FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0-28838
PEOPLES FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 34-1822228
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
211 Lincoln Way East
Massillon, Ohio 44646
(Address of principal (Zip Code)
executive office)
Issuers' telephone number, including area code: (330) 832-7441
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
As of May 4, 1998, the latest practicable date, 1,422,633 shares of the
registrant's common stock, without par value, were issued and outstanding.
Page 1 of 19 pages
<PAGE>
INDEX
PEOPLES FINANCIAL CORPORATION
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION 18
SIGNATURES 19
Page 2 of 19 Pages
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PEOPLES FINANCIAL CORPORATION
(In thousands, except share data)
March 31, September 30,
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 212 $ 343
Interest-bearing deposits in other financial institutions 1,758 4,440
------- -------
Cash and cash equivalents 1,970 4,783
Investment securities designated as available for sale -
at market 3,228 3,291
Investment securities - at cost, approximate market value
of $1,018 and $2,025 as of March 31, 1998 and
September 30, 1997 966 1,973
Mortgage-backed and related securities designated
as available for sale - at market 7,149 8,657
Mortgage-backed and related securities - at amortized cost,
approximate market value of $5,457 and $7,044 as of
March 31, 1998 and September 30, 1997 5,287 6,841
Loans receivable - net 60,966 56,642
Office premises and equipment - at depreciated cost 1,389 1,422
Stock in Federal Home Loan Bank - at cost 831 802
Accrued interest receivable 282 316
Prepaid expenses and other assets 147 479
-------- --------
Total assets $82,215 $85,206
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $65,115 $65,660
Note payable - 3,000
Other liabilities 264 326
Accrued federal income taxes 202 10
Deferred federal income taxes 896 884
-------- --------
Total liabilities 66,477 69,880
Shareholders' equity
Preferred stock - authorized, 1,000,000 shares without par
value; no shares issued - -
Common stock - authorized 6,000,000 shares without par
or stated value; 1,491,012 shares issued - -
Additional paid-in capital 7,183 7,165
Retained earnings - restricted 9,958 9,779
Unrealized gains on securities designated as available
for sale, net of related tax effects 1,111 1,083
Shares acquired by stock benefit plans (1,229) (1,416)
Less 74,400 treasury shares, at cost (1,285) (1,285)
------- -------
Total shareholders' equity 15,738 15,326
------ ------
Total liabilities and shareholders' equity $82,215 $85,206
====== ======
</TABLE>
Page 3 of 19 Pages
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
PEOPLES FINANCIAL CORPORATION
(In thousands, except share data)
Six months ended Three months ended
March 31, March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans $2,374 $1,881 $1,207 $ 941
Mortgage-backed and related securities 458 791 214 390
Investment securities 116 234 55 126
Interest-bearing deposits and other 87 205 35 88
------- ------ ------- ------
Total interest income 3,035 3,111 1,511 1,545
Interest expense
Deposits 1,614 1,539 808 757
Borrowings 19 - - -
------- ----- ----- ----
Total interest expense 1,633 1,539 808 757
----- ----- ------ ------
Net interest income 1,402 1,572 703 788
Provision for losses on loans 36 6 33 3
------- -------- ------- --------
Net interest income after provision for
losses on loans 1,366 1,566 670 785
Other income
Gain on sale of investment and mortgage-backed
securities designated as available for sale 501 - 501 -
Other operating 12 21 6 7
------- ------- -------- --------
Total other income 513 21 507 7
General, administrative and other expense
Employee compensation and benefits 592 449 321 237
Occupancy and equipment 105 113 49 54
Franchise taxes 118 102 54 66
Federal deposit insurance premiums 20 37 10 14
Data processing 37 38 19 19
Advertising 19 20 8 9
Other operating 168 166 80 97
------ ------ ------- -------
Total general, administrative and other expense 1,059 925 541 496
----- ------ ------ ------
Earnings before income taxes 820 662 636 296
Federal income taxes
Current 287 60 225 (52)
Deferred - 163 - 153
----- ------ ----- ------
Total federal income taxes 287 223 225 101
------ ------ ------ ------
NET EARNINGS $ 533 $ 439 $ 411 $ 195
====== ====== ====== ======
EARNINGS PER SHARE
Basic $.39 $.31 $.30 $.14
=== === === ===
Diluted $.38 $.31 $.29 $.14
=== === === ===
</TABLE>
Page 4 of 19 Pages
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
PEOPLES FINANCIAL CORPORATION
For the six months ended December 31,
(In thousands)
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 533 $ 439
