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, 1999
---------------------------------------------
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 10, 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 20 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 19
SIGNATURES 20
Page 2 of 20 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 1999 1998
<S> <C> <C>
Cash and due from banks $ 219 $ 269
Interest-bearing deposits in other financial institutions 1,060 2,152
------ ------
Cash and cash equivalents 1,279 2,421
Investment securities designated as available for sale -
at market 1,439 2,591
Investment securities held to maturity - at cost, approximate
market value of $1,034 and $1,045 as of March 31, 1999
and September 30, 1998 956 967
Mortgage-backed and related securities designated
as available for sale - at market 8,881 8,859
Mortgage-backed and related securities held to maturity - at
amortized cost, approximate market value of $3,790 and
$4,521 as of March 31, 1999 and September 30, 1998 3,698 4,400
Loans receivable - net 68,497 64,341
Office premises and equipment - at depreciated cost 1,448 1,471
Stock in Federal Home Loan Bank - at cost 877 861
Accrued interest receivable 319 298
Prepaid federal income taxes 271 -
Prepaid expenses and other assets 131 87
------ ------
Total assets $87,796 $86,296
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $66,972 $65,797
Advances from Federal Home Loan Bank 5,500 4,000
Other liabilities 222 251
Accrued federal income taxes - 329
Deferred federal income taxes 804 886
------ ------
Total liabilities 73,498 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 9,950 9,927
Unrealized gains on securities designated as available
for sale, net of related tax effects 958 1,095
Shares acquired by stock benefit plans (950) (1,097)
Less: 206,911 and 139,327 treasury shares, at cost (2,947) (2,179)
------ ------
Total shareholders' equity 14,298 15,033
------ ------
Total liabilities and shareholders' equity $87,796 $86,296
====== ======
</TABLE>
Page 3 of 20 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,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income
Loans $2,563 $2,374 $1,298 $1,207
Mortgage-backed and related securities 390 458 187 214
Investment securities 86 116 38 55
Interest-bearing deposits and other 46 87 17 35
----- ----- ----- -----
Total interest income 3,085 3,035 1,540 1,511
Interest expense
Deposits 1,598 1,614 791 808
Borrowings 120 19 64 -
----- ----- ----- -----
Total interest expense 1,718 1,633 855 808
----- ----- ----- -----
Net interest income 1,367 1,402 685 703
Provision for losses on loans 6 36 3 33
----- ----- ----- -----
Net interest income after provision for
losses on loans 1,361 1,366 682 670
Other income
Gain on sale of investment and mortgage-backed
securities designated as available for sale 351 501 123 501
Other operating 25 12 13 6
----- ----- ----- -----
Total other income 376 513 136 507
General, administrative and other expense
Employee compensation and benefits 581 592 288 321
Occupancy and equipment 131 105 63 49
Franchise taxes 106 118 50 54
Federal deposit insurance premiums 20 20 10 10
Data processing 58 37 29 19
Advertising 18 19 8 8
Other operating 179 168 99 80
----- ----- ----- -----
Total general, administrative and other expense 1,093 1,059 547 541
----- ----- ----- -----
Earnings before income taxes 644 820 271 636
Federal income taxes
Current 236 287 96 225
Deferred (11) - - -
----- ----- ----- -----
Total federal income taxes 225 287 96 225
----- ----- ----- -----
NET EARNINGS $ 419 $ 533 $ 175 $ 411
===== ===== ===== =====
EARNINGS PER SHARE
Basic $.33 $.39 $.14 $.30
=== === === ===
Diluted $.33 $.38 $.14 $.29
=== === === ===
</TABLE>
Page 4 of 20 Pages
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PEOPLES FINANCIAL CORPORATION
(In thousands)
For the six months For the three months
ended March 31, ended March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net earnings $419 $533 $175 $411
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period 95 359 (132) 140
Reclassification adjustment for realized gains
included in earnings (232) (331) (82) (331)
--- --- --- ---
Comprehensive income (loss) $282 $561 $(39) $220
=== === === ===
</TABLE>
Page 5 of 20 Pages
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
PEOPLES FINANCIAL CORPORATION
For the six months ended March 31,
(In thousands)
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 419 $ 533
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation of premises and equipment 59 47
Amortization of premiums and discounts on investment securities
and mortgage-backed securities, net 20 8
Gain on sale of investment and mortgage-backed
securities designated as available for sale (351) (501)
Amortization of deferred loan costs (fees) - net (10) 21
Provision for losses on loans 6 36
Recovery of loss on investments 4 -
Federal Home Loan Bank stock dividends (15) (29)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (21) 34
Prepaid expenses and other assets (316) 332
Other liabilities 118 144
Federal income taxes:
Current (329) 192
Deferred (11) -
------ -----
Net cash provided by (used in) operating activities (427) 817
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed and related securities 2,856 2,055
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 (2,258) (992)
Proceeds from sale of investment securities 357 1,524
Principal repayments and maturities of investment securities 1,012 1,080
Purchase of investment securities designated as available for sale - (999)
Loan principal repayments 11,316 10,114
Loan disbursements (15,473) (14,497)
Purchase of office premises and equipment (36) (14)
