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 December 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 February 9, 1999, the latest practicable date, 1,284,101 shares of the
registrant's common stock, without par value, were issued and outstanding.
Page 1 of 17 pages
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INDEX
PEOPLES FINANCIAL CORPORATION
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Other Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION 17
SIGNATURES 18
Page 2 of 17 Pages
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PEOPLES FINANCIAL CORPORATION
(In thousands, except share data)
December 31, September 30,
ASSETS 1998 1998
<S> <C> <C>
Cash and due from banks
Interest-bearing deposits in other financial institutions $ 197 $ 269
Cash and cash equivalents 1,295 2,152
------ ------
1,492 2,421
Investment securities designated as available for sale -
at market 2,759 2,591
Investment securities - at cost, approximate market value
of $1,034 and $1,045 as of December 31, 1998 and
September 30, 1998 955 967
Mortgage-backed and related securities designated
as available for sale - at market 7,865 8,859
Mortgage-backed and related securities - at amortized cost,
approximate market value of $4,193 and $4,521 as of
December 31, 1998 and September 30, 1998 4,089 4,400
Loans receivable - net 67,423 64,341
Office premises and equipment - at depreciated cost 1,478 1,471
Stock in Federal Home Loan Bank - at cost 877 861
Accrued interest receivable 284 298
Prepaid expenses and other assets 57 87
------ ------
Total assets $87,279 $86,296
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $66,578 $65,797
Advances from Federal Home Loan Bank 5,000 4,000
Other liabilities 375 251
Accrued federal income taxes 19 329
Deferred federal income taxes 925 886
------ ------
Total liabilities 72,897 71,263
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 7,287 7,287
Retained earnings - restricted 9,967 9,927
Unrealized gains on securities designated as available
for sale, net of related tax effects 1,172 1,095
Shares acquired by stock benefit plans (1,097) (1,097)
Less: 206,911 and 139,327 treasury shares, at cost (2,947) (2,179)
------ ------
Total shareholders' equity 14,382 15,033
------ ------
Total liabilities and shareholders' equity $87,279 $86,296
====== ======
</TABLE>
Page 3 of 17 Pages
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
PEOPLES FINANCIAL CORPORATION
For the three months ended December 31,
(In thousands, except share data)
1998 1997
<S> <C> <C>
Interest income
Loans $1,265 $1,167
Mortgage-backed and related securities 203 244
Investment securities 48 61
Interest-bearing deposits and other 29 52
----- -----
Total interest income 1,545 1,524
Interest expense
Deposits 807 806
Borrowings 56 19
----- -----
Total interest expense 863 825
----- -----
Net interest income 682 699
Provision for losses on loans 3 3
----- -----
Net interest income after provision for
losses on loans 679 696
Other income
Gain on sale of investment securities
designated as available for sale 228 -
Other operating 12 6
----- -----
Total other income 240 6
General, administrative and other expense
Employee compensation and benefits 293 271
Occupancy and equipment 68 56
Franchise taxes 56 64
Federal deposit insurance premiums 10 10
Data processing 29 18
Advertising 10 11
Other operating 80 88
----- -----
Total general, administrative and other expense 546 518
----- -----
Earnings before income taxes 373 184
Federal income taxes
Current 129 62
Deferred - -
----- -----
Total federal income taxes 129 62
----- -----
NET EARNINGS $ 244 $ 122
===== =====
EARNINGS PER SHARE
Basic $.19 $.09
=== ===
Diluted $.19 $.09
=== ===
</TABLE>
Page 4 of 17 Pages
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PEOPLES FINANCIAL CORPORATION
For the three months ended December 31,
(In thousands)
1998 1997
<S> <C> <C>
Net earnings $244 $122
Other comprehensive income, net of tax:
Unrealized holding gains on securities during
the period 227 219
Reclassification adjustment for gains included in net earnings (150) -
--- ---
Comprehensive income $321 $341
=== ===
</TABLE>
Page 5 of 17 Pages
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
PEOPLES FINANCIAL CORPORATION
For the three months ended December 31,
(In thousands)
1998 1997
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 244 $ 122
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation of premises and equipment 28 23
Amortization of premiums and discounts on investment securities
and mortgage-backed securities, net 8 3
Gain on sale of investment securities designated
as available for sale (228) -