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation of premises and equipment 47 51
Amortization of premiums and discounts on investment securities
and mortgage-backed securities, net 8 24
Gain on sale of investment and mortgage-backed
securities designated as available for sale (501) -
Amortization of deferred loan costs - net 21 -
Provision for losses on loans 36 6
Federal Home Loan Bank stock dividends (29) (26)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 34 35
Prepaid expenses and other assets 332 (51)
Other liabilities 144 (470)
Accrued interest payable - 5
Federal income taxes:
Current 192 (15)
Deferred - 163
------- --------
Net cash provided by operating activities 817 161
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed and related securities 2,055 2,490
Proceeds from sales of mortgage-backed securities designated as
available for sale 1,998 -
Purchase of mortgage-backed and related securities designated
as available for sale (992) (3,499)
Proceeds from sale of investment securities 1,524 -
Principal repayments and maturities of investment securities 1,080 859
Purchase of investment securities - (1,000)
Purchase of investment securities designated as available for sale (999) (1,500)
Loan principal repayments 10,114 7,372
Loan disbursements (14,497) (11,220)
Purchase of office premises and equipment (14) (2)
-------- -------
Net cash provided by (used in) investing activities 269 (6,500)
-------- -------
Net cash provided by (used in) operating and investing
activities (balance carried forward) 1,086 (6,339)
------- -------
</TABLE>
Page 5 of 19 Pages
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the six months ended March 31,
(In thousands)
1998 1997
<S> <C> <C>
Net cash provided by (used in) operating and
investing activities (balance brought forward) $1,086 $ (6,339)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (545) 276
Repayment of note payable (3,000) -
Cash dividends paid on common stock (354) (112)
------ -------
Net cash provided by (used in) financing activities (3,899) 164
----- -------
Net decrease in cash and cash equivalents (2,813) (6,175)
Cash and cash equivalents at beginning of period 4,783 12,533
----- ------
Cash and cash equivalents at end of period $1,970 $ 6,358
===== =======
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 95 $ 75
====== =======
Interest on deposits and borrowings $1,637 $ 1,534
===== =======
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available for sale,
net of related tax effects $ 28 $ 95
===== =======
</TABLE>
Page 6 of 19 Pages
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PEOPLES FINANCIAL CORPORATION
For the three and six month periods ended March 31, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and, therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Accordingly, these financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto of Peoples Financial Corporation included in the Annual Report on Form
10-KSB for the year ended September 30, 1997. However, in the opinion of
management, all adjustments (consisting of only normal recurring accruals) which
are necessary for a fair presentation of the consolidated financial statements
have been included. The results of operations for the three and six-month
periods ended March 31, 1998 and 1997, are not necessarily indicative of the
results which may be expected for an entire fiscal year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Peoples Financial Corporation ("PFC" or the "Corporation") and Peoples Federal
Savings and Loan Association of Massillon ("Peoples Federal" or the
"Association").
All significant intercompany items have been eliminated.
3. Effects of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
Page 7 of 19 Pages
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the three and six month periods ended March 31, 1998 and 1997
3. Effects of Recent Accounting Pronouncements (continued)
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing assets
and liabilities are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are subject to subsequent
assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet only if
the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1997, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management adopted SFAS No. 125 effective January 1, 1998, as required, without
material effect on PFC's consolidated financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on the Corporation's financial statements.
Page 8 of 19 Pages
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the three and six month periods ended March 31, 1998 and 1997
3. Effects of Recent Accounting Pronouncements (continued)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on the
Corporation's financial statements.
