' equity $25,425 $24,857
======= =======
CONDENSED STATEMENTS OF INCOME
2005 2004 2003
------ ------- ------
INCOME
Dividends from Bank subsidiary $ 250 $ 3,457 $2,543
Interest income 82 108 --
------ ------- ------
332 3,565 2,543
EXPENSES -- other 159 119 21
------ ------- ------
INCOME BEFORE INCOME TAX AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARY 173 3,466 2,522
INCOME TAX BENEFIT (26) -- (7)
------ ------- ------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARY 199 3,446 2,529
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 1,591 (1,815) 16
------ ------- ------
NET INCOME $1,790 $ 1,631 $2,545
====== ======= ======
30
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENTS OF CASH FLOWS
2005 2004 2003
------- ------- -------
OPERATING ACTIVITIES
Net income $ 1,790 $ 1,631 $ 2,545
Items not requiring (providing) cash (1,616) 1,813 (24)
------- ------- -------
Net cash provided by
operating activities 174 3,444 2,521
------- ------- -------
INVESTING ACTIVITIES--NET CHANGE IN LOANS 1,141 (1,059) (1,011)
------- ------- -------
FINANCING ACTIVITIES
Advances from (to) Bank subsidiary -- (506) 2,283
Repayment of advances (from) to
Bank subsidiary 43 -- (2,543)
Purchase of stock (502) (1,105) (777)
Proceeds from exercise of stock options 205 261 248
Cash dividends (944) (880) (680)
------- ------- -------
Net cash used in financing activities (1,198) (2,230) (1,469)
------- ------- -------
NET CHANGE IN CASH 117 155 41
CASH AT BEGINNING OF YEAR 196 41 --
------- ------- -------
CASH END OF YEAR $ 313 $ 196 $ 41
======= ======= =======
31
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
NOTE 18: SELECTED QUARTERLY DATA (UNAUDITED)
The following tables summarize selected quarterly results of operations for
2005 and 2004.
JUNE 30, 2005 SEPTEMBER DECEMBER MARCH JUNE
- ------------- --------- -------- ------ ------
Interest and dividend income $2,708 $2,755 $2,760 $2,838
Interest expense 990 988 970 979
------ ------ ------ ------
Net interest income 1,718 1,767 1,790 1,859
Provision for loan losses 30 30 30 93
------ ------ ------ ------
Net interest income after provision
for loan losses 1,688 1,737 1,760 1,766
Noninterest income 543 494 475 560
Noninterest expense 1,610 1,571 1,584 1,640
------ ------ ------ ------
Income before income tax 621 660 651 686
Income tax expense 199 219 211 199
------ ------ ------ ------
Net income $ 422 $ 441 $ 440 $ 487
====== ====== ====== ======
Earnings per share
Basic $ 0.06 $ 0.06 $ 0.06 $ 0.07
Diluted 0.06 0.06 0.06 0.07
Dividends per share 0.065 0.065
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 --
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 surrounding 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 2005 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 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 expected 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, 2005 AND 2004
The Company reported earnings of $1,790,000 for the year ended June 30, 2005, an
increase of $159,000, or 9.7% from the $1,631,000 reported for the same period
in 2004. Basic earnings per share increased $0.03, or 13.6% from $0.22 for the
year ended June 30, 2004 to $0.25 for the year ended June 30, 2005. Diluted
earnings per share increased $0.02, or 9.10% from $0.22 for the year ended June
30, 2004 to $0.24 for the year ended June 30, 2005. The Company's return on
average assets was 0.92% for 2005 compared to 0.82% for 2004 and the return on
average equity was 7.30% for 2005, compared to 6.57% for 2004.
The increase in 2005 earnings was a result of a $183,000 increase in net
interest income coupled with a $147,000 decline in the provision for loan losses
in comparison to those reported for the year ended June 30, 2004. These positive
influences on net income were partially offset by a $102,000 decline in
noninterest income for the year ended June 30, 2005, in comparison to the year
ended June 30, 2005.
NET INTEREST INCOME was $7,134,000 for the year ended June 30, 2005, $183,000,
or 2.6% greater than the $6,951,000 reported for the year ended June 30, 2004.
