Item 1. Business
General
Peoples Community Bancorp, Inc. (“Peoples” or the “Company”) was organized in December 1999 at the direction of the Board of Directors of The People’s Building, Loan and Savings Company, presently Peoples Community Bank (the “Bank”), for the purpose of holding all of the capital stock of the Bank and in order to facilitate the conversion of the Bank from an Ohio-chartered mutual savings and loan association to a federally-chartered stock savings bank (the “Conversion”). (Unless the context otherwise requires, reference to Peoples includes the Bank). In fiscal year 2005, Peoples changed its charter to a federal bank holding company, in order to acquire an investment interest in a local bank holding company. In fiscal year 2006, Peoples sold its investment interest in the local bank holding company and converted its charter to a registered savings and loan holding company. People’s assets consist primarily of the outstanding shares of common stock of the Bank, investments made with the portion of the net proceeds from the issuance of Peoples shares to the public (the “Offering”) retained by Peoples, and Peoples’ loan to the employee stock ownership plan (the “ESOP”). Peoples has no significant liabilities other than junior subordinated debentures issued in fiscal 2005 and a $17.5 million line of credit. The management of Peoples and the Bank are substantially identical and Peoples neither owns nor leases any property but instead uses the premises, equipment and furniture of the Bank. The Bank is a federally-chartered stock savings bank that was originally organized in 1889. The Bank conducts its business from nineteen offices in Hamilton, Warren, and Butler Counties in Ohio and Dearborn and Ohio Counties in Indiana. The Bank is primarily engaged in attracting deposits from the general public and using those funds to originate loans and invest in securities. The Bank’s primary lending emphasis has been, and continues to be, loans secured by first liens on single-family (one- to four-units) residential properties located in its local market. However, over the past five fiscal years, the Bank has placed an increasing emphasis on multi-family residential loans, nonresidential real estate and land loans, construction loans, commercial loans and consumer loans. As a result, as a percentage of the total loan portfolio, single-family residential loans have decreased from 57.8% at September 30, 2001 to 42.3% at December 31, 2006, while multi-family residential loans, nonresidential real estate and land loans, construction loans, commercial loans and consumer loans have increased during the same time period from 8.7% to 15.0%, 15.7% to 17.3%, 15.0% to 28.9%, 2.3% to 3.8% and 0.5% to 2.9%, respectively.
The Company was formed in December 1999 in connection with the mutual to stock conversion of the Bank, and the sale of 1,190,000 shares of common stock to depositors and members of the community. The Bank conducts its business from nineteen full service offices in Hamilton, Warren and Butler counties in Southwest Ohio and Dearborn and Ohio Counties in Southeast Indiana. The Bank’s business is conducted through an aggressive marketing and selling effort of its lending products and services to the communities in its market area and through the continued development of innovative lending programs that give the Bank a competitive advantage. The Bank offers a wide variety of loan products, including single and multi-family residential loans, nonresidential real estate and land loans and construction loans. In addition, the Bank invests in securities. The funds for the Bank’s lending and investment activities are primarily provided by deposits and borrowings. At December 31, 2006, the Company had $1.0 billion in total assets, $755.3 million in deposits, $156.9 million in borrowings (excluding subordinated debentures) and $87.6 million of stockholders’ equity. The Company’s principal executive office is located at 6100 West Chester Road, West Chester, Ohio 45071-1130. The Company’s telephone number is (513) 870-3530.
As a result of acquisitions and internal growth, the Company has grown from $416.0 million in total assets as of September 30, 2001 to $1.0 billion in total assets as of December 31, 2006. Between the completion of the public offering in March 2000 and December 31, 2006, the Company has acquired six financial institutions with aggregate total assets as of the time of acquisition of $495.6 million. Also, in September 2003, the Company purchased $32.8 million in loans and assumed $55.6 million in deposits in connection with the acquisition of two branch offices from another financial institution. The Company has supplemented this growth from acquisitions with loan generation secured primarily by real estate in its market area. Loan originations increased from $241.1
million in fiscal 2001, $261.6 million in fiscal 2002, $278.6 million in fiscal 2003, $289.5 million in fiscal 2004 and $337.0 million in fiscal 2005 to $341.6 million in fiscal 2006. Loans receivable, net increased from $377.7 million at September 30, 2001 to $812.6 million at December 31, 2006. In addition, since September 30, 2000, the Company has expanded its franchise through the opening of six full service branch offices. These new branch offices, as well as acquired branch offices, have expanded the Company’s market presence and facilitated its loan production growth. The Company’s loan growth has been funded in part by deposits. The Company has placed an emphasis on deposit generation both internally and through whole bank and branch acquisitions. Deposits have increased from $233.1 million at September 30, 2001 to $755.3 million at December 31, 2006.
On June 9, 2006, the Company acquired Mercantile Financial Corporation (“Mercantile”) and its wholly-owned subsidiary, Mercantile Savings Bank, which operated one branch office in Cincinnati, Ohio. The Bank paid $34.78 in cash and exchanged 43.10 shares of stock for each of the outstanding common shares of Mercantile, resulting in aggregate merger consideration of approximately $9.3 million, including acquisition costs. This acquisition complements our market area, and increases our market share and scale of operations.
On December 29, 2006, the Company sold its 69,925 shares of Columbia for an aggregate purchase price of $2.9 million. In conjunction with this divesture, the Corporation converted its charter to a registered savings and loan holding company.
The Bank is subject to examination and comprehensive regulation by the Office of Thrift Supervision, which is the Bank’s chartering authority and primary federal regulator. The Bank is also regulated by the Federal Deposit Insurance Corporation (the “FDIC”), administrator of the Savings Association Insurance Fund. The Bank is a member of the Federal Home Loan Bank (the “FHLB”) of Cincinnati, which is one of the 12 regional banks comprising the FHLB System.
As previously announced, the Board of Directors of the Company adopted an amendment to Article VI of the Company’s Bylaws to change the Company’s fiscal year end from September 30, to December 31, effective retroactively to January 1, 2006, in order to increase operational efficiency. As a result, the consolidated statements of financial condition compares December 31, 2006 to December 31, 2005, while the consolidated statements of operations, the consolidated statements of comprehensive income (loss), and the consolidated statements of cash flow reflect, as applicable, the twelve month period ended December 31, 2006, the three month period ended December 31, 2005, the twelve month period ended September 30, 2005 and the twelve month period ended September 30, 2004.
Peoples Lending Activities
General. At December 31, 2006, the net loan portfolio of Peoples totaled $812.6 million, representing approximately 79.0% of total assets at that date. The principal lending activity of Peoples is the origination of residential and nonresidential real estate loans. At December 31, 2006, residential loans (including construction loans secured by residential real estate) amounted to $570.3 million, or 63.7% of the gross loan portfolio. Nonresidential real estate and land loans totaled $140.9 million, or 15.7% of the gross loan portfolio and nonresidential construction loans amounted to $130.1 million, or 14.5% of the gross loan portfolio as of December 31, 2006. Further, commercial loans amounted to $30.9 million, or 3.5% of the gross loan portfolio at December 31, 2006 and consumer loans amounted to $23.0 million, or 2.6% of the gross loan portfolio at such time. Peoples has placed an increased emphasis on multi-family residential loans, nonresidential real estate and land loans, construction loans, commercial loans and consumer loans over the last five fiscal years. The aggregate amount of these loans has increased to $551.9 million, or 61.6% of the gross loan portfolio at December 31, 2006, compared to $260.6 million, or 46.8% of the gross loan portfolio at September 30, 2002. Notwithstanding the overall increase during the period between September 30, 2002 and December 31, 2006, the Company currently expects to curtail its acquisition and development lending, one- to four-family residential investment lending, and unsecured commercial lending due in large part to the softening of the local housing market, the increase in the Bank’s nonaccrual loans and charge-offs, and to realign the portfolio due to loan concentrations. Commercial
loans have decreased from $47.3 million, or 5.6% of net loans at December 31, 2005, to $30.9 million, or 3.8% of the net loans at December 31, 2006.
The types of loans that Peoples may originate are subject to federal and state laws and regulations. Interest rates charged on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by its competitors. These factors are affected by general and economic conditions, the monetary policy of the federal government, including the Federal Reserve Board, legislative and tax policies, and governmental budgetary matters.