4. Pending Legislative Changes
Congress has enacted legislation that would merge the Savings Association
Insurance Fund (the "SAIF") and the Bank Insurance Fund (the "BIF") on January
1, 1999, assuming the enactment of legislation providing for the elimination of
the thrift charter or separate thrift regulation under federal law prior to the
merger of the deposit insurance funds. Peoples Federal would then be regulated
as a bank under federal law and subject to the more restrictive activity limits
imposed on national banks.
5. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period less shares in the ESOP that are unallocated and
not committed to be released. Weighted-average common shares outstanding, which
gives effect to 46,559 unallocated ESOP shares, totaled 1,369,789 and 1,370,684
for the six and three month periods ended March 31, 1998, respectively.
Weighted-average common shares outstanding, which gives effect to 59,678
unallocated ESOP shares, totaled 1,431,334 for each of the six and three month
periods ended March 31, 1997.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares to be issued under PFC's stock
option plan. Weighted-average common shares deemed outstanding for purposes of
computing diluted earnings per share totaled 1,395,759 and 1,411,184 for the six
and three month periods ended March 31, 1998 and 1,431,334 for each of the six
and three month periods ended March 31, 1997, respectively.
Page 9 of 19 Pages
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the six month periods ended March 31, 1998 and 1997
5. Earnings Per Share (continued)
Options to purchase 104,371 shares of common stock at a weighted-average
exercise price of $16.00 per share were outstanding at March 31, 1997, but were
excluded from the computation of common share equivalents because their exercise
prices were greater than the average market price of the common shares.
6. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
consolidated financial statement presentation.
Page 10 of 19 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PEOPLES FINANCIAL CORPORATION
Note Regarding Forward-Looking Statements
In addition to historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, PFC's operations and PFC's actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed
herein but also include changes in the economy and interest rates in the nation
and PFC's market area generally. See Exhibit 99 hereto, which is incorporated
herein by reference.
Some of the forward-looking statements included herein are the statements
regarding management's determination of the amount and adequacy of allowance for
losses on loans, legislative changes with respect to the federal thrift charter,
effects of the year 2000 on information technology systems, and the effect of
certain recent accounting pronouncements.
Discussion of Financial Condition Changes from
September 30, 1997 to March 31, 1998
PFC's assets totaled $82.2 million as of March 31, 1998, a decrease of $3.0
million, or 3.5%, from the September 30, 1997 total. This change in assets
resulted primarily from repayment of the $ 3.0 million note payable incurred in
connection with the return of capital distribution. Changes in operating assets
from September 30, 1997 levels consisted of an increase of $4.3 million in net
loans receivable, which was offset by decreases in investment securities of $1.1
million, mortgage-backed securities of $3.1 million and cash and cash
equivalents of $2.8 million.
Cash and cash equivalents totaled $2.0 million at March 31, 1998, a decrease of
$2.8 million, or 58.8%, from the total at September 30, 1997. Excess funds were
redeployed primarily to fund growth in the loan portfolio.
Investment securities totaled $4.2 million at March 31, 1998, a decrease of $1.1
million, or 20.3%, from the total at September 30, 1997. This decrease resulted
primarily from sales of $1.5 million, principal repayments of $73,000 and
maturities of $1.0 million, which were partially offset by purchases of $999,000
and net fair value appreciation of $22,000.
Mortgage-backed securities totaled $12.4 million at March 31, 1998, a decrease
of $3.1 million, or 19.8%, from the total at September 30, 1997. This decrease
resulted primarily from sales of $2.0 million and principal repayments of $2.1
million, which were partially offset by purchases of $992,000 and net fair value
appreciation of $18,000. Proceeds from such sales and principal repayments were
primarily used to repay the $3.0 million note payable.