Amortization of deferred loan fees (2) (13)
Provision for losses on loans 3 3
Recovery of loss on investments 4 -
Federal Home Loan Bank stock dividends (15) (14)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 14 54
Prepaid expenses and other assets 30 461
Other liabilities 125 60
Accrued interest payable - (8)
Federal income taxes:
Current (311) 37
Deferred - -
----- -----
Net cash provided by (used in) operating activities (100) 728
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed and related securities 1,240 1,225
Proceeds from sales of mortgage-backed securities designated as
available for sale - 1,998
Proceeds from sale of investment securities 232 1,012
Principal repayments and maturities of investment securities 12 46
Loan principal repayments 6,783 3,787
Loan disbursements (9,870) (6,665)
Purchase of office premises and equipment (35) (1)
----- -----
Net cash provided by (used in) investing activities (1,638) 1,402
----- -----
Net cash provided by (used in) operating and investing
activities (balance carried forward) (1,738) 2,130
----- -----
</TABLE>
Page 6 of 17 Pages
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the three months ended December 31,
(In thousands)
1998 1997
<S> <C> <C>
Net cash provided by (used in) operating and
investing activities (balance brought forward) $(1,738) $2,130
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 781 (109)
Advances from Federal Home Loan Bank 5,000 -
Repayment of borrowings (4,000) (3,000)
Purchase of treasury shares (769) -
Cash dividends paid (203) (177)
------ -----
Net cash provided by (used in) financing activities 809 (3,286)
------ -----
Net decrease in cash and cash equivalents (929) (1,156)
Cash and cash equivalents at beginning of period 2,421 4,783
------ -----
Cash and cash equivalents at end of period $ 1,492 $3,627
====== =====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 440 $ 25
====== =====
Interest on deposits and borrowings $ 863 $ 837
====== =====
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available for sale,
net of related tax effects $ 77 $ 219
====== =====
</TABLE>
Page 7 of 17 Pages
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PEOPLES FINANCIAL CORPORATION
For the three month periods ended December 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, 1998. 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-month period ended
December 31, 1998, 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 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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. Management adopted SFAS No. 130
as of October 1, 1998, as required, without a material impact on the
Corporation's financial statements.
Page 8 of 17 Pages
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the three month periods ended December 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No. 133 is
not expected to have a material impact on Peoples Financial's financial position
or results of operations.
Page 9 of 17 Pages
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the three month periods ended December 31, 1998 and 1997
4. Charter Unification Legislation
The deposit accounts of Peoples Federal and other savings associations are
insured up to applicable limits by the FDIC in the SAIF. Legislation to
recapitalize the SAIF was enacted on September 30, 1996. Such legislation
provided that the SAIF will be merged into the Bank Insurance Fund if there are
no remaining federal savings associations. Such legislation also requires the
Department of Treasury to submit a report to Congress on the development of a
common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS, and Peoples
Federal may be regulated under federal law as a bank or may be required to
change its charter. Such change in regulation or charter would likely change the
range of activities in which Peoples Federal may engage and would probably
subject Peoples Federal to more regulation by the FDIC. In addition, Peoples
Federal might become subject to a different form of holding company regulation,
which may limit the activities in which PFC may engage, and subject PFC to other
additional regulatory requirements, including separate capital requirements. At
this time, PFC cannot predict when or whether Congress may actually pass
legislation regarding PFC's and Peoples Federal's regulatory requirements or
charter. Although such legislation may change the activities in which either PFC
or Peoples Federal may engage, it is not anticipated that the current activities
of both PFC and Peoples Federal will be materially affected by those activity
limits.