Total interest income remained steady at $11,060,000 for the year ended June 30,
2005, compared to the $11,095,000 reported during the year ended June 30, 2004,
as the increase in average loans outstanding was offset by lower average
interest rates earned on those loans. While interest income remained steady,
interest expense declined by a $218,000, or 5.3% during the same period,
primarily due to a reduction in borrowings from the Federal Home Loan Bank.
34
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest income was virtually unchanged at $11,060,000 for the year ended June
30, 2005, compared to $11,095,000 for the year ended June 30, 2004. As
illustrated in the accompanying average balance sheet, this resulted from an
increase in average loans outstanding which was almost entirely offset by a
decline in the average rate earned on those loans. Average loans outstanding
increased $6,261,000, or 4.1% from $154,499,000 for the year ended June 30, 2004
to $160,760,000 for the year ended June 30, 2005, which was the result of
management's emphasis on growing its loan portfolio, particularly in those
categories of loans that tend to be shorter-term or otherwise reprice
periodically. The average yield earned on loans declined 19 basis points from
6.65% for the year ended June 30, 2004 to 6.46% for the year ended June 30,
2005, and was attributable to the significant number of 1-4 family mortgage
loans originated during 2005 at interest rates ranging from 5.75 to 6.00 percent
and, to a lesser extent, growth in shorter-term and variable rate loans which
tend to carry lower interest rates. As a result, interest income earned on loans
was $10,388,000 for the year ended June 30, 2005, $117,000, or 1.1% greater than
the $10,271,000 earned for the year ended June 30, 2004. In addition other
interest and dividend income increased $48,000 from $283,000 for the year ended
June 30, 2004 to $331,000 for the year ended June 30, 2005.
These increases in interest income were partially offset by a decline in
interest income on investment securities as management used proceeds from calls
and maturities of investment securities to fund growth in the loan portfolio.
Accordingly, interest income on investment securities decreased $200,000, from
$541,000 for the year ended June 30, 2004 to $341,000 for the year ended June
30, 2005.
Interest expense was $3,926,000 for the year ended June 30, 2005, a decrease of
$218,000, or 5.3% from $4,144,000 for the year ended June 30 2004, as the
Company was able to repay or replace maturing Federal Home Loan Bank advances
with lower costing advances and customer deposits. Interest expense on FHLB
advances was $2,589,000, $313,000 or 10.8% lower than the $2,902,000 recorded in
the year ended June 30, 2004. As illustrated in the accompanying average balance
sheet, the average balance of FHLB advances declined by $6,543,000, from
$56,636,000 for the year ended June 30, 2004 to $50,093,000 for the year ended
June 30, 2005. The average rate paid on FHLB advances increased slightly to
5.17%. The decline in interest expense on FHLB advances was partially offset by
a $95,000 increase in interest expense on interest-bearing deposits. While the
average balance of the Company's interest-bearing deposits declined $1,114,000,
from $119,454,000 for the year ended June 30, 2004, to $118,340,000 for the year
ended June 30, 2005, the average interest rate paid on those deposits increased
by 9 basis points from 1.04% during 2004 to 1.13% during 2005.