------ ------
Net cash provided by (used in) investing activities (2,226) 269
------ ------
Net cash provided by (used in) operating and investing
activities (balance carried forward) (2,653) 1,086
------ ------
</TABLE>
Page 6 of 20 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)
1999 1998
<S> <C> <C>
Net cash provided by (used in) operating and
investing activities (balance brought forward) $(2,653) $1,086
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 1,175 (545)
Proceeds from Federal Home Loan Bank advances 5,500 -
Repayment of borrowings (4,000) (3,000)
Purchase of treasury shares (769) -
Cash dividends paid on common stock (395) (354)
------ -----
Net cash provided by (used in) financing activities 1,511 (3,899)
------ -----
Net decrease in cash and cash equivalents (1,142) (2,813)
Cash and cash equivalents at beginning of period 2,421 4,783
------ -----
Cash and cash equivalents at end of period $ 1,279 $1,970
====== =====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 825 $ 95
====== =====
Interest on deposits and borrowings $ 1,717 $1,637
====== =====
Supplemental disclosure of noncash investing activities:
Unrealized net gains (losses) on securities designated as
available for sale, net of related tax effects $ (137) $ 28
======= =====
</TABLE>
Page 7 of 20 Pages
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PEOPLES FINANCIAL CORPORATION
For the six month periods ended March 31, 1999 and 1998
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 six and three month
periods ended March 31, 1999, 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. 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
material impact on the Corporation's financial statements.
Page 8 of 20 Pages
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the six month periods ended March 31, 1999 and 1998
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. Management adopted SFAS No. 131 effective October 1, 1998, as
required, without 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 the Corporation's financial position
or results of operations.
Page 9 of 20 Pages
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the six month periods ended March 31, 1999 and 1998
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.
Although it now seems unlikely that Congress will eliminate the OTS, legislation
is currently being considered that may change the range of activities in which
various types of financial institutions and their holding companies, including
Peoples Federal and PFC, may engage. Although PFC cannot predict when or whether
this "financial modernization" legislation will be passed or what its effect on
PFC and Peoples Federal will be, it is not anticipated that the current
activities of PFC and Peoples Federal will be materially affected.
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 1,278,213 and 1,251,585
for the six and three-month periods ended March 31, 1999. Weighted-average
common shares outstanding, which gives effect to 45,928 unallocated ESOP shares,
totaled 1,369,789 and 1,370,684 for the six and three-month periods ended March
31, 1998.
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 1,278,213 and 1,251,585 for the six
and three-month periods ended March 31, 1999 and 1,395,759 and 1,411,184 for the
six and three-month periods ended March 31, 1998.
Options to purchase 125,661 shares of common stock at a weighted-average
exercise price of $12.51 per share were outstanding at March 31, 1999, 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 1999
consolidated financial statement presentation.
Page 10 of 20 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 March 31, 1999
PFC's assets totaled $87.8 million as of March 31, 1999, an increase of $1.5
million, or 1.7%, over the September 30, 1998 total. The increase in assets was
funded by an increase in deposits of $1.2 million and an increase in advances
from the Federal Home Loan Bank of $1.5 million, partially offset by a $735,000
decrease in shareholders' equity, and was comprised primarily of an increase in
loans receivable of $4.2 million, offset by 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 $1.3 million at March 31, 1999, a decrease of
$1.1 million, or 47.2%, 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 and purchase mortgage-backed securities.
Investment securities totaled $2.4 million at March 31, 1999, a decrease of $1.2
million, or 32.7%, from the total at September 30, 1998. This decrease resulted
primarily from a net decrease of $147,000 in unrealized gains and maturities of
$1.0 million.
Mortgage-backed securities totaled $12.6 million at March 31, 1999, a decrease
of $680,000, or 5.1%, from the total at September 30, 1998. This decrease
resulted primarily from principal repayments of $2.9 million and a decrease in
net unrealized gains of $61,000, partly offset by purchases of $2.3 million.
Proceeds from principal repayments were primarily used to fund loan originations
and purchase mortgage-backed securities.
Page 11 of 20 Pages
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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 March 31, 1999 (continued)
Net loans receivable totaled $68.5 million at March 31, 1999, an increase of
$4.2 million, or 6.5%, 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 $207,000 at March 31, 1999, an
increase of $11,000, including $5,000 from loss recoveries, over the balance at
September 30, 1998. The allowance represented .28% of total loans at March 31,
1999 as compared to .29% at September 30, 1998. Nonperforming loans totaled
$115,000 at September 30, 1998. There were no nonperforming loans at March 31,
1999.