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 32,516 unallocated ESOP shares, totaled 1,304,261 for the
three-month period ended December 31, 1998. Weighted-average common shares
outstanding, which gives effect to 45,928 unallocated ESOP shares, totaled
1,369,422 for the three-month period ended December 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 1,304,261 for the three-month
period ended December 31, 1998 and 1,392,484 for the three-month period ended
December 31, 1997.
Options to purchase 125,661 shares of common stock at a weighted-average
exercise price of $12.51 at per share were outstanding at December 31, 1998, 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 17 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, 1998 to December 31, 1998
PFC's assets totaled $87.3 million as of December 31, 1998, an increase of
$983,000, or 1.1%, over the September 30, 1998 total. The increase in assets was
primarily due to increases in loans receivable of $3.1 million funded by an
increase in deposits of $781,000, an increase in advances from the Federal Home
Loan Bank of $1.0 million, proceeds from maturities, sales and principal
repayments of investment securities and mortgage-backed securities and a
decrease in cash and cash equivalents.
Cash and cash equivalents totaled $1.5 million at December 31, 1998, a decrease
of $929,000, or 38.4%, from the total at September 30, 1998. Cash and proceeds
from maturities, sales and repayments of investment securities and
mortgage-backed securities were primarily used to fund growth in the loan
portfolio.
Investment securities totaled $3.7 million at December 31, 1998, an increase of
$156,000, or 4.4%, from the total at September 30, 1998. This increase resulted
primarily from a net increase of $172,000 in the unrealized gains, offset by
sales of $4,000 and maturities of $12,000.
Mortgage-backed securities totaled $12.0 million at December 31, 1998, a
decrease of $1.3 million, or 9.8%, from the total at September 30, 1998. This
decrease resulted primarily from principal repayments of $1.2 million and a
decrease in net unrealized gains of $56,000. Proceeds from such principal
repayments were primarily used to fund loan originations.
Page 11 of 17 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, 1998 to December 31, 1998 (continued)
Net loans receivable totaled $67.4 million at December 31, 1998, an increase of
$3.1 million, or 4.8%, over the September 30, 1998 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 $203,000 at December 31, 1998, an
increase of $7,000, including $4,000 from loss recoveries, over the balance at
September 30, 1998. The allowance represented .28% of total loans and 176.5% of
nonperforming loans at December 31, 1998, as compared to .29% of total loans and
170.4% of nonperforming loans at September 30, 1998. Nonperforming loans totaled
$115,000 at both December 31, 1998 and September 30, 1998.
Deposits totaled $66.6 million at December 31, 1998, an increase of $781,000, or
1.2%, over the September 30, 1998 amount. During the three months ended December
31, 1998, certificates of deposit increased by $390,000, as Peoples Federal
offered rates designed to increase certificates. Passbook deposits, NOW accounts
and money market demand accounts increased by $311,000, $20,000 and $60,000,
respectively, during the period.
Advances from Federal Home Loan Bank were $5.0 million at December 31, 1998, an
increase of $1.0 million, or 25.0% over the September 30, 1998 amount. At
December 31, 1998, fixed rate advances were comprised of $4.0 million at 5.04%,
maturing July 6, 1999 and $1.0 million at 5.03%, maturing August 20, 1999.
Advances as of September 30, 1998 were repaid in October 1998. Advances have
been used primarily to fund loan portfolio growth.
Peoples Federal is required to meet minimum capital standards promulgated by the
Office of Thrift Supervision (the "OTS"). At December 31, 1998, the
Association's regulatory capital was well in excess of such minimum capital
requirements.
Comparison of Operating Results for the Three-Month Periods
Ended December 31, 1998 and 1997
General
Net earnings for the three months ended December 31, 1998, totaled $244,000,
compared to $122,000 for the same period in 1997, an increase of $122,000, or
100.0%. The primary reason for the increase in net earnings was a gain on sale
of investment securities of $228,000 in 1998. There were no gains or losses in
the 1997 quarter. Other operating income for 1998 increased by $6,000 over 1997.
The gain and increase were offset by decreases in net interest income of
$17,000, or 2.4%, an increase in general, administrative and other expense of
$28,000, or 5.4%, and an increase in the federal income tax provision of
$67,000, or 108.1%.