Page 11 of 19 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Discussion of Financial Condition Changes from
September 30, 1997 to March 31, 1998 (continued)
Net loans receivable totaled $61.0 million at March 31, 1998, an increase of
$4.3 million, or 7.6%, over the September 30, 1997, total. The increase is
attributable to Peoples Federal's continued focus on its marketing program to
originate new fixed and adjustable-rate mortgage loans and home equity loans at
the main office and the branch lending office and disbursements on construction
loans. The allowance for loan losses totaled $182,000 at March 31, 1998, an
increase of $37,000, including $1,000 from loss recoveries, over the balance at
September 30, 1997. The allowance represented .3% of total loans and 2,022.2% of
nonperforming loans at March 31, 1998, as compared to .2% of total loans and
7,250.0% of nonperforming loans at September 30, 1997. Nonperforming loans
totaled $9,000 at March 31, 1998 and $2,000 at September 30, 1997.
Deposits totaled $65.1 million at March 31, 1998, a decrease of $545,000, or
.8%, from the September 30, 1997 amount. During the six months ended March 31,
1998, certificates of deposit increased by $567,000, as Peoples Federal offered
rates designed to increase certificates. Passbook deposits decreased by $417,000
during the period. NOW accounts at September 30, 1997 included transitory
deposits, accounting for most of a decrease of $773,000 for the six-month
period.
Peoples Federal is required to meet minimum capital standards promulgated by the
Office of Thrift Supervision (the "OTS"). At March 31, 1998, the Association's
regulatory capital was well in excess of such minimum capital requirements.
Comparison of Operating Results for the Six-Month Periods
Ended March 31, 1998 and 1997
General
Net earnings for the six months ended March 31, 1998, totaled $533,000, compared
to $439,000 for the same period in 1997, an increase of $94,000, or 21.4%. The
primary reason for the increase in net earnings were net gains on sale of
investment and mortgage-backed securities of $501,000 in 1998. Such gains were
offset by decreases in net interest income of $170,000, or 10.8%, an increase in
provision for losses on loans of $30,000, a decrease in other operating income
of $9,000 and an increase in general, administrative and other expense of
$134,000, or 14.5%, and an increase in the federal income tax provision of
$64,000.
Page 12 of 19 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Comparison of Operating Results for the Six-Month Periods
Ended March 31, 1998 and 1997 (continued)
Net Interest Income
Interest income on loans for the six months ended March 31, 1998, increased by
$493,000 or 26.2%, over the 1997 period. This increase resulted from a $13.1
million increase in the average loan portfolio balance outstanding, partially
offset by a decrease in weighted average yield from 8.08% to 7.96%. Interest
income on mortgage-backed and related securities, investment securities and
interest-bearing deposits decreased by $569,000, or 46.3%, from the 1997 period.
This decrease resulted from a $19.7 million decrease in average portfolio
balances outstanding, partially offset by an increase in weighted average yield
from 6.10% to 6.40%.
Interest expense on deposits increased by $75,000, or 4.9%, for the six months
ended March 31, 1998, as compared to 1997. This increase resulted from a $1.4
million increase in average deposit balances and a 13 basis point increase in
the weighted-average cost of funds from 4.82% in 1997 to 4.95% in 1998. Interest
expense on borrowings totaled $19,000 in 1997 and was incurred for funds
borrowed to pay part of the return of capital distribution. The note payable was
repaid in December 1997.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $170,000, or 10.8%, for the six months ended
March 31, 1998, compared to 1997. The interest rate spread increased to 2.61%
for the six months ended March 31, 1998, as compared to 2.34% for the
corresponding 1997 six-month period. The net interest margin decreased to 3.54%
for the six months ended March 31, 1998, as compared to 3.62% for the comparable
1997 period.
Provision for Losses on Loans
It is the Association's policy to provide valuation allowances for estimated
losses on loans based on past loan loss experience, changes in the composition
of the loan portfolio, trends in the level of delinquent and problem loans,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current and anticipated
economic conditions in the primary lending area. The allowance for loan losses
is increased by charges to earnings and decreased by charge-offs (net of
recoveries). After considering the above guidelines, management decided to
increase the allowance for losses on loans by $36,000 during the six months
ended March 31, 1998, as compared to a provision of $6,000 for the comparable
period in fiscal 1997. The increase was due primarily to the growth in the loan
portfolio year to year. There can be no assurance that the allowance for losses
on loans of Peoples Federal will be adequate to cover losses on nonperforming
loans in the future.