A savings institution generally may not make loans to one borrower and related entities in an amount which exceeds 15% of its unimpaired capital and surplus. However, loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to a borrower if the loans are fully secured by readily marketable securities. At December 31, 2006, Peoples’ regulatory limit on loans-to-one borrower was $15.5 million. All of Peoples’ five largest loans or groups of loans-to-one borrower, amounting to $13.0 million, $12.5 million, $12.5 million, $12.5 million and $12.0 million at December 31, 2006 were performing in accordance with their terms at such date.
Loan Portfolio Composition. The following table sets forth the composition of Peoples’ loans at the dates indicated.
Origination of Loans. The lending activities of Peoples are subject to the written underwriting standards and loan origination procedures established by the Board of Directors and management. Loan originations are obtained through a variety of sources, including referrals from real estate brokers, builders and existing customers. Written loan applications are taken by loan officers. Loan processors obtain or procure credit reports, appraisals and other documentation involved with a loan. Property valuations are performed by independent outside appraisers approved by the Board of Directors of Peoples. Over the past twelve months, the Bank has revised its underwriting standards to place an increased focus on cash flow analysis. This represents a transition from underwriting standards primarily based on collateral value, which are generally used by thrifts, to underwriting standards more widely used by banks, whereby the borrower’s cash flow capacity to service the loan is the primary focus.
Under the real estate lending policy of Peoples, a title opinion must be obtained for each real estate loan. Peoples also requires fire and extended coverage casualty insurance, in order to protect the properties securing its real estate loans. Borrowers must also obtain flood insurance policies when the property is in a flood hazard area as designated by the Department of Housing and Urban Development. Peoples does not require borrowers to advance funds to an escrow account for the payment of real estate taxes or hazard insurance premiums.
Peoples’ loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will secure the loan. The Board of Directors has granted authority to approve secured loans as follows: loans up to $500,000 must be approved by two senior executive officers; loans between $500,000 and $1.0 million must be approved by three senior officers and loans greater than $1.0 million must be approved by the Board of Directors or the executive committee of the Board of Directors.
Unsecured loans up to $500,000 require approval by three senior executive officers and those greater than $500,000, individually or in the aggregate, must be approved by the Board of Directors or the executive committee of the Board of Directors. The executive committee ratifies all approvals and presents its report on a monthly basis for the Board of Directors review and approval.
Activity in Loans. The following table shows the activity in Peoples’ loans during the periods indicated.
(1) Undisbursed portions of loans in process totaled $62.0 million, $77.1 million, $72.9 million, $59.0 million, $55.3 million, and $43.1 million at December 31, 2006 and 2005, and September 30, 2005, 2004, 2003, and 2002, respectively.
(2) Includes loan participations sold of $5.1 million, $1.1 million, $5.0 million, $10.2 million, and $6.7 million in fiscal 2006, 2005, 2004, 2003, and 2002, respectively. There were no loan participations sold for the three months ended December 31, 2005. For fiscal 2006 and 2005, includes whole loans sold of $29.5 million and $6.7 million, respectively, and for the three months ended December 31, 2005, includes whole loans sold of $3.5 million. The reduction in total loans resulting from sales of loans and loan participations in fiscal 2006, the three months ended December 31, 2005, and fiscal 2005, 2004, 2003, and 2002 were offset (increased) by increases (decreases) in undisbursed loans in process, and other net items totaling approximately $(13.9 million0, $5.7 million, $13.0 million, $5.3 million, $16.1 million, and ($2.5 million), respectively.
The significant repayments of $367.5 million, $263.7 million, $236.4 million and $247.1 million during fiscal 2006, 2005, 2004 and 2003, respectively, were primarily due to the repayment of short-term construction loans and land development loans as well as the refinancing activity related to adjustable-rate single-family residential loans that were set to reprice in the current year.
Charge-offs of $13.1 million during fiscal 2006 consisted primarily of $4.1 million in loans secured by single-family residential real estate, $2.4 million in loans secured by multi-family residential real estate, $1.6 million in construction loans, $1.3 million in loans secured by commercial real estate and land, and $3.7 million in commercial and consumer loans. The increase in charged-off loans was primarily due to real estate investors and developers experiencing financial difficulties and a moderate decline in the local economy. See “Asset Quality.”
Although federal laws and regulations permit savings institutions to originate and purchase loans secured by real estate located throughout the United States, Peoples generally confines its lending activity to its primary market area of Warren, Butler and Hamilton Counties in Ohio and Dearborn and Ohio Counties in Indiana. Subject to its loans-to-one borrower limitation, Peoples is permitted to invest without limitation in residential mortgage loans and up to 400% of its capital in loans secured by non-residential or commercial real estate. Peoples may also invest in secured and unsecured consumer loans in an amount not exceeding 35% of total assets. This 35% limitation may be exceeded for certain types of consumer loans. In addition, Peoples may invest up to 10% of its total assets in secured and unsecured loans for commercial, corporate, business or agricultural purposes. At December 31, 2006, Peoples was within each of the above lending limits.
One- to Four-Family Residential Real Estate Loans. Despite the diversification of the loan portfolio over the past few years, the primary real estate lending activity of Peoples continues to be the origination of loans secured by residential real estate. At December 31, 2006, $343.3 million, or 42.3% of the net loan portfolio of Peoples consisted of conventional one- to four-family residential loans, compared to $341.2 million, or 40.1% at December 31, 2005 and $252.4 million or 35.8% of the net loan portfolio at September 30, 2005. The increase of $90.9 million, or 36.0% between September 30, 2005 and December 31, 2006, was due to approximately $160.7 million of single-family residential loans acquired in conjunction with the purchase of Peoples Federal in December 2005 and Mercantile in June 2006.
The loan-to-value ratio, maturity and other provisions of the loans made by Peoples generally have reflected Peoples’ policy of making less than the maximum loan permissible under applicable regulations, in accordance with sound lending practices, market conditions and underwriting standards established by Peoples. Peoples’ lending policies on one- to four-family residential mortgage loans generally limit the loan-to-value ratio to 80% of the lesser of the appraised value or purchase price of the property. Residential mortgage loans are amortized on a monthly basis with principal and interest due each month. The loans generally include “due-on-sale” clauses.
The residential mortgage loans originated by Peoples consist of fixed rate and adjustable rate loans. Presently, the single-family fixed-rate residential mortgage loans originated by Peoples have terms of up to 30 years. In addition, Peoples originates adjustable-rate mortgage loans on which the interest rate adjusts every one, three or five years based upon the one-year or three-year rate on T-bills plus a specified margin. During fiscal 2004, Peoples introduced a five year fixed rate balloon product and a five year fixed rate product which adjusts on an annual basis thereafter based on the one-year rate on the T-bill. At December 31, 2006, $159.4 million, or 46.4% of our single-family residential loans were fixed rate and $183.9 million, or 53.6% were adjustable rate. Although significantly all of Peoples’ single-family loans are originated for its portfolio, the single-family residential mortgage loans presently being originated by Peoples generally conform to Fannie Mae and Freddie Mac requirements and may be sold in the secondary market.
The non-owner occupied residential mortgage loans originated by Peoples are primarily to investors and builders, and are made on substantially the same terms as owner occupied residential real estate loans. The Company currently
expects to curtail its one- to four-family residential lending to investors, due in large part to the softening of the local housing market, the increase in the Bank’s nonaccrual loans and charge-offs, and to realign the portfolio due to loan concentrations.
Multi-family Residential Loans. Peoples also originates multi-family (over four units) residential loans. Peoples’ multi-family loans are primarily secured by apartment buildings or apartments being converted to condominium units. The multi-family residential mortgage loans of Peoples are underwritten on substantially the same basis as its nonresidential real estate loans, discussed below, although loan-to-value ratios are generally limited to 80%. At December 31, 2006, Peoples had $122.2 million in multi-family residential mortgage loans, which amounted to 15.0% of Peoples’ net loan portfolio, compared to $125.0 million, or 14.7% of Peoples’ net loan portfolio at December 31, 2005.
Nonresidential Real Estate and Land Loans. Peoples’ nonresidential real estate and land loan portfolio primarily consists of loans secured by land for development purposes, professional offices, small retail centers, warehouses and building lots located within Peoples’ primary market area. Nonresidential real estate and land loans amounted to $140.9 million, or 17.3% of the net loan portfolio at December 31, 2006. This compares to $147.1 million, or 17.3% at December 31, 2005.