Page 12 of 17 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 December 31, 1998 and 1997 (continued)
Net Interest Income
Interest income on loans for the three months ended December 31, 1998, increased
by $98,000, or 8.4%, over the 1997 period. This increase resulted from a $7.8
million increase in the average net loan portfolio balance outstanding,
partially offset by a decrease in weighted average yield from 7.97% in the three
months ended December 31, 1997 to 7.63% in the 1998 period. Interest income on
mortgage-backed and related securities, investment securities and
interest-bearing deposits decreased by $77,000, or 21.6%, from the 1997 period.
This decrease resulted from a $3.1 million decrease in average portfolio
balances outstanding and a decrease in weighted average yield from 6.60% to
6.04%.
Interest expense on deposits increased by $1,000, or .1%, for the three months
ended December 31, 1998, as compared to 1997. This increase resulted from a
$930,000 increase in average deposit balances outstanding, partially offset by a
four basis point decrease in the weighted-average cost of funds from 4.94% in
1997 to 4.90% in 1998. Interest expense on borrowings totaled $56,000 for the
three months ended December 31, 1998, an increase of $39,000 over the comparable
quarter in 1997. The 1998 average Advances from Federal Home Loan Bank balance
was $4.7 million, with a weighted-average interest rate of 4.81%. A note payable
outstanding at September 30, 1997 of $3.0 million was repaid in October 1997.
Interest cost of $19,000 was recorded on the note in 1997.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $17,000, or 2.4%, for the three months ended
December 31, 1998, compared to 1997. The interest rate spread decreased to 2.39%
for the three months ended December 31, 1998, as compared to 2.62% for the
corresponding 1997 three-month period. The net interest margin decreased to
3.20% for the three months ended December 31, 1998, as compared to 3.49% 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 $3,000 during the three months
ended December 31, 1998 and 1997. 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 17 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 December 31, 1998 and 1997 (continued)
Other Income
Other income totaled $240,000 for the three months ended December 31, 1998, an
increase of $234,000 over the 1997 amount. The increase resulted primarily from
net gains on the sales of securities during the three months ended December 31,
1998. Federal Home Loan Mortgage Corporation common stock with a book value of
$4,000 was sold in November 1998 for $232,000 resulting in a realized gain of
$228,000. Other operating income increased by $6,000 primarily due to increased
fee income and safe deposit box rentals. Also included in other operating income
are late charges on loans.
General, Administrative and Other Expense
General, administrative and other expense increased by $28,000, or 5.4%, for the
three months ended December 31, 1998, compared to the same period in 1997. The
principal increase for 1998 over 1997 was $22,000, or 8.1%, in employee and
director compensation and benefits. Employee benefit plan costs recorded for the
three months ended December 31, 1998 increased $21,000 over the 1997 amount, as
the value used to record Employee Stock Ownership Plan (ESOP) expense and health
care plan cost increased and an excess provision for the 401(k) plan was
reversed in 1997. Occupancy and equipment costs for 1998 increased by $12,000,
or 21.4%, over 1997 due primarily to increased building and grounds maintenance
and depreciation of new automated teller equipment. Data processing for 1998
increased by $11,000, or 61.1%, over 1997 due to processing fees paid in
conjunction with the operation of new automated teller equipment recorded in
1998, with no corresponding expense in 1997. Ohio franchise taxes for the three
months ended December 31, 1998 decreased by $8,000, or 12.5% from 1997, based on
decreased capital of Peoples Federal due to payment of an intercompany dividend.
Other operating expense for 1998 decreased by $8,000, or 9.1%, from 1997 as cost
of employee continuing education decreased by $8,000 and professional expenses
decreased by $10,000, partially offset by $10,000 of increased purchases of
office supplies.
Federal Income Taxes
Federal income taxes are based on earnings before taxes for the three months
ended December 31, 1998 and 1997. The increase of $67,000, or 108.1%, in the
provision for income taxes resulted primarily from the $189,000, or 102.7%,
increase in earnings before income taxes. The effective tax rates were 34.6% and
33.7% for the three month periods ended December 31, 1998 and 1997,
respectively.