Page 13 of 19 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Comparison of Operating Results for the Six-Month
Periods Ended March 31, 1998 and 1997 (continued)
Other Income
Other income totaled $513,000 for the six months ended March 31, 1998, an
increase of $492,000 from the 1997 amount. The increase resulted primarily from
net gains on the sales of securities during the six months ended March 31, 1998.
Mortgage-backed and investment securities with a book value of $3.0 million were
sold in October, 1997 and a loss of $13,000 was realized. Federal Home Loan
Mortgage Corporation common stock with a book value of $11,000 was sold in
December 1997 and March 1998 for a total of $525,000 and gains of $514,000 were
realized. Other operating income decreased by $9,000 primarily due to
nonrecurring late payment fees on delinquent loans which were collected in
December, 1996. Also included in other operating income are safe deposit box
rentals, negotiable order of withdrawal account fees and service fees.
General, Administrative and Other Expense
General, administrative and other expense increased by $134,000, or 14.5%, for
the six months ended March 31, 1998, compared to the same period in 1997. The
principal increase for 1998 over 1997 was $143,000, or 31.8%, in employee and
director compensation and benefits. Employee benefit plan costs recorded for the
six months ended March 31, 1998 increased $95,000 over the 1997 amount as
Recognition and Retention Plan monthly provisions were recorded each period in
1998 and did not begin in 1997 until the plan was approved March 19, 1997, and
an additional Employee Stock Ownership Plan provision for 1998 for which no
comparable amount was recorded in 1997. Ohio franchise taxes for the six months
ended March 31, 1998 increased by $16,000, or 15.7% over 1997, based on
increased capital from the conversion. Decreases for 1998 as compared to 1997
were $17,000 or 45.9%, in federal deposit insurance premiums based on the
decrease in premium rates after the special recapitalization assessment by the
Federal Deposit Insurance Corporation ("FDIC") recorded in the year ended
September 30, 1997 and $8,000, or 7.1%, in occupancy and equipment due to
decreases in depreciation and maintenance costs.
Federal Income Taxes
Federal income taxes are based on earnings before taxes for the six months ended
March 31, 1998 and 1997. The increase of $64,000 in the provision for income
taxes resulted primarily from the $158,000 increase in earnings before income
taxes. The effective tax rates were 35.0% for 1998, and 33.7% for 1997.
Page 14 of 19 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Comparison of Operating Results for the Three-Month Periods
Ended March 31, 1998 and 1997
General
Net earnings for the three months ended March 31, 1998, totaled $411,000,
compared to $195,000 for the same period in 1997, an increase of $216,000, or
110.8%. The primary reasons for the increase in net earnings were net gains on
sale of investment and mortgage-backed securities of $501,000 in 1998, which
were offset by decreases in net interest income of $85,000, or 10.8%, an
increase in provision for losses on loans of $30,000, a decrease in other
operating income of $1,000, an increase in general, administrative and other
expense of $45,000, or 9.1%, and an increase in the federal income tax provision
of $124,000 or 122.8%.
Net Interest Income
Interest income on loans for the three months ended March 31, 1998, increased by
$266,000, or 28.3%, over the 1997 period. This increase resulted from a $13.4
million increase in the average loan portfolio balance outstanding, and an
increase in weighted average yield from 7.94% to 7.96%. Interest income on
mortgage-backed and related securities, investment securities and deposits
decreased by $300,000, or 49.7%, from the 1997 period. This decrease resulted
from a $19.8 million decrease in average portfolio balances outstanding,
partially offset by an increase in weighted average yield from 6.12% to 6.19%.