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)
------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------ -------- -------- ------
Assets:
Interest-earning assets:
Interest-earning demand deposits $ 9,758 $ 82 0.84% $ 15,406 $ 78 0.51% $ 10,985 $ 128 1.17%
Investment securities 9,152 341 3.73 18,471 541 2.93 9,392 207 2.20
Loans, including nonaccrual loans 160,760 10,388 6.46 154,499 10,271 6.65 183,363 13,397 7.31
Federal Home Loan Bank, stock 5,576 249 4.47 5,317 205 3.86 5,139 221 4.30
-------- ------- -------- ------- -------- -------
Total interest-earning assets 185,246 11,060 5.97 193,693 11,095 5.73 208,879 13,953 6.68
------- ------- -------
Noninterest earning assets 9,364 5,805 11,052
-------- -------- --------
Total assets $194,610 $199,498 $219,931
======== ======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and money
market accounts $ 61,505 $ 401 0.65 $ 60,182 $ 336 0.56 $ 48,421 $ 595 1.23%
Savings accounts 21,903 101 0.46 25,262 62 0.25 28,275 268 0.95
Certificates of deposit 34,932 835 2.39 34,010 844 2.48 37,511 1,364 3.64
-------- ------- -------- ------- -------- -------
Total interest-bearing deposits 118,340 1,337 1.13 119,454 1,242 1.04 114,207 2,227 1.95
Federal Home Loan Bank, advances 50,093 2,589 5.17 56,636 2,902 5.12 71,889 3,673 5.11
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 168,433 3,926 2.33 176,090 4,144 2.35 186,096 5,900 3.17
-------- ------- -------- ------- -------- -------
Other liabilities 1,651 8,559 8,559
-------- -------- --------
Stockholder's equity,
including equity from ESOP shares 24,526 24,841 25,276
-------- -------- --------
Total liabilities and
stockholders' equity $194,610 $199,498 $219,931
======== ======== ========
Net interest-earning assets $ 16,813 $ 20,660 $ 22,783
======== ======== ========
Net interest rate spread (1) $ 7,134 3.64% $ 6,951 3.37% $ 8,053 3.51%
======= ======= =======
Net interest margin (2) 3.85% 3.59% 3.86%
Ratio of average interest-earning
assets to average interest-bearing
liabilities 109.98% 111.94% 112.24%
======== ======== ========
(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 (Dollar Amounts in Thousands)
-------------------------------------------------------------------
2005 vs 2004 2004 vs 2003
-------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ----- ---------- ------- ------- ----------
Interest-earning assets:
Demand deposits $ (35) $ 39 $ 4 $ 39 $ (89) $ (50)
Investment securities (321) 121 (200) 249 85 334
Loans 409 (292) 117 (1,988) (1,138) (3,126)
FHLB, stock 10 34 44 7 (23) (16)
----- ----- ----- ------- ------- -------
Total interest-earning assets 63 (98) (35) (1,693) (1,165) (2,858)
----- ----- ----- ------- ------- -------
Interest-bearing liabilities:
NOW and money market accounts 8 57 65 120 (379) (259)
Savings (9) 48 39 (26) (180) (206)
Certificates of deposit 23 (32) (9) (118) (402) (520)
FHLB advances (339) 26 (313) (782) 11 (771)
----- ----- ----- ------- ------- -------
Total interest-bearing liabilities (317) 99 (218) (806) (950) (1,756)
----- ----- ----- ------- ------- -------
Increase (decrease) in net
interest income $ 380 $(197) $ 183 $ (887) $ (215) $(1,102)
===== ===== ===== ======= ======= =======
THE PROVISION FOR LOAN LOSSES was $183,000 for the year ended June 30, 2005
compared to $330,000 for the same period in 2004. 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 2005 were $525,000, compared to $165,000 during
2004. While the charge-offs recorded during 2004 related to several loans, the
charge-offs during 2005 were primarily attributable to one residential loan and
one commercial real estate loan that had been provided for during 2004. 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 $2,072,000 for the year ended June 30, 2005,
$102,000, or 4.7%, less than the $2,174,000 recorded for the year ended June 30,
2004. This decline was primarily attributable to a decline in revenue generated
by the Bank's trust department of $88,000, from $559,000 for the year ended June
30, 2004 to $471,000 for the year ended June 30, 2005. While the average trust
assets under management increased slightly ($134.0 million during 2005 compared
to $130.1 during 2004), a larger portion of those assets were held in custody
and agency accounts which generate lower fees than traditional trust accounts.
In addition, the Bank recog-
37
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS
nized a $68,000 gain on the sale of available-for-sale securities during the
year ended June 30, 2004. There were no sales of securities during the year
ended June 30, 2005.
NONINTEREST EXPENSE was $6,405,000 for the year ended June 30, 2005, $15,000
less than the $6,420,000 reported for the year ended June 30, 2004, as slight
increases in salary and employee benefits and data processing fees were more
than offset by declines in all other categories of noninterest expense.
Salaries and employee benefits totaled $2,972,000 for 2005 and $2,915,000 for
2004, an increase of $57,000 or 2.0% and were the result of normal salary
increases.
Net occupancy expense totaled $435,000 for 2005 and $450,000 for 2004, a
decrease of $15,000 or 3.3%. This decline was primarily attributable to expenses
incurred during fiscal year 2004 related to the remodeling the Bank's main
office and Piqua locations which were completed early in fiscal 2004.