Page 14 of 17 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Year 2000 Readiness
As with most 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.
PFC's primary data processing applications are handled by a third-party service
bureau which has advised PFC that it has transferred to a fully year
2000-compliant processing system that will be fully tested prior to June 30,
1999. Management has also reviewed PFC's ancillary equipment and is in the
process of providing the appropriate remedial measures without material cost.
As a result of the foregoing, PFC has not identified any material 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, PFC's net
earnings and financial condition could be adversely affected.
While Peoples Federal is endeavoring to ensure that its computer-dependent
operations are year 2000 compliant, no assurance can be given that some year
2000 problems will not occur. Peoples Federal has developed a Year 2000
contingency/business resumption plan which calls for manual posting of
customers' accounts and passbooks. Under the plan, general ledger accounts and
other company records will also be posted manually. Management believes manual
posting is possible due to the size of Peoples Federal, the relative simplicity
of products and records, the number of personnel available to participate in the
additional record keeping and the fact that all loan and deposit accounts,
except NOW accounts and Home Equity Line of Credit loans are passbook accounts.
In addition to possible expense related to its own systems, PFC could incur
losses if year 2000 issues adversely affect Peoples Federal's depositors or
borrowers. Such problems could include delayed loan payments due to year 2000
problems affecting any significant borrowers or impairing the payroll systems of
large employers 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. Finally, PFC could be adversely affected if customers
react to publicity about year 2000 by withdrawing deposits or if other third
parties, such as governmental agencies, clearing houses, telephone companies,
utilities and other services fail to prepare properly.
Page 15 of 17 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
On January 27, 1999, the Annual Meeting of PFC's Shareholders was
held. The three directors nominated were elected to terms expiring in
2001 by the following votes:
Victor C. Baker For: 1,160,779 Withheld: 37,997
Vincent G. Matecheck For: 1,163,779 Withheld: 34,997
Paul von Gunten For: 1,163,779 Withheld: 34,997
One other matter was submitted to the shareholders, for which the
following votes were cast.
Ratification of the selection of Grant Thornton LLP as independent
auditors of PFC for the year ending September 30, 1999.
For: 1,187,906 Against: 8,670 Abstain: 2,200
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial data schedule for the three months
ended December 31, 1998.
99 Safe Harbor under the Private Securities Litigation
Reform Act of 1995.
(b) Reports on Form 8-K: None.
Page 16 of 17 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: February 9, 1999 By: /s/Paul von Gunten
----------------------- ---------------------------
Paul von Gunten
President and Chief
Executive Officer
Date: February 9, 1999 By: /s/James R. Rinehart
----------------------- ---------------------------
James R. Rinehart
Treasurer
Page 17 of 17 Pages
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 197
<INT-BEARING-DEPOSITS> 1,295
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,624
<INVESTMENTS-CARRYING> 5,044
<INVESTMENTS-MARKET> 5,227
<LOANS> 67,423
<ALLOWANCE> 203
<TOTAL-ASSETS> 87,279
<DEPOSITS> 66,578
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 1,319
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 14,382
<TOTAL-LIABILITIES-AND-EQUITY> 87,279
<INTEREST-LOAN> 1,265
<INTEREST-INVEST> 251
<INTEREST-OTHER> 29
<INTEREST-TOTAL> 1,545
<INTEREST-DEPOSIT> 807
<INTEREST-EXPENSE> 863
<INTEREST-INCOME-NET> 682
<LOAN-LOSSES> 3
<SECURITIES-GAINS> 228
<EXPENSE-OTHER> 546
<INCOME-PRETAX> 373
<INCOME-PRE-EXTRAORDINARY> 244
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 244
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
<YIELD-ACTUAL> 3.20
<LOANS-NON> 115
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 196
<CHARGE-OFFS> 0
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 203
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 203
</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 December 31, 1998, 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.