Interest expense on deposits increased by $51,000, or 6.7%, for the three months
ended March 31, 1998, as compared to 1997. This increase resulted from a $1.4
million increase in average deposit balances and a 22 basis point increase in
the weighted-average cost of funds from 4.74% in 1997 to 4.96% in 1998.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $85,000, or 10.8%, for the three months ended
March 31, 1998, compared to 1997. The interest rate spread increased to 2.57%
for the three months ended March 31, 1998, as compared to 2.37% for the
corresponding 1997 three-month period. The net interest margin decreased to
3.50% for the three months ended March 31, 1998, as compared to 3.63% for the
comparable 1997 period.
Provision for Losses on Loans
As the loan portfolio continues to increase, a provision for losses of $33,000
was recorded for the three months ended March 31, 1998, compared to $3,000 for
the same period in 1997.
Other Income
Other income totaled $507,000 for the three months ended March 31, 1998, an
increase of $500,000 over the 1997 amount. The increase resulted primarily from
a gain on the sale of Federal Home Loan Mortgage Corporation common stock. The
stock with a book value of $11,000 was sold for $512,000 and a gain of $501,000
was recorded in February, 1998. No securities were sold in the comparable 1997
period. Also included in other operating income are late payment fees on loans,
safe deposit box rentals, negotiable order of withdrawal account fees and
service fees.
Page 15 of 19 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Comparison of Operating Results for the Three-Month Periods
Ended March 31, 1998 and 1997 (continued)
General, Administrative and Other Expense
General, administrative and other expense increased by $45,000, or 9.1%, for the
three months ended March 31, 1998, compared to the same period in 1997. The
principal increase for 1998 over 1997 was $84,000, or 35.4%, in employee and
director compensation and benefits. Employee benefit plan costs recorded for the
three months ended March 31, 1998 increased $59,000 over the 1997 amount as
Recognition and Retention Plan monthly provisions were recorded each period in
1998 and did not begin in 1997 until the plan was approved March 19, 1997 and an
additional Employee Stock Ownership Plan provision for 1998 for which no
comparable amount was recorded in 1997. Decreases for 1998 as compared to 1997
were $5,000, or 9.3%, in occupancy and equipment due to decreases in
depreciation and maintenance costs, $12,000, or 18.2%, in Ohio franchise taxes
due to reductions in capital after payment of the return of capital
distribution, purchase of shares for the Recognition and Retention Plan and
purchase of treasury shares, $4,000, or 28.6%, in federal deposit insurance
premiums and $17,000, or 17.5%, in other operating expenses mostly due to
decreases in costs of compliance reporting, loan origination and office costs.
Federal Income Taxes
The provision for federal income taxes totaled $225,000 for the three month
period ended March 31, 1998, an increase of $124,000, or 122.8%, over the
comparable quarter in 1997. The increase resulted primarily from a $340,000, or
114.9%, increase in pretax earnings. The effective tax rates amounted to 35.4%
and 34.1% for the three month periods ended March 31, 1998 and 1997,
respectively.
Other Matters
As with all providers of financial services, Peoples Federal's operations are
heavily dependent on information technology systems. Peoples Federal is
addressing the potential problems associated with the possibility that the
computers that control or operate Peoples Federal's information technology
system and infrastructure may not be programmed to read four-digit date codes
and, upon arrival of the year 2000, may recognize the two-digit code "00" as the
year 1900, causing systems to fail to function or to generate erroneous data.
Peoples Federal is working with the companies that supply or service its
information technology systems to identify and remedy any year 2000 related
problems.
As of the date of this Form 10-QSB, Peoples Federal has not identified any
specific expenses that are reasonably likely to be incurred by Peoples Federal
in connection with this issue and does not expect to incur significant expense
to implement the necessary corrective measures. No assurance can be given,
however, that significant expense will not be incurred in future periods. In the
event that Peoples Federal is ultimately required to purchase replacement
computer systems, programs and equipment, or incur substantial expense to make
Peoples Federal's current systems, programs and equipment year 2000 compliant,
Peoples Federal's net earnings and financial condition could be adversely
affected.