Data processing fees totaled $678,000 for 2005 and $637,000 for 2004, an
increase of $41,000 or 6.4%. This increase was primarily attributable to
periodic maintenance of the Bank's processing hardware.
Professional fees expenses were $338,000 for the year ended June 30, 2005,
$67,000 or 16.5% less than the $405,000 reported for the year ended June 30,
2004. This decline was attributable to $65,000 in fees associated with trust
specific consulting services which were incurred during fiscal 2004, that were
not incurred during fiscal 2005.
Advertising totaled $149,000 for 2005 and $156,000 for 2004, a decline of $7,000
or 4.5%. This decrease was attributable to a timing difference. The Bank takes
great pride in being the primary sponsor of the Miami County Homebuilder's
Association "Homarama." Prior to 2004, this event was held during September,
however, during calendar year 2004, the event was held during May. Accordingly,
the Bank incurred approximately $50,000 of expense related to sponsoring this
event twice during fiscal 2004, compared to approximately $25,000 of advertising
expense related to sponsoring the event during fiscal 2005. The decline was
partially offset by an increase in newspaper advertising which increased
$10,000, from $31,000 during fiscal 2004 to $41,000 for fiscal 2005. The
increase in newspaper advertising was primarily attributable to recruiting
advertisements placed in several local newspapers during the year.
Other expenses were $1,400,000 for the year ended June 30, 2005, $22,000 or 1.5%
less than the $1,422,000 reported for the year ended June 30, 2004. This decline
was attributable to $103,000 in fees related to developing new products and
services during fiscal 2004, that were not incurred during fiscal 2005. This
decline was partially offset by an increase in the charges associated with
providing credit card services to local merchants and fees paid to an executive
recruiter during fiscal 2005. Charges associated with providing overdraft
privilege services to deposit customers increased $23,000, from $49,000 during
fiscal 2004 to $72,000 during fiscal 2005. Fees paid to an executive recruiter
were $ 22,000 during fiscal 2005. No such fees were incurred during fiscal 2004.
The balance of increases were due to overall increases in other expense items.
INCOME TAX EXPENSE Total income tax expense was $828,000 (an effective tax rate
of 31.6%) for the year ended June 30, 2005, compared to $744,000 (an effective
tax rate of 31.3%) during the year ended June 30, 2004.
FINANCIAL CONDITION
Total consolidated assets of the Company at June 30, 2005 were $199,881,000,
compared to $193,196,000 at June 30, 2004, an increase of $6,685,000 or 3.5%.
NET LOANS increased $20,452,000 or 13.6%, from $150,735,000 at June 30, 2004, to
$171,187,000 at June 30, 2005. The following table illustrates changes in the
Bank's loan portfolio by category at June 30 of each year presented.
38
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS
BALANCE JUNE 30, BALANCE JUNE 30, CHANGE CHANGE
(Dollar Amounts in Thousands) 2005 2004 ($'S) (%)
---------------- ---------------- ------ ------
Residential single family mortgages $111,985 $100,629 $11,356 11.3%
Other residential and commercial mortgages 29,952 27,582 2,370 8.6%
-------- -------- -------
141,937 128,211 13,726 10.7%
Construction 18,281 12,315 5,966 48.4%
Commercial business 6,805 6,714 91 1.4%
Consumer 1,681 2,282 (601) (26.3%)
Home Improvement 8,598 6.016 2,582 42.9%
Deposit and other 187 264 (77) (29.2%)
-------- -------- -------
177,489 155,802 21,687 13.9%
Deferred fees (84) (177) 93 (52.5%)
Undisbursed portion of loans (5,493) (3,842) (1,651) (43.0%)
Allowance for loan losses (725) (1,048) 323 (30.8%)
-------- -------- -------
Total loans, net $171,187 $150,735 $20,452 13.6%
======== ======== =======
As previously noted, management emphasized growth of the loan portfolio during
fiscal 2005, particularly in those categories that tend to be shorter-term or
otherwise reprice periodically. The result, as outlined above, was that loans
grew in nearly every category from June 30, 2004 to June 30, 2005.