Nonresidential real estate loans originated by Peoples typically have a loan-to-value ratio of 75% or less and generally have higher interest rates than single-family residential mortgage loans with similar terms and structure. The maximum original term of Peoples’ nonresidential real estate loans is 25 years. Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. Creditworthiness is determined by considering the character, experience, management and financial strength of the borrower, and the ability of the property to generate adequate funds to cover both operating expenses and debt services. In evaluating whether to make a nonresidential real estate loan, Peoples places primary emphasis on the ratio of net cash flow to debt service on the property and generally requires a ratio of cash flow to debt service of at least 120%, computed after deduction for a vacancy factor and property expenses as Peoples deems appropriate.
The land loans of Peoples generally are secured by single-family residential lots or undeveloped land being held for residential development. Lot loans generally have a loan-to-value ratio of 80% or less (on an undeveloped basis) and are typically interest only loans with one-year maturities. Loans originated on developed land generally have a loan to value ratio of 75% or less with interest only over either a one or two year term. Land loans secured by single-family residential lots are structured similar to undeveloped land with a loan-to-value ratio of 80% or less.
Nonresidential real estate lending is generally considered to involve a higher degree of risk than one- to four-family residential lending. Such lending typically involves large loan balances concentrated in a single borrower or groups of related borrowers for rental or business properties. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is typically affected by adverse conditions in the real estate market and in the economy. Peoples generally attempts to mitigate the risks associated with its nonresidential real estate lending by, among other things, lending primarily in its market area and using reasonable loan-to-value ratios in the underwriting process.
Land development and acquisition loans involve significant additional risks when compared with loans on existing residential properties. These loans may involve larger loan balances to single borrowers, and the payment experience may be dependent on the successful development of the land and the sale of the lots. These risks can be significantly impacted by supply and demand conditions as well as local economic conditions. The Bank expects to curtail new origination of land development and acquisition loans based on the softening of the local housing market, the increase in the Bank’s nonaccrual loans and charge-offs, and to realign the portfolio due to loan concentrations.
Construction Loans. At December 31, 2006, Peoples had approximately $234.8 million, or 28.9% of the net loan portfolio, in construction loans, compared to $259.2 million, or 30.4% of the total loan portfolio at December 31, 2005. Of this amount at December 31, 2006, $104.7 million, or 44.6%, consisted of residential construction loans and $130.1 million, or 55.4%, consisted of nonresidential construction loans. The construction loans of Peoples are comprised of loans made to builders on a pre-sold basis, as well as to builders for homes on an unsold or speculative basis. Peoples’ construction loans to builders are generally made with a term not to exceed twelve months. Interest-only payments are required during the construction period, which is typically twelve months. Peoples generally limits the number of unsold homes under construction to its builders. This number is dependent on the financial strength of the builder, marketability
of the property and the Bank’s experience with and present exposure to the builder. In addition, loans made to borrowers to construct their personal residences are originated at one closing as a construction/permanent loan.
Peoples also originates loans for the construction of nonresidential real estate such as small office buildings and warehouses. These loans are typically originated as construction/permanent loans with interest only payments during the construction period and converting to a permanent loan at the end of the construction period. These loans are generally made with a construction term of 12 months. The loan to value ratio is generally limited to 75% on these loans on an “as completed” basis.
Prior to making a commitment to fund a construction loan, Peoples requires an appraisal of the property. Peoples also generally requires third party inspections of each project prior to disbursement of funds. Loan proceeds are then disbursed based on a percentage of completion.
Construction lending is generally considered to involve a higher degree of risk of loss than long-term financing on improved, owner-occupied real estate because of the uncertainties of construction, including the possibility of costs exceeding the initial estimates and the need to obtain a tenant or purchaser if the property will not be owner-occupied. Peoples generally attempts to mitigate the risks associated with construction lending by, among other things, primarily lending in its market area, using conservative underwriting guidelines, and monitoring the construction process.
Commercial Loans. Peoples’ commercial loans consist primarily of secured and unsecured lines of credit predominantly to builders and developers for working capital purposes, and to a lesser extent, loans secured by business equipment. At December 31, 2006, commercial loans amounted to $30.9 million, or 3.8% of Peoples’ net loan portfolio, compared to $47.3 million, or 5.6% of the net loan portfolio at December 31, 2005. The Bank expects to curtail new origination of commercial unsecured loans in recognition of the moderate downturn in the local housing market and the increase in the Bank’s nonaccrual loans and charge-offs.
Consumer Loans. Peoples’ consumer and other loans consist of loans secured by deposit accounts, automobiles and stock. At December 31, 2006, consumer and other loans amounted to $23.0 million, or 2.9% of Peoples’ net loan portfolio, compared to $24.9 million, or 2.9% of Peoples’ net loan portfolio as of December 31, 2005.
Loan Origination and Other Fees. In addition to interest earned on loans, Peoples receives loan origination fees or “points” for originating loans. Loan points are a percentage of the principal amount of the mortgage loan and are charged to the borrower in connection with the origination of the loan. In accordance with Statement of Financial Accounting Standards No. 91, loan origination fees and certain related direct loan origination costs are offset, and the resulting net amount is deferred and amortized as interest income over the contractual life of the related loans as an adjustment to the yield of such loans. Peoples had $2.3 million and $2.9 million of deferred loan fees at December 31, 2006 and December 31, 2005, respectively.
Contractual Principal Repayments and Interest Rates. The following table sets forth scheduled contractual amortization of Peoples’ loans at December 31, 2006 as well as the dollar amount of such loans which are scheduled to mature after one year which have fixed or adjustable interest rates. Demand loans, loans having no schedule of repayments and no stated maturity and overdraft loans are reported as due in one year or less.
(1) Of the $487.8 million of loan principal payments contractually due after December 31, 2007, $169.0 million have fixed rates of interest and $318.8 million have adjustable rates of interest.
Scheduled contractual maturities of loans do not necessarily reflect the actual expected term of the loan portfolio. The average life of mortgage loans is substantially less than their average contractual terms because of prepayments. The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage loans and, conversely, decrease when rates on current mortgage loans are lower than existing mortgage loan rates (due to refinancing of adjustable-rate and fixed-rate loans at lower rates). Under the latter circumstance, the weighted-average yield on loans decreases as higher yielding loans are repaid or refinanced at lower rates.
Asset Quality
General. Peoples mails delinquent notices to borrowers when a borrower fails to make a required payment within 15 days of the date due. Additional notices begin when a loan becomes 30 days past due. If a loan becomes 90 days past due, Peoples refers it to an attorney to commence foreclosure. In many cases, deficiencies are cured promptly. While Peoples generally prefers to work with borrowers to resolve such problems, Peoples will institute foreclosure or other collection proceedings when necessary to minimize any potential loss.
Loans are placed on non-accrual status when management believes the probability of collection of interest is insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. As a matter of policy, Peoples generally discontinues the accrual of interest income when the loan becomes 90 days past due as to principal or interest, and if collection of the interest is questionable.
Real estate acquired by Peoples as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until sold. Peoples had real estate owned of $333,000 and $188,000 at December 31, 2006 and December 31, 2005, respectively.
Delinquent Loans. The following tables set forth information concerning delinquent loans at the dates indicated, in dollar amounts and as a percentage of each category of Peoples’ loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts which are past due.
Non-Performing Assets. The following table sets forth information with respect to non-performing assets identified by Peoples, including non-accrual loans and other real estate owned.
Nonperforming assets totaled $26.1 million, $18.9 million and $20.9 million at December 31, 2006 and 2005, and September 30, 2005, respectively. Nonperforming assets at December 31, 2006 consisted of $7.1 million of loans secured by single-family residential real estate, $4.2 million of loans secured by multi-family residential real estate, $8.3 million of loans secured by nonresidential real estate and land, $2.3 million in construction loans, $2.1 million of commercial and consumer loans, $1.7 million of loans 90 days or more past due and still accruing, and $333,000 in foreclosed real estate. Of the $25.8 million of nonperforming loans at December 31, 2006, approximately $6.4 million were less than 30 days past due. Over the past twelve months, the Bank has revised its methods of reviewing loans for potential weaknesses, which includes a strong emphasis on cash flow analysis. The Bank’s management believes that this proactive approach has resulted in earlier detection of loans with potential exposure. The Bank’s management continues to aggressively pursue the collection and resolution of all delinquent and nonperforming loans. The increase in nonperforming loans was due in large part to the moderate downturn in the local housing market and resultant cash flow issues faced by local property investors.
At December 31, 2006, non-accrual loans secured by one- to four-family residential real estate consisted of $4.4 million in owner-occupied residences and $2.7 million in non-owner occupied residential real estate, each with an average balance of $67,000. Non-accrual loans secured by multi-family residential real estate consisted of $4.2 million with an average balance of $386,000. Two borrowers represented $3.4 million of the multi-family residential non-accrual loans, with the largest borrower owing $2.4 million. Both of these borrowers were current on these loans as of December 31, 2006.