Page 16 of 19 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Comparison of Operating Results for the Three-Month Periods
Ended March 31, 1998 and 1997 (continued)
Other Matters
In addition to possible expense related to its own systems, Peoples Federal
could incur losses if loan payments are delayed due to year 2000 problems
affecting any major borrowers in Peoples Federal's primary market area. Because
Peoples Federal's loan portfolio is highly diversified with regard to individual
borrowers and types of businesses and Peoples Federal's primary market area is
not significantly dependent upon one employer or industry, Peoples Federal does
not expect any significant or prolonged difficulties that will affect net
earnings or cash flow.
Page 17 of 19 Pages
<PAGE>
PART II
PEOPLES FINANCIAL CORPORATION
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
27.1 Financial data schedule for the six months ended
March 31, 1998.
27.2 Restated financial data schedule for the six months
ended March 31, 1997.
99 Safe Harbor under the Private Securities Litigation Reform
Act of 1995.
(b) Reports on Form 8-K
Not applicable
Page 18 of 19 Pages
<PAGE>
SIGNATURES
PEOPLES FINANCIAL CORPORATION
Pursuant to the requirements 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.
Date: May 12, 1998 By: /s/Paul von Gunten
----------------------------- ------------------
Paul von Gunten
President and Chief
Executive Officer
Date: May 12, 1998 By: /s/James R. Rinehart
----------------------------- --------------------
James R. Rinehart
Treasurer
and Chief Financial Officer
Page 19 of 19 Pages
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 212
<INT-BEARING-DEPOSITS> 1,758
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,377
<INVESTMENTS-CARRYING> 6,253
<INVESTMENTS-MARKET> 6,475
<LOANS> 60,966
<ALLOWANCE> 182
<TOTAL-ASSETS> 82,215
<DEPOSITS> 65,115
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,362
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 15,738
<TOTAL-LIABILITIES-AND-EQUITY> 82,215
<INTEREST-LOAN> 2,374
<INTEREST-INVEST> 574
<INTEREST-OTHER> 87
<INTEREST-TOTAL> 3,035
<INTEREST-DEPOSIT> 1,614
<INTEREST-EXPENSE> 1,633
<INTEREST-INCOME-NET> 1,402
<LOAN-LOSSES> 36
<SECURITIES-GAINS> 501
<EXPENSE-OTHER> 1,059
<INCOME-PRETAX> 820
<INCOME-PRE-EXTRAORDINARY> 533
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 533
<EPS-PRIMARY> .39
<EPS-DILUTED> .38
<YIELD-ACTUAL> 3.54
<LOANS-NON> 9
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 145
<CHARGE-OFFS> 0
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 182
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 182
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 245
<INT-BEARING-DEPOSITS> 6,113
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,783
<INVESTMENTS-CARRYING> 9,751
<INVESTMENTS-MARKET> 9,938
<LOANS> 48,047
<ALLOWANCE> 199
<TOTAL-ASSETS> 89,687
<DEPOSITS> 64,632
<SHORT-TERM> 0
<LIABILITIES-OTHER> 927
<LONG-TERM> 0
0
0
<COMMON> 14,203
<OTHER-SE> 9,925
<TOTAL-LIABILITIES-AND-EQUITY> 89,687
<INTEREST-LOAN> 1,881
<INTEREST-INVEST> 1,025
<INTEREST-OTHER> 205
<INTEREST-TOTAL> 3,111
<INTEREST-DEPOSIT> 1,539
<INTEREST-EXPENSE> 1,539
<INTEREST-INCOME-NET> 1,572
<LOAN-LOSSES> 6
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 925
<INCOME-PRETAX> 662
<INCOME-PRE-EXTRAORDINARY> 439
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 439
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
<YIELD-ACTUAL> 3.62
<LOANS-NON> 33
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 193
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 199
<ALLOWANCE-DOMESTIC> 199
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 99
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. Peoples
Financial Corporation ("PFC") desires to take advantage of the "safe harbor"
provisions of the Act. Certain information, particularly information regarding
future economic performance and finances and plans and objectives of management,
contained or incorporated by reference in PFC's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1997, is forward-looking. In some cases,
information regarding certain important factors that could cause actual results
of operations or outcomes of other events to differ materially from any such
forward-looking statement appear together with such statement. In addition,
forward-looking statements are subject to other risks and uncertainties
affecting the financial institutions industry, including, but not limited to,
the following:
Interest Rate Risk
PFC's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from loans,
investments and other interest-earning assets and interest expense on deposits,
borrowings and other interest-bearing liabilities. The interest income and
interest expense of PFC change as the interest rates on interest-earning assets
and interest-bearing liabilities change. Interest rates may change because of
general economic conditions, the policies of various regulatory authorities and
other factors beyond PFC's control. In a rising interest rate environment, loans
tend to prepay slowly and new loans at higher rates increase slowly, while
interest paid on deposits increases rapidly because the terms to maturity of
deposits tend to be shorter than the terms to maturity or prepayment of loans.