THE ALLOWANCE FOR LOAN LOSSES decreased from $1,048,000 at June 30, 2004 to
$725,000 at June 30, 2005 as a result of a provision for loan losses of
$183,000, which was offset by net charge offs of $506,000. Charge-offs during
2005 were primarily attributable to one residential loan and one commercial real
estate loan. 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, 2005 and 2004, respectively
JUNE 30, JUNE 30,
2005 2004
-------- ----------
Non-accrual $415,000 $ 683,000
Past due 90+ and still accruing 333,000 565,000
-------- ----------
Total non-performing loans $748,000 $1,248,000
======== ==========
Non-performing loans decreased $500,000, from $1,248,000 at June 30, 2004, to
$748,000 at June 30, 2005. This decrease is primarily attributable to a $549,000
decline in non-performing loans in the commercial loan portfolio. The decrease
in non-performing commercial loans is attributable to three relationships, two
of which were charged-off and one of which was repossessed and disposed of
during 2005. There was one non-performing commercial business loan ($4,000) at
June 30, 2005. Management continues to work 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
96.9% and 84.0% at June 30, 2005 and 2004, respectively.
FEDERAL HOME LOAN BANK stock increased $249,000 or 4.54%, from $5.49 million at
June 30, 2004, to $5.74 million at June 30, 2005. This increase was entirely the
result of stock dividends received during 2005.
INTEREST RECEIVABLE was $733,000 at June 30, 2005 compared to $731,000 at June
30, 2004. The majority of the Company's interest earning assets are scheduled to
pay interest monthly, on the first. Accordingly, while growth in interest
earning assets can impact the balance of interest receivable, the balance of
interest receivable is primarily dependent upon when interest payments are
actually received, and to a lesser extent, the rate being earned on those
assets. Note, the average rate earned on interest earning assets increased 24
basis points from 5.73% for the year ended June 30, 2004 to 5.97% for the year
ended June 30, 2005.
CASH SURRENDER VALUE OF LIFE INSURANCE increased from $4,196,000 at June 30,
2004, to $4,362,000 at June 30, 2005. This increase was solely attributable to
net earnings credited to the policies during 2005. In June 2003, the Company
purchased life insurance on several key executives in order to protect the Bank
against increases in employee benefit costs and to mitigate the costs associated
with replacing key members of management in the event of their untimely death.
It should be noted that no benefits were provided by the Company or Bank to
these executives as a result of this transaction.
DEPOSITS increased $12,297,000 or 10.8%, from $114,223,000 at June 30, 2004 to
$126,520,000 at June 30, 2005. The following table illustrates changes in the
various types of deposits at June 30 of each year presented.
JUNE 30, JUNE 30, CHANGE CHANGE -
(Dollar Amounts in Thousands) 2005 2004 ($'s) (%)
- ----------------------------- -------- -------- ------ --------
Noninterest bearing accounts $ 14,620 $ 12,672 1,948 15.4%
NOW accounts 19,752 19,964 (212) (1.1%)
Super NOW accounts 1,271 1,463 (192) (13.1%)
Passbook accounts 24,049 23,850 199 0.8%
Money market accounts 26,158 26,346 (188) (0.7%)
Certificates of deposit 40,670 29,928 10,742 35.9%
-------- -------- ------
Total deposits $126,520 $114,223 12,297 10.8%
======== ======== ======
With the exception of noninterest bearing accounts and certificates of deposit
(CD's), the Company's deposit accounts were stable. The increase in noninterest
bearing accounts was attributable to a $1,074,000 increase in "Totally Free
Checking" accounts. The number of accounts increased by 186, from 1,102 at June
30, 2004 to 1,288 at June 30, 2005, and the average balance per account
increased from $1,934 to $2,488. Management introduced several "CD specials"
during fiscal 2005, which resulted in growth in both regular and jumbo CD's
during the year.
FHLB ADVANCES declined by $7,172,000 or 13.5%, from $53,295,000 at June 30,
2004, to $46,123,000 at June 30, 2005. During fiscal 2005, the Bank used growth
in customer deposits to fund maturing advances.
OTHER LIABILITIES increased by $899,000, from $757,000 at June 30, 2004, to
$1,656,000 at June 30, 2005. This increase was primarily attributable to
increases in four other liability accounts. Accrued income taxes payable
increased $412,000 from June 30, 2004 to June 30, 2005 as the Company earned
substantially more income during the fourth quarter of fiscal 2005 in comparison
to the fourth quarter of fiscal 2004. The balance in construction loan
borrower's escrow accounts increased $344,000 which is the direct result of the
increase in the Company's construction loan portfolio, a $54,000 increase in the
treasury tax and loan account and a $63,000 increase in miscellaneous accounts
payable from June 30, 2004 to June 30, 2005.