Nonresidential real estate secured non-accrual loans total $8.3 million at December 31, 2006. The average balance of these 22 loans was $376,000. Approximately $3.4 million of the nonresidential real estate secured non-accrual loans were loan acquisition and development loans, with the largest borrower owing $2.4 million. Loans secured by building lots included in the nonresidential real estate secured non-accrual loans totaled $2.7 million at December 31, 2006, and were primarily comprised of five borrowers, with the largest borrower owing $1.1 million. Four nonresidential real estate secured non-accrual loans totaling $2.2 million were secured by commercial real estate, with the largest borrower owing $1.6 million.
Non-accrual construction loans totaled $2.3 million at December 31, 2006, with an average balance of $177,000. Approximately $2.0 million of these construction loans are secured by one-to four-family residential real estate. Commercial and consumer non-accrual loans totaled $2.1 million, with $2.0 million of these loans being unsecured.
If the $24.1 million of non-accruing loans of Peoples had been current in accordance with their terms during fiscal 2006, the gross income on such loans would have been approximately $2.3 million. A total of approximately $963,000 of interest income was actually recorded by Peoples on such loans in the fiscal year ended December 31, 2006.
Classified Assets. Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a higher possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated “special mention” also must be established and maintained for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. Assets classified as substandard or doubtful may require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount. General loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital. Federal examiners may disagree with an insured institution’s classifications and amounts reserved.
Peoples’ total classified assets at December 31, 2006 amounted to $42.1 million, with $40.8 million of assets classified as substandard, and $1.3 classified as doubtful. The largest classified asset at December 31, 2006 was a $2.4 million loan secured by nonresidential real estate. The remaining $39.7 million of classified assets at December 31, 2006 consisted of approximately $27.6 million of residential real estate loans, $4.1 million of commercial and consumer loans, $7.7 million of nonresidential real estate and land loans, and $333,000 of foreclosed real estate.
Approximately $31.6 million of loans were categorized as special mention by the Bank as of December 31, 2006, compared to $10.3 million at December 31, 2005. Although these loans are not deemed classified, these loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the credit or the Bank’s credit position. Concerns may lie with cash flow, liquidity, leverage, collateral or industry conditions. Over the past twelve months, the Bank has revised its methods of reviewing loans for potential weaknesses, which includes a strong emphasis on cash flow analysis. The Bank’s management believes that this proactive approach has resulted in earlier detection of loans with
potential exposure. The Bank’s management has also increased its monitoring of these loans and is working proactively with borrowers to remediate and mitigate risk associated with these loans.
Allowance for Loan Losses. The allocation of the allowance for loan losses based on particular types of loans was as follows:
The allowance for loan losses is maintained by management at a level considered sufficient to cover estimated losses inherent in the existing portfolio based on prior loan loss experience, known risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, general economic conditions, and other factors and estimates which are subject to change over time.
A quarterly analysis of the allowance for loan loss requirements includes general allocations based on the type of collateral securing the loan. In the analysis, loans determined to have a higher risk will have higher allowance requirements. Additional allowance requirements are allocated to criticized assets, based on the classified status on the loan. For example, loans classified substandard require higher loan loss allowances as compared to loans classified special mention. No special allowances are provided for concentration of loans to one borrower, unless management becomes aware of a potential problem with collectibility. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that should be charged-off.
Peoples increased its allowance for loan losses in fiscal 2006 by recording a $17.5 million provision for losses on loans based on higher non-performing, classified and criticized assets for the fiscal year 2006. The increase in such loans is primarily due to delinquent loans in the Bank’s non-owner occupied (investment property) residential loan portfolio and its acquisition, development, and construction loan portfolio. The delinquencies in these portfolios are due primarily to the moderate downturn in the local economy and resultant cash flow issues faced by local property investors and developers. As a result, the Company currently expects to curtail its acquisition and development lending, one- to four-family residential investment lending, and unsecured commercial lending. While management believes that it determines the size of the allowance based on the best information available at the time, the allowance will need to be adjusted as circumstances change and assumptions are updated. Future adjustments to the allowance could significantly affect future net earnings.
As previously stated, over the past five years, the Bank had increased originations of multi-family residential loans, non-residential real estate and land loans, construction loans, commercial loans and consumer loans. Correspondingly, the allowance for loan losses has increased from $7.7 million or 1.4% of total loans at September 30, 2002 to $18.4 million or 2.1% of total loans at December 31, 2006.
The following table sets forth the activity in the allowance for loan losses during the periods indicated.
Investment Securities
Peoples has authority to invest in various types of securities, including mortgage-backed securities, United States Treasury obligations, securities of various federal agencies and of state and municipal governments, certificates of deposit at federally-insured banks and savings institutions, certain bankers’ acceptances and federal funds. Each significant purchase of an investment security is approved by the Board of Directors.
The investment policy of Peoples is designed to maintain adequate liquidity, manage investment assets in conjunction with interest rate risk and maximize stability through diversification. Excess funds not utilized to meet loan demand are typically invested using the guidelines of the investment policy to seek the maximum return with minimal risk. All investments are approved to be held as “Available for sale” or “Held to maturity”. Peoples does not maintain any investments as “Trading”. Peoples transacts all investment activity through a select group of securities dealers approved by the Board of Directors.
The following table sets forth information regarding the carrying value and fair value of Peoples’ securities at the dates indicated.
The following table sets forth the activity in Peoples’ aggregate securities portfolio during the periods indicated.
(1) Includes increases in Federal Home Loan Bank stock, other stock investments, and mutual funds from purchases and dividends.
(2) At December 31, 2006 and 2005, and September 30, 2005, and 2004, $67.3 million or 94.8%, $85.8 million or 97.9%, $199.6 million or 91.1%, and $228.1 million or 95.0%, respectively, of Peoples’ securities portfolio consisted of adjustable-rate securities .
The following table sets forth certain information regarding the maturities of Peoples’ security portfolio at December 31, 2006.
Mortgage-backed securities represent a participation interest in a pool of one- to four-family or multi-family mortgages. The mortgage originators use intermediaries (generally U.S. Government agencies and government-sponsored enterprises) to pool and repackage the participation interests in the form of securities, with investors receiving the principal and interest payments on the mortgages. Such U.S. Government agencies and government-sponsored enterprises guarantee the payment of principal and interest to investors.
Mortgage-backed securities are typically issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security approximates the life of the underlying mortgages.
The mortgage-backed securities of Peoples may consist of Government National Mortgage Association (“Ginnie Mae”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) securities. Ginnie Mae is a government agency within the Department of Housing and Urban Development which is intended to help finance government-assisted housing programs. Ginnie Mae securities are backed by loans insured by the Federal Housing Administration, or guaranteed by the Veterans Administration, and the timely payment of principal and interest on Ginnie Mae securities are guaranteed by Ginnie Mae and backed by the full faith and credit of the U.S. Government.
Mortgage-backed securities generally yield less than the loans which underlie such securities because of their payment guarantees or credit enhancements which offer nominal credit risk. In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of Peoples. At December 31, 2006, Peoples had mortgage-backed securities with a fair value totaling $52.7 million.
Sources of Funds
General. Deposits are the primary source of Peoples’ funds for lending and other investment purposes. In addition to deposits, principal and interest payments on loans and mortgage-backed securities are a source of funds. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates, competition from other financial entities, and money market conditions. Borrowings may also be used on a short-term basis to compensate for reductions in the availability of funds from other sources and on a longer-term basis for general business purposes.
Deposits. Deposits are attracted by the Bank principally from within its primary market area. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit and the interest rate. The Bank offers traditional passbook savings accounts, money market accounts, checking accounts and certificates of deposit.
The Bank obtains deposits primarily from residents of its primary market areas of southwestern Ohio and southeastern Indiana. The Bank does not solicit deposits from outside its primary market area or pay fees to brokers to solicit funds for deposit.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Management determines the rates and terms based on rates paid by competitors, the need for funds or liquidity, growth goals and federal and state regulations.
The following table sets forth the activity in Peoples’ deposits during the periods indicated.
The following table sets forth by various interest rate categories the certificates of deposit with Peoples at the dates indicated.
The following table sets forth the amount and remaining maturities of Peoples’ certificates of deposit at December 31, 2006.