Such differences in the adjustment of interest rates on assets and liabilities
may negatively affect PFC's income.
Possible Inadequacy of the Allowance for Loan Losses
PFC maintains an allowance for loan losses based upon a number of
relevant factors, including, but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience, possible losses
arising from specific problem loans and changes in the composition of the loan
portfolio. While the Board of Directors of PFC believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in material adjustments, and net earnings could
be significantly adversely affected if circumstances differ substantially from
the assumptions used in making the final determination.
<PAGE>
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by one-
to four-family residential real estate due, in part, to the effects of general
economic conditions. The repayment of multifamily residential and nonresidential
real estate loans generally depends upon the cash flow from the operation of the
property, which may be negatively affected by national and local economic
conditions. Construction loans may also be negatively affected by such economic
conditions, particularly loans made to developers who do not have a buyer for a
property before the loan is made. The risk of default on consumer loans
increases during periods of recession, high unemployment and other adverse
economic conditions. When consumers have trouble paying their bills, they are
more likely to pay mortgage loans than consumer loans. In addition, the
collateral securing such loans, if any, may decrease in value more rapidly than
the outstanding balance of the loan.
Competition
Peoples Federal Savings and Loan Association of Massillon ("Peoples Federal")
competes for deposits with other savings associations, commercial banks and
credit unions and issuers of commercial paper and other securities, such as
shares in money market mutual funds. The primary factors in competing for
deposits are interest rates and convenience of office location. In making loans,
Peoples Federal competes with other savings associations, commercial banks,
consumer finance companies, credit unions, leasing companies, mortgage companies
and other lenders. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels and other factors which are not readily predictable. The
size of financial institutions competing with Peoples Federal is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such
increased competition may have an adverse effect upon PFC.
Legislation and Regulation that may Adversely Affect PFC's Earnings
Peoples Federal is subject to extensive regulation by the Office of
Thrift Supervision (the "OTS") and the Federal Deposit Insurance Corporation
(the "FDIC") and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. As a savings and loan holding
company, PFC is also subject to regulation and examination by the OTS. Such
supervision and regulation of Peoples Federal and PFC are intended primarily for
the protection of depositors and not for the maximization of shareholder value
and may affect the ability of the company to engage in various business
activities. The assessments, filing fees and other costs associated with
reports, examinations and other regulatory matters are significant and may have
an adverse effect on PFC's net earnings.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under such system,
assessments may vary depending on the risk the institution poses to its deposit
insurance fund. Such risk level is determined by reference to the institution's
capital level and the FDIC's level of supervisory concern about the institution.
<PAGE>
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings associations under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, Peoples Federal would have to convert to a different
financial institution charter. In addition, Peoples Federal would be regulated
under federal law as a bank and would, therefore, become subject to the more
restrictive activity limitations imposed on national banks. Moreover, PFC might
become subject to more restrictive holding company requirements, including
activity limits and capital requirements similar to those imposed on Peoples
Federal. PFC cannot predict the impact of the conversion of Peoples Federal to,
or regulation of Peoples Federal as, a bank until the legislation requiring such
change is enacted.