40
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS
TOTAL STOCKHOLDERS' EQUITY was virtually unchanged at $24.93 million at June 30,
2005. The following table illustrates the changes in stockholders' equity from
June 30, 2004 to June 30, 2005. (Dollar Amounts in Thousands)
Total stockholders' equity, June 30, 2004 $24,391
Net income 1,790
Change in the unrealized gain on securities AFS (8)
Cash dividends ($0.13 per share) (944)
Exercise of stock options 205
Tax benefit related to exercise of options 27
Purchase of treasury shares (502)
Net change in equity from ESOP shares (34)
-------
Total stockholders' equity, June 30, 2005 $24,925
=======
As the table indicates, the Company earned $1,790,000 in net income for the year
ended June 30, 2005 and raised an additional $205,000 through the exercise of
stock options. These increases were partially offset by $944,000 in dividends
paid to the Company's stockholders, $502,000 in purchases of treasury stock.
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.
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 almost
entirely attributable to a decline in interest income earned on loans. Interest
income earned
41
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS
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%.
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.
42
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS
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
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 year 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.
43
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 Bank's
Board of Directors has established an Asset/Liability Committee consisting of
management officers, which is responsible for reviewing the Company's
asset/liability policies and interest rate risk position. Such committee
generally meets on a quarterly basis, and at other times as dictated by market
conditions, and reports to the Board of Directors after each such meeting.
The Company's interest rate risk strategy primarily consists of: (i) emphasizing
the attraction and retention of core deposits, which tend to be a more stable
source of funding, (ii) emphasizing the organization of adjustable rate mortgage
loan products and short-term commercial loans, the origination of which is
largely dependent on the market demand for such loans, (iii) when market
conditions are favorable and in consideration of the regulatory requirements
relating to required levels of residential loans which must be maintained by the
Bank, selling fixed-rate one-to-four-family mortgage loans, (iv) investing
primarily in short-term U.S. Government securities and mortgage-backed
securities, and (v) using FHLB advances as a funding source when rates on FHLB
advances compare favorably to local competitive deposit rates. As a traditional
thrift lender, the Company has a significant amount of its earning assets
invested in fixed-rate mortgages with contractual maturities greater than one
year. At June 30, 2005 an aggregate of $124.64 million, or 62.4% 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, 2005,
assuming changes in interest rates. The assumptions used to prepare this table
are the latest available by the OTS in assessing the interest rate sensitivity
of thrift institutions.
Change in Net Portfolio
Change in Interest Rate Value - Dollars Change in Net Portfolio
(Basis Points) (000's) Value - Percent
- ----------------------- ----------------------- -----------------------
+300 $(3,222) (10)%
+200 (1,561) (5)
+100 (255) (1)
0 -- --
- -100 (2,103) (7)
- -200 (5,732) (18)
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.
44
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 9.64% and 16.00% at June 30, 2005 and 2004,
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, and prepayments and maturities
of outstanding loans, mortgage-backed securities, and investments. While
scheduled payments of loans and mortgage-backed securities and maturing
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by interest rates, economic conditions and
competition. The Bank utilizes FHLB borrowings to leverage its capital base and
provide funds for lending and to better manage its interest rate risk. The sole
investment of the Company is its investment in the Bank's stock.
At June 30, 2005, the Bank had outstanding commitments to fund the undisbursed
portion of construction loans of $5,493,000, originate mortgage loans of
$16,014,000, unused lines of credit of $13,438,000 and standby letters of credit
of $3,300,000. As of June 30, 2005, certificates of deposit scheduled to mature
in one year or less totaled $24,081,000.