As of December 31, 2006, the aggregate amount of outstanding certificates of deposit at Peoples, in amounts greater than $100,000, was approximately $131.9 million. The following table presents the maturity of these certificates of deposit at such date.
The following table sets forth the dollar amount of deposits in various types of deposits offered by Peoples at the dates indicated.
Peoples attempts to control the flow of deposits by pricing its accounts to remain generally competitive with other financial institutions in its market area.
The average daily deposits for the years ended December 31, 2006, September 30, 2005 and September 30, 2004, and the average rates paid on those deposits are summarized in the following table.
Borrowings. Peoples may obtain advances from the Federal Home Loan Bank of Cincinnati upon the security of the common stock Peoples owns in that bank and certain of its residential mortgage loans and mortgage-backed securities, provided certain standards related to creditworthiness have been met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Federal Home Loan Bank advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending. As of December 31, 2006, Peoples was permitted to borrow, subject to security pledge agreements, up to $527.4 million from the Federal Home Loan Bank of Cincinnati. At such date, Peoples had $144.2 million of Federal Home Loan Bank advances. The Bank has used Federal Home Loan Bank advances in order to complement deposits as a funding source for loans and investments. Of the $144.2 million of advances at December 31, 2006, $6.5 million mature in fiscal 2007.
In addition, Peoples has a line of credit with another financial institution for $17.5 million. As of December 31, 2006, Peoples had an outstanding balance on this line of credit of $12.7 million. This line of credit matures in December 2007.
The following table shows certain information regarding the borrowings of Peoples at or for the dates indicated:
Total Employees
Peoples had 217 full-time equivalent employees at December 31, 2006. None of these employees are represented by a collective bargaining agent, and Peoples believes that it enjoys good relations with its personnel.
Competition
Peoples faces significant competition both in attracting deposits and in making loans. Its most direct competition for deposits has come historically from commercial banks, credit unions and other savings institutions located in its primary market area, including many large financial institutions which have greater financial and marketing resources available to them. In addition, it faces significant competition for investors’ funds from short-term money market securities, mutual funds and other corporate and government securities. Peoples does not rely upon any individual group or entity for a material portion of its deposits. The ability of Peoples to attract and retain deposits depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.
Peoples’ competition for loans comes principally from mortgage banking companies, commercial banks, other savings institutions and credit unions. It competes for loan originations primarily through the interest rates and loan fees it charges, and the efficiency and quality of services it provides borrowers. Factors which affect competition include general and local economic conditions, current interest rate levels and volatility in the mortgage markets. Competition may increase as a result of the continuing reduction of restrictions on the interstate operations of financial institutions and the anticipated slowing of refinancing activity.
REGULATION
The following is a summary of certain statutes and regulations affecting Peoples and the Bank. This summary is qualified in its entirety by such statutes and regulations. A change in applicable laws or regulations may have a material effect on Peoples, the Bank and the business of Peoples and the Bank.
General
Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, the growth and earnings performance of Peoples and the Bank can be affected not only by management decisions and general economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the Office of Thrift Supervision, the Federal Reserve Board, the FDIC, the Internal Revenue Service, and state taxing authorities. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to Peoples and the Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds, the depositors of the Bank and the public, rather than shareholders of the Bank or Peoples.
Federal law and regulations establish supervisory standards applicable to the lending activities of the Bank, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.
Peoples Community Bancorp
Peoples is a registered savings and loan holding company within the meaning of Section 10 of the Home Owners’ Loan Act, and is subject to Office of Thrift Supervision examination and supervision as well as certain reporting requirements. Federal law generally prohibits a savings and loan holding company, without prior Office of Thrift Supervision approval, from acquiring the ownership or control of any other savings institution or savings and loan holding company, or all, or substantially all, of the assets or more than 5% of the voting shares thereof. These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings institution not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the Office of Thrift Supervision.
Holding Company Activities. Peoples operates as a unitary savings and loan holding company. The activities of Peoples and its non-savings institution subsidiaries are restricted to activities traditionally permitted to multiple savings and loan holding companies and to financial holding companies under newly added provisions of the Bank Holding Company Act. Multiple savings and loan holding companies may:
· furnish or perform management services for a savings association subsidiary of a savings and loan holding company;
· hold, manage or liquidate assets owned or acquired from a savings association subsidiary of a savings and loan holding company;
· hold or manage properties used or occupied by a savings association subsidiary of a savings and loan holding company;
· engage in activities determined by the Federal Reserve to be closely related to banking and a proper incident thereto; and
· engage in services and activities previously determined by the Federal Home Loan Bank Board by regulation to be permissible for a multiple savings and loan holding company as of March 5, 1987.
The activities financial holding companies may engage in include:
· lending, exchanging, transferring or investing for others, or safeguarding money or securities;
· insuring, guaranteeing or indemnifying others, issuing annuities, and acting as principal, agent or broker for purposes of the foregoing;
· providing financial, investment or economic advisory services, including advising an investment company;
· issuing or selling interests in pooled assets that a bank could hold directly;
· underwriting, dealing in or making a market in securities; and
· merchant banking activities.
If the Office of Thrift Supervision determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings institution, the Office of Thrift Supervision may impose such restrictions as deemed necessary to address such risk. These restrictions include limiting the following:
· the payment of dividends by the savings institution;
· transactions between the savings institution and its affiliates; and
· any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution.
Every savings institution subsidiary of a savings and loan holding company is required to give the Office of Thrift Supervision at least 30 days’ advance notice of any proposed dividends to be made on its guaranty, permanent or other non-withdrawable stock, or else such dividend will be invalid. See “Peoples Community Bank - Capital Distributions.”
Restrictions on Transactions With Affiliates. Transactions between a savings institution and its “affiliates” are subject to quantitative and qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act and Office of Thrift Supervision regulations. Affiliates of a savings institution generally include, among other entities, the savings institution’s holding company and companies that are controlled by or under common control with the savings institution. However, most subsidiaries of savings institutions are not considered affiliates for the purposes of these rules.
In general, a savings institution or its subsidiaries may engage in certain “covered transactions” with affiliates up to certain limits. In addition, a savings institution and its subsidiaries may engage in covered transactions and certain other transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the savings institution or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” is defined to include a loan or extension of credit to an affiliate; a purchase of investment securities issued by an affiliate; a purchase of assets from an affiliate, with certain exceptions; the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; or the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In addition, a savings institution may not:
· make a loan or extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies;
· purchase or invest in securities of an affiliate other than shares of a subsidiary;
· purchase a low-quality asset from an affiliate; or
· engage in covered transactions and certain other transactions between a savings institution or its subsidiaries and an affiliate except on terms and conditions that are consistent with safe and sound banking practices.
With certain exceptions, each loan or extension of credit by a savings institution to an affiliate must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of the loan or extension of credit.
Federal Securities Laws. Peoples registered its common stock with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934. Peoples is subject to the proxy and tender offer rules, insider trading reporting requirements and restrictions, and certain other requirements under the Exchange Act.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, the bill restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence, any non-audit services being provided to an audit client will require preapproval by the company’s audit committee members. In addition, the audit partners must be rotated. The bill requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.
Longer prison terms and increased penalties will also be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives are restricted. In addition, a provision directs that civil penalties levied by the SEC as a result of any judicial or administrative action under the Act be deposited to a fund for the benefit of harmed investors. The Federal Accounts for Investor Restitution (“FAIR”) provision also requires the SEC to develop methods of improving collection rates. The legislation accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers must also provide information for most changes in ownership in a company’s securities within two business days of the change.
The Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company’s “registered public accounting firm” (“RPAF”). Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is a “financial expert” (as such term will be defined by the SEC) and if not, why not. Under the Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company’s chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statement’s materially misleading. The Act also requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by management in the annual report to stockholders. The Act requires the RPAF that issues the audit report to attest to and report on management’s assessment of the company’s internal controls. In addition, the Act requires that each financial report required to be prepared in accordance with (or reconciled to) accounting principles generally accepted in the United States of America and filed with the SEC reflect all material correcting adjustments that are identified by a RPAF in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC.
Peoples Community Bank
General. The Bank is a federally chartered stock savings bank. The Office of Thrift Supervision is the chartering authority and primary federal regulator of the Bank. The Office of Thrift Supervision has extensive authority over the operations of federally chartered savings institutions. As part of this authority, federally chartered savings institutions are required to file periodic reports with the Office of Thrift Supervision and are subject to periodic examinations by the Office of Thrift Supervision and the FDIC. The Bank also is subject to regulation and examination by the FDIC and to requirements established by the Federal Reserve Board. The investment and lending authority of savings institutions are prescribed by federal laws and regulations, and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations. Such regulation and supervision is primarily intended for the protection of depositors and the Savings Association Insurance Fund.
The Office of Thrift Supervision’s enforcement authority over all savings institutions and their holding companies includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the Office of Thrift Supervision.
Insurance of Accounts. The deposits acquired in conjunction with the purchase of American State Corporation in June 2005 are insured to the maximum extent permitted by the Bank Insurance Fund. The remaining deposits of the Bank are insured to the maximum extent permitted by the Savings Association Insurance Fund. Both funds are administered by the FDIC, and are backed by the full faith and credit of the U.S. Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the Office of Thrift Supervision an opportunity to take such action. Currently, FDIC deposit insurance rates generally range from zero basis points to 27 basis points, depending on the assessment risk classification assigned to the depository institution.
The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the deposit insurance of the Bank.
Regulatory Capital Requirements. Current OTS capital standards require savings institutions to satisfy three different capital requirements. Under these standards, savings institutions must maintain “tangible” capital equal to at least 1.5% of adjusted total assets, “core” capital equal to at least 4.0% of adjusted total assets and “total” capital (a combination of core and “supplementary” capital) equal to at least 8.0% of “risk-weighted” assets. Tangible capital generally equals common stockholders’ equity (including retained earnings) minus intangible assets, with only a limited exception for purchased mortgage servicing rights. Core capital generally consists of tangible capital plus qualifying intangible assets.
In determining compliance with the risk-based capital requirement, a savings institution is allowed to include both core capital and supplementary capital in its total capital, provided that the amount of supplementary capital included does not exceed the savings institution’s core capital. Supplementary capital generally consists of general allowances for loan losses up to a maximum of 1.25% of risk-weighted assets, together with certain other items. In determining the required amount of risk-based capital, total assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks inherent in the type of assets. The risk weights range from 0% for cash and securities issued by the U.S. Government or unconditionally backed by the full faith and credit of the U.S. Government to 100% for loans (other than qualifying residential loans weighted at 50%) and repossessed assets.
Savings institutions must value securities available for sale at amortized cost for regulatory capital purposes. This means that in computing regulatory capital, savings institutions should add back any unrealized losses and deduct any unrealized gains, net of income taxes, on securities reported as a separate component of generally accepted accounting principles capital.
At December 31, 2006, the Bank exceeded all of its OTS capital requirements, with tangible, core and risk-based capital ratios of 8.5%, 8.5% and 12.6%, respectively.
Any savings institution that fails any of the capital requirements is subject to possible enforcement actions by the Office of Thrift Supervision or the FDIC. Such actions could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution’s operations, termination of federal deposit insurance and the appointment of a conservator or receiver. The Office of Thrift Supervision’s capital regulation provides that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions.
Prompt Corrective Action. The following table shows the amount of capital associated with the different OTS capital categories set forth in the prompt corrective action regulations.
In addition, an institution is “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Under specified circumstances, a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan which meets specified requirements within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An
institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions, and the appropriate federal banking agency also may take any number of discretionary supervisory actions.
At December 31, 2006, the Bank was deemed a well capitalized institution for purposes of the above regulations and as such is not subject to the above mentioned restrictions.
Safety and Soundness Guidelines. The Office of Thrift Supervision and the other federal banking agencies have established guidelines for safety and soundness, addressing operational and managerial standards, as well as compensation matters for insured financial institutions. Institutions failing to meet these standards are required to submit compliance plans to their appropriate federal regulators. The Federal Reserve, the Office of Thrift Supervision, and the other agencies have also established guidelines regarding asset quality and earnings standards for insured institutions. The Bank believes that it is in compliance with these guidelines and standards.
Capital Distributions. Office of Thrift Supervision regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. A savings institution must file an application for Office of Thrift Supervision approval of the capital distribution if either (1) the total capital distributions for the applicable calendar year exceed the sum of the institution’s retained net income for that year to date plus the institution’s retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute, regulation, agreement or OTS-imposed condition, or (4) the institution is not eligible for expedited treatment of its filings. If an application is not required to be filed, savings institutions which are a subsidiary of a holding company (as well as certain other institutions) must still file a notice with the Office of Thrift Supervision at least 30 days before the board of directors declares a dividend or approves a capital distribution.
Community Reinvestment Act and the Fair Lending Laws. Savings institutions have a responsibility under the Community Reinvestment Act of 1977 and related regulations of the Office of Thrift Supervision to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities. Failure to comply with fair lending laws could result in enforcement actions by the Office of Thrift Supervision, as well as other federal regulatory agencies, and the Department of Justice.
Qualified Thrift Lender Test. All savings institutions are required to meet a qualified thrift lender test to avoid certain restrictions on their operations. A savings institution can comply with the qualified thrift lender test by either qualifying as a domestic building and loan association as defined in the Internal Revenue Code or by maintaining at least 65% of its portfolio assets in certain housing and consumer-related assets such as loans made to purchase, refinance, construct, improve or repair domestic residential housing; home equity loans; most mortgage-backed securities; stock issued by a Federal Home Loan Bank; and direct or indirect obligations of the FDIC.
A savings institution that does not meet the qualified thrift lender test must either convert to a bank charter or comply with certain restrictions on its operations. At December 31, 2006, the qualified thrift investments of the Bank were approximately 77.8% of its portfolio assets.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Cincinnati, which is one of 12 regional Federal Home Loan Banks that administers the home financing credit function of savings institutions. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the Federal Home Loan Bank.
As a member, the Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Cincinnati in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans or similar obligations at the beginning of each year. At December 31, 2006, the Bank had $12.9 million in Federal Home Loan Bank of Cincinnati stock, which was in compliance with this requirement. The Bank also had approximately $1.1 in Federal Home Loan Bank of Indianapolis stock, which was obtained through the acquisition of American State Bank in June 2005 and Peoples Federal in December 2005.
The Federal Home Loan Banks are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of Federal Home Loan Bank dividends paid in the past and could do so in the future. These contributions also could have an adverse effect on the value of Federal Home Loan Bank stock in the future.
Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. Because required reserves must be maintained in the form of vault cash or a noninterest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce an institution’s earning assets.
TAXATION
Federal Taxation
General. Peoples and the Bank are subject to the corporate tax provisions of the Internal Revenue Code, and the Bank is subject to certain additional provisions which apply to thrifts and other types of financial institutions. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters relevant to the taxation of Peoples and the Bank and is not a comprehensive discussion of the tax rules applicable to Peoples and the Bank.
Fiscal Year. Peoples and the Bank file federal income tax returns on the basis of a calendar year ending on December 31.
Bad Debt Reserves. In 1996, legislation was enacted that repealed the reserve method of accounting (including the percentage of taxable income method) previously used by many savings institutions to calculate their bad debt reserve for federal income tax purposes. Savings institutions with $500 million or less in assets may, however, continue to use the experience method. The Bank must recapture that portion of its reserve which exceeds the amount that could have been taken under the experience method for post-1987 tax years. The Bank’s post-1987 excess reserves amounted to approximately $1.2 million. The recapture has occurred over a six-year period, which commenced in fiscal 1999. The legislation also requires savings institutions to account for bad debts for federal income tax purposes on the same basis as commercial banks for tax years beginning after December 31, 1995. This change in accounting method and recapture of excess bad debt reserves is adequately provided for in the Bank’s deferred tax liability.
At December 31, 2006, the federal income tax reserves of the Bank included $1.4 million for which no federal income tax has been provided. Because of these federal income tax reserves and the liquidation account established for the benefit of certain depositors of the Bank in connection with the recent conversion, the retained earnings of the Bank are substantially restricted.
Distributions. If the Bank were to distribute cash or property to its stockholders, and the distribution was treated as being from its accumulated bad debt reserves, the distribution would cause the Bank to have additional taxable income. A distribution is from accumulated bad debt reserves if (a) the reserves exceed the amount that would have been accumulated on the basis of actual loss experience, and (b) the distribution is a “non-qualified distribution.” A distribution with respect to its stock is a non-qualified distribution to the extent that, for federal income tax purposes, (1) it is in redemption of its shares, (2) it is pursuant to a liquidation of the institution, or (3) in the case of a current distribution, together with all other such distributions during the taxable year, it exceeds the institution’s current and post-1951 accumulated earnings and profits. The amount of additional taxable income created by a non-qualified distribution is an amount that when reduced by the tax attributable to it is equal to the amount of the distribution.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax generally applies to a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income”) and is payable to the extent such alternative minimum taxable income is in excess of an exemption amount. Tax preference items include depreciation and 75% of the excess (if any) of (1) alternative minimum taxable income determined without regard to this preference and prior to reduction by net operating losses, over (2) adjusted current earnings as defined in the Code. Peoples has not been subject to the alternative minimum tax or had any such amounts available as credits for carry-over.
Capital Gains and Corporate Dividends-Received Deduction. Corporate net capital gains are taxed at a maximum rate of 35%. Corporations which own 20% or more of the stock of a corporation distributing a dividend may deduct 80% of the dividends received. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of the dividends received. However, a corporation that receives dividends from a member of the same affiliated group of corporations may deduct 100% of the dividends received.
Other Matters. Federal legislation is introduced from time to time that would limit the ability of individuals to deduct interest paid on mortgage loans. Individuals are currently not permitted to deduct interest on consumer loans. Significant increases in tax rates or further restrictions on the deductibility of mortgage interest could adversely affect Peoples. Peoples’ federal income tax returns for the tax years ended 2005, 2004 and 2003 are open under the statute of limitations and are subject to review by the IRS. Peoples is currently undergoing an IRS audit for tax year 2004.
State Taxation
Ohio Taxation. Peoples is subject to the Ohio corporation franchise tax, which is a tax measured by both net earnings and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times taxable net worth.
In computing Peoples’ tax under the net worth method, 100% of the investment in the capital stock of the Bank after the conversion may be excluded, as reflected on the balance sheet, in computing taxable net worth as long as Peoples owns at least 25% of the issued and outstanding capital stock of the Bank. The calculation of the exclusion from net worth is based on the ratio of the excludable investment (net of any appreciation or goodwill included in such investment) to total assets multiplied by the net value of the stock. As a holding company, Peoples may be entitled to various other deductions in computing taxable net worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations, including Peoples, subject to the Ohio corporation franchise tax other than “financial institutions.” If the franchise tax is paid on the net income basis, the litter tax is equal to 0.11% of the first $50,000 of computed Ohio taxable income and 0.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax is paid on the net worth basis, the litter tax is equal to 0.014% times taxable net worth.
The Bank is a “financial institution” for State of Ohio tax purposes. As such, it is subject to the Ohio corporate franchise tax on “financial institutions,” which is imposed annually at a rate of 1.3% of the Bank’s book net worth determined in accordance with generally accepted accounting principles. As a “financial institution”, the Bank is not subject to any tax based upon net income or net profits imposed by the State of Ohio.
Indiana Taxation. Peoples is subject to the Indiana financial institution tax, which is tax calculated at eight and one-half (8.5) percent of the adjusted gross income of the business conducted in the state of Indiana. This financial institution tax is extended to both resident and nonresident financial institutions.
Maryland Taxation. As a Maryland holding company not earning income in Maryland, Peoples is exempt from Maryland corporate income tax.
Item 1A.
Item 1A. Risk Factors
Like all financial companies, the Company’s business and results of operations are subject to a number of risks, many of which are outside of the Company’s control. In addition to the other information in this report, readers should carefully consider that the following important risk factors, among others, could materially impact the Company’s business and future results of operations. In addition, in analyzing whether to make or continue an investment in the Company’s securities, investors should consider, among other factors, the following risk factors.
Changes in interest rates could have a material adverse effect on the financial condition and results of operation. The earnings of the Company depend substantially on the interest rate spread, which is the difference between the rates the Company earns on loans, investment securities and other interest-earning assets, and the interest rates the Company pays on deposits and borrowings. These rates are highly sensitive to many factors beyond the control of the Company, including general economic conditions and the policies of various governmental and regulatory authorities. While the Company has taken measures intended to manage the risk of operating in a changing interest rate environment, there can be no assurance that such measures will be effective in avoiding undue interest rate risk.
Regional economic changes in the Company’s markets could adversely impact results from operations. Like all banks, the Company is subject to the effects of any economic downturn, and in particular a significant decline in home values or reduced commercial development in the Company’s markets could have a negative effect on results of operations. The Company’s success depends primarily on the general economic conditions in the counties in which the Company conducts business, and in the southwest Ohio and southeast Indiana area in general. Unlike larger banks that are more geographically diversified, the Company provides banking and financial services to customers primarily in the southwest Ohio counties of Butler, Hamilton and Warren counties, as well as Dearborn and Ohio counties in Indiana. The local economic conditions in these market areas have a significant impact on the Company’s ability to originate loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in the general economic conditions caused by inflation, recession, unemployment or other factors beyond the Company’s control could adversely affect the Company’s financial condition and results of operations. Additionally, because the Company has a significant amount of loans secured by commercial, multi-family, and non-owner occupied investment properties, decreases in tenant occupancy may also have a negative effect on the ability of many of the Company’s borrowers to make timely repayments of their loans, which would have an adverse impact on the Company’s earnings. A significant decline in home values would likely lead to increased delinquencies and defaults in both consumer and home equity loans and owner-occupied residential real estate loan portfolios and result in increased losses in the portfolios. Recently, there has been a moderate downturn in the local economy, a softening in the real estate market and a oversupply of lots, speculative homes and non-owner occupied rental units, leading to cash flow issues faced by local property investors, builders, and developers. These issues have had a material adverse impact on the Bank’s nonaccrual loans. At December 31, 2006, the Bank’s nonperforming loans amounted to $25.8 million, or 3.17% of total net loans. The resolution of such nonperforming loans may substantially impact the Company’s provision for loan losses and allowance for loan losses.
New or revised tax, accounting and other laws, regulations, rules and standards could significantly impact strategic initiatives, results of operations and financial condition. The financial services industry is highly regulated and laws and regulations may sometimes impose significant limitations on operations. These limitations, and sources or potential liability for the violation of such laws and regulation, are described in Item 1 of Part I of this report under the heading “Business - Regulation.” These regulations, along with the currently existing tax and accounting laws, regulations, rules and standards, control the methods by which financial institutions conduct business; implement strategic initiatives, as well as past, present, and contemplated tax planning; and govern financial disclosures. These laws, regulations, rules, and standards are constantly evolving and may change significantly over time. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on the Company’s results of operations and financial condition, the effects of which are impossible to predict at this time.
Strong competition within the Company’s market area may limit profitability. The Company faces significant competition both in attracting deposits and in the origination of loans, as described in Item 1 of Part I of this report under the heading “Business - Competition.” Mortgage bankers, commercial banks, credit unions and other savings institutions, which have offices in the Bank’s market area have historically provided most of the Company’s competition for deposits. Many competitors have substantially greater financial and other resources than the Company. Moreover, the Company may face increased competition in the origination of loans if competing thrift institutions convert to stock form, because such converting thrifts would likely seek to invest their new capital into loans. Finally, credit unions do not pay federal or state income taxes and are subject to fewer regulatory constraints than savings banks and as a result, they may enjoy a competitive advantage over the Company. The Bank competes for loans principally on the basis of the interest rates and loan fees it charges, the types of loans it originates and the quality of services it provides to borrowers. This advantage places significant competitive pressure on the prices of loans and deposits.
Losses on a few large loans or lending relationships can cause significant volatility in earnings. Due to the Company’s limited size, individual loan values can be large relative to the Company’s earnings for a particular period. If a few relatively large loan relationships become non-performing in a period and the Company is required to increase its loss reserves, or to write off principal or interest relative to such loans, the operating results of that period could be significantly adversely affected. The effect on results of operations for any given period from a change in the performance of a relatively small number of loan relationships may be disproportionately larger than the impact of such loans on the quality of the Company’s overall loan portfolio. In each of the third and fourth quarters of 2006, the Company incurred losses on lending relationships that significantly impacted operating results for the relevant period. As of December 31, 2006, the Bank’s nonperforming loans amounted to $25.8 million, with six borrowers owing $12.1 million, or 46.9% of the total nonperforming loans. Nonresidential real estate secured non-accrual loans totaled $8.3 million at December 31, 2006, or 32.1% of the total nonperforming loans.
The extended disruption of vital infrastructure could negatively impact the Company’s results of operations and financial condition. The Company’s operations depend upon, among other things, its technology and physical infrastructure, including its equipment and facilities. Extended disruption of its vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of the Company’s control, could have a material adverse impact either on the financial services industry as a whole, or on the Company’s business, results of operations, and financial condition. In order to mitigate some of this risk, the Company has a business continuity plan that is regularly updated and tested.
Impairment of goodwill or other intangible assets could require charges to earnings, which could result in a negative impact on the Company’s results of operations. Under current accounting standards, goodwill and certain other intangible assets with indeterminate lives are no longer amortized but, instead, are assess for impairment periodically or when impairment indicators are present. Assessment of goodwill and such other intangible assets could result in circumstances where the applicable intangible asset is deemed to be impaired for accounting purposes. Under such circumstances, the intangible asset’s impairment would be reflected as a charge to earnings in the period during which such impairment is identified.
The Company is a thrift holding company and its sources of funds are limited. The Company is a thrift holding company, and its operations are primarily conducted by the Bank, which is subject to significant federal regulation. Cash available to pay dividends to stockholders of the Company and to service the debt of the Company is largely dependent on the receipt of dividends from the Bank. In the event that the Bank is unable to pay dividends to the Company, the Company may not be able to service the debt or pay dividends on the common stock. Any payment of dividends in the future will depend, in large part, on the Bank’s earnings, capital requirements, regulatory approval and financial condition.
Other risk factors. The above description of risk factors is not exhaustive. Other risk factors are described elsewhere herein as well as in other reports and documents that we file with or furnish to the SEC. Other factors that could also cause results to differ from our expectations may not be described in any such report or document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Item 2. Properties
At December 31, 2006, Peoples conducted its business from its main office in West Chester, Ohio and eighteen other branch offices in Hamilton and Warren counties in Ohio and Dearborn and Ohio Counties in Indiana. The following table sets forth the net book value (including leasehold improvement, furnishings and equipment) and certain other information with respect to the offices and other properties of Peoples at December 31, 2006.
Additionally, the Company had capitalized construction in progress costs totaling approximately $2.0 at December 31, 2006, and has purchased land in Warren County for $1.0 million for future expansion.
Item 3.
Item 3. Legal Proceedings
From time to time, the Bank and Company are involved as plaintiff or defended in various legal proceedings arising in the normal course of business. While the ultimate outcome of these various legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on the Company’s consolidated financial conditions or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) The information required herein is incorporated by reference from page 2 of Peoples’ 2006 Annual Report to Stockholders filed as Exhibit 13 hereto (“2006 Annual Report”) and from Part III, Item 12 hereof.
(b) Not applicable.
(c) Not applicable.
Item 6.
Item 6. Selected Financial Data The information required herein is incorporated from pages 5 and 6 of the 2006 Annual Report.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information required herein is incorporated by reference from pages 7 to 18 of the 2006 Annual Report.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required herein is incorporated from pages 19 and 20 of the 2006 Annual Report.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required herein is incorporated by reference from pages 23 to 63 of the 2006 Annual Report.
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Peoples Community Bancorp, Inc.
West Chester, Ohio
We have audited the accompanying consolidated balance sheets of Peoples Community Bancorp, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the year ended December 31, 2006, the three-month period ended December 31, 2005 and for each of the two years in the period ended September 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 Community Bancorp, Inc. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the year ended December 31, 2006, the three-month period ended December 31, 2005 and for each of the two years in the period ended September 30, 2005, in conformity with accounting principles generally accepted in the United States of America.
Cincinnati, Ohio
March 27, 2007
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2006. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the fourth fiscal quarter of fiscal 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Code of Ethics for Executive Officers
The board of directors has adopted a code of ethics for the Company’s executive officers, including the chief executive officer, the chief operating officer and the chief financial officer. These officers are expected to adhere at all times to this code of ethics. Failure to comply with this code of ethics is a serious offense and will result in appropriate disciplinary action. We have posted this code of ethics on our website at www.pcbionline.com.
We will disclose on our website at www.pcbionline.com, to the extent and in the manner permitted by Item 5.05 of Form 8-K under Section 13 of the Exchange Act, the nature of any amendment to this code of ethics (other than technical, administrative, or other non-substantive amendments), our approval of any material departure from a provision of this code of ethics, and our failure to take action within a reasonable period of time regarding any material departure from a provision of this code of ethics that has been made known to any of the executive officers noted above.
Additional information required herein is incorporated by reference from the Registrant’s Proxy Statement to be filed within 120 days after the end of the fiscal year covered by this Form 10-K (“Proxy Statement”).
Item 11.
Item 11. Executive Compensation
The information required herein is incorporated by reference from the Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table sets forth certain information for all equity compensation plans and individual compensation arrangements (whether with employees or non-employees, such as directors), in effect as of December 31, 2006.
(1) Included in such number are 111,999 shares which are subject to restricted stock grants which were not vested as of December 31, 2006. The weighted average exercise price excludes restricted stock grants.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required herein is incorporated by reference from the Proxy Statement.
Item 14.
Item 14. Principal Accounting Fees and Services The information required herein is incorporated by reference from the Proxy Statement.
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a) (1) The following documents are filed as part of this report and are incorporated herein by reference from the Registrant’s 2006 Annual Report:
Report of Registered Independent Certified Public Accountants.
Consolidated Statements of Financial Condition as of December 31, 2006 and 2005.
Consolidated Statements of Operations for the Year Ended December 31, 2006, the Three Month Period Ended December 31, 2005, and the Years Ended September 30, 2005, and 2004.
Consolidated Statements of Comprehensive Income (Loss) for the Year Ended December 31, 2006, the Three Month Period Ended December 31, 2005, and the Years Ended September 30, 2005, and 2004.
Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2006, the Three Month Period Ended December 31, 2005, and the Years Ended September 30, 2005, and 2004.
Consolidated Statements of Cash Flows for the Year Ended December 31, 2006, the Three Month Period Ended December 31, 2005, and the Years Ended September 30, 2005, and 2004.
Notes to Consolidated Financial Statements.
(2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.
(b) Exhibits.
The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index:
No.
Exhibits
3.1
Articles of Incorporation of Peoples Community Bancorp, Inc. (1)
3.2
Bylaws of Peoples Community Bancorp, Inc.
Stock Certificate of Peoples Community Bancorp, Inc. (4)
10.1
2001 Stock Option Plan (2)
10.2
2001 Recognition and Retention Plan (2)
10.3
2004 Stock Option Plan (3)
10.4
2004 Recognition and Retention Plan (3)
10.5
Employment Agreements with each of Jerry D. Williams, Thomas J. Noe, and Teresa A. O’Quinn (4)
10.6
Employment Agreement with Stephen P. Wood (5)
10.7
Change in Control Agreement with Rick W. Wade (5)
10.8
Change in Control Agreement with Lori M. Henn
10.9
Change in Control Agreement with Fred L. Darlington
10.10
Change in Control Agreement with Jerry L. Gore (6)
13.0
Annual Report to Stockholders for the Year Ended December 31, 2006
21.0
List of Subsidiaries (See “Item I. Business - Subsidiaries” in this Form 10-K)
23.1
Consent of BKD LLP
31.1
Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
(1) Incorporated herein by reference to Peoples’ Proxy Statement dated January 28, 2002.
(2) Incorporated herein by reference to Peoples’ Proxy Statement dated January 29, 2001.
(3) Incorporated herein by reference to Peoples’ Proxy Statement dated January 5, 2004.
(4) Incorporated herein by reference to Peoples’ Annual Report on Form 10-K for the year ended September 30, 2004, filed with the SEC on December 29, 2004.
(5) Incorporated herein by reference to Peoples’ Current Report on Form 8-K filed with the SEC on April 27, 2006.
(6) Incorporated herein by reference to Peoples’ Current Report on Form 8-K filed with the SEC on December 20, 2006.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Jerry D. Williams
March 28, 2007
Jerry D. Williams
President, Chief Executive
Officer and Director
(principal executive officer)
/s/ Thomas J. Noe
March 28, 2007
Thomas J. Noe
Treasurer and Director
/s/ Paul E. Hasselbring
March 28, 2007
Paul E. Hasselbring
Chairman of the Board and
Director
/s/ John E. Rathkamp
March 28, 2007
John E. Rathkamp
Director
/s/ John L. Buchanan
March 28, 2007
John L. Buchanan
Director
/s/ Donald L. Hawke
March 28, 2007
Donald L. Hawke
Director
/s/ James R. Van DeGrift
March 28, 2007
James R. Van DeGrift
Director
/s/ Nicholas N. Nelson
March 28, 2007
Nicholas N. Nelson
Director
/s/ Teresa A. O’Quinn
March 28, 2007
Teresa A. O’Quinn
Chief Financial Officer
(principal financial and accounting officer)