Deposits totaled $67.0 million at March 31, 1999, an increase of $1.2 million,
or 1.8%, over the September 30, 1998 amount. During the six months ended March
31, 1999, certificates of deposit increased by $461,000, as Peoples Federal
offered rates designed to maintain certificates and control interest cost.
Passbook deposits, NOW accounts and money market demand accounts increased by
$495,000, $126,000 and $93,000, respectively, during the period.
Advances from the Federal Home Loan Bank were $5.5 million at March 31, 1999, an
increase of $1.5 million, or 37.5% over the September 30, 1998 amount. At March
31, 1999, fixed rate advances were comprised of $4.0 million at 5.04%, maturing
July 6, 1999, $1.0 million at 5.03%, maturing August 20, 1999 and $500,000 at
5.02%, maturing May 18, 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 March 31, 1999, 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 31,1999 and 1998
General
Net earnings for the six months ended March 31, 1999, totaled $419,000, compared
to $533,000 for the same period in 1998, a decrease of $114,000, or 21.4%. The
decrease in net earnings was due primarily to a decrease in net interest income
of $35,000, or 2.5%, a decrease in gain on sale of investments of $150,000 or
29.9% and an increase in general, administrative and other expense of $34,000,
or 3.2%, which were partially offset by an increase in other operating income of
$13,000, a decrease in the provision for loan losses of $30,000 and a decrease
in federal income taxes of $62,000.
Page 12 of 20 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, 1999 and 1998 (continued)
Net Interest Income
Interest income on loans for the six months ended March 31, 1999, increased by
$189,000, or 8.0%, over the 1998 period. This increase resulted from a $7.5
million increase in the average net loan portfolio balance outstanding,
partially offset by a decrease in weighted average yield from 7.96% in the six
months ended March 31, 1998 to 7.64% in the 1999 period. Interest income on
mortgage-backed and related securities, investment securities and
interest-bearing deposits decreased by $139,000, or 21.0%, from the 1998 period.
This decrease resulted from a $2.6 million decrease in average portfolio
balances outstanding and a decrease in weighted average yield from 6.40% to
5.80%.
Interest expense on deposits decreased by $16,000, or 1.0%, for the six months
ended March 31, 1999, as compared to 1998. This decrease resulted from a
decrease in the weighted-average cost of funds from 4.95% in 1998 to 4.81% in
1999, partially offset by a $1.2 million increase in average deposit balances
outstanding. Interest expense on borrowings totaled $120,000 for the six months
ended March 31, 1999, an increase of $101,000 over the comparable period in
1998. The 1999 average advances from Federal Home Loan Bank totaled $5.0
million, with a weighted-average interest rate of 4.79%. A note payable
outstanding at September 30, 1998 of $3.0 million was repaid in October 1998.
Interest cost of $19,000 was recorded on the note in 1998.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $35,000, or 2.5%, for the six months ended
March 31, 1999, compared to 1998. The interest rate spread decreased to 2.44%
for the six months ended March 31, 1999, as compared to 2.61% for the
corresponding 1998 six-month period. The net interest margin decreased to 3.21%
for the six months ended March 31, 1999, as compared to 3.49% for the comparable
1998 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 $6,000 during the six months ended
March 31, 1999 and by $36,000 for the six months ended March 31, 1998. 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 20 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, 1999 and 1998 (continued)
Other Income
Other income totaled $376,000 for the six months ended March 31, 1999, a
decrease of $137,000 from the 1998 amount. Federal Home Loan Mortgage
Corporation ("FHLMC") common stock with a book value of $6,000 was sold during
the six months ended March 31, 1999 for $357,000 resulting in a realized gain of
$351,000. During the six months ended March 31, 1998, FHLMC common stock with a
book value of $11,000 was sold and a gain of $514,000 was realized and
mortgage-backed and investment securities with a book value of $3.0 million were
sold and a loss of $13,000 was realized. Other operating income increased by
$13,000 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 $34,000, or 3.2%, for the
six months ended March 31, 1999, compared to the same period in 1998. Occupancy
and equipment increased by $26,000, or 24.8%, due to depreciation of automatic
teller machine equipment acquired in the fall of 1998, increased maintenance
costs of buildings, grounds and operating equipment, due in part to winter
weather. Data processing increased by $21,000, or 56.8%, principally due to
automatic teller machine operation and year 2000 compliance testing. Other
operating expenses increased by $11,000, or 6.5% principally due to year 2000
compliance costs and increased purchases of office supplies. Employee
compensation and benefits decreased by $11,000, or 1.9%, due to a net decrease
in employee benefit plan costs which were partially offset by normal wage
increases. Ohio franchise taxes for the six months ended March 31, 1999
decreased by $12,000, or 10.2% from 