The following table presents additional information about the Company's unfunded
commitments as of June 30, 2005, which by their terms have contractual maturity
dates subsequent to June 30, 2005:
2006 2007 2008 2009 2010 Thereafter Totals
------ ------ ---- ---- ---- ---------- -------
Unfunded commitments:
Letters of credit $1,291 $2,009 $ -- $ -- $-- $ -- $ 3,300
Lines of credit 5,822 1,632 208 548 96 5,132 13,438
The following table presents additional information about the Company's
contractual obligations as of June 30, 2005, which by their terms have
contractual maturity and/or termination dates subsequent to June 30, 2005:
2006 2007 2008 2009 2010 Thereafter Totals
------- ------- ------ ------ ------- ---------- -------
Contractual Obligations:
Certificates of deposit $24,081 $10,971 $3,406 $ 841 $ 1,341 $ 30 $40,670
FHLB advances 4,996 3,649 5,166 8,888 11,706 11,718 46,123
Management believes that adequate liquidity is available to meet all known
contractual obligations and unfounded 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 upon the Bank's operating, financing lending
and investing activities during any given period. At June 30, 2005, the Bank's
cash and cash equivalents totaled $8,992,000. 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
45
(PEOPLES OHIO FINANCIAL CORPORATION LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 2005, the Bank exceeded all of its regulatory capital
requirements with tangible and tier 1 capital both at $23,628,000 or 11.9% of
adjusted total assets, and risk-based capital at $24,353,000 or 18.1 % of
risk-weighted assets. The required minimum ratios 1.5% for tangible capital to
adjusted total assets, 4.0% for tier 1 capital to adjusted total assets and 8.0%
for risk-based capital to risk-weighted assets. See "Regulatory Matters" in the
accompanying notes to the consolidated financial statements for the Bank's
capital calculations as of June 30, 2005 and 2004.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America. These principles require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
The primary assets and liabilities of financial institutions such as the Bank
are monetary in nature. As a result, interest rates have a more significant
impact on the Bank's performance than the effects of general levels of
inflation. Interest rates, however, do not necessarily move in the same
direction or with the same magnitude as the price of goods and services, since
such prices are affected by inflation. In a period of rapidly rising interest
rates, the liquidity and maturity structure of the Bank's assets and liabilities
are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest rates, on
earnings is in the area of noninterest expense. Such expense items as
compensation and benefits and occupancy and equipment costs may be subject to
increases as a result of inflation. An additional effect of inflation is the
possible increase in the dollar value of the collateral securing loans made by
the Bank. The Bank is unable to determine the extent, if any, to which
properties securing the Bank's loans have appreciated in dollar value due to
inflation.
IMPACT OF CURRENT ACCOUNTING ISSUES
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which sets
accounting requirements for "share-based" compensation to employees, including
employee-stock-purchase-plans (ESPPs) and provides guidance on accounting for
awards to non-employees. This Statement will require the Company to recognize in
the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees, but expresses no preference for a
type of valuation model. This Statement is effective for the Company on July 1,
2006. While the Company has been unable to determine its impact, the
implementation of SFAS No. 123R is not expected to be significant 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, 2005, the Company had approximately 600 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
2005
1st Qtr. $4.15 $4.24 $0.065
2nd Qtr. 4.08 4.45 --
3rd Qtr. 3.95 4.10 0.065
4th Qtr. 3.85 4.80 --
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 --
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes the Company's equity compensation plans as of
June 30, 2005:
Number of Securities
Remaining Available for
Future Issuance Under
Number of Securities Weighted Average Equity Compensation Plans
To be Issued Upon Exercise Price of (excluding securities
Exercise of Options Outstanding Options included in first column)
-------------------- ------------------- -------------------------
Equity compensation plans
approved by shareholders 615,473 $4.15 420,500
Equity compensation plans
not approved by shareholders -- --
------- -------
Total 615,473 420,500
======= =======
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
WILLIAM E. LUKENS -- CHAIRMAN PETER E. JENKINS THOMAS E. ROBINSON
President & Majority Owner Manager of the Miami County Fair Retired Executive
Stillwater Technologies, Inc Troy, Ohio Troy, Ohio
A Contract Manufacturing Firm
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 RICHARD W. WALLACE
DOUGLAS HAINES Peoples Savings Bank of Troy) President
President Hartzell Fan, Inc
Buckeye Mutual Insurance Group Piqua, Ohio
Piqua, 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 Chief Administration Officer Assistant Vice-President
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 Managment Services Finance Officer
LINDA A. DANIEL JANICE YOHEY
Vice-President Assistant Vice-President
Marketing/Administration Lending Officer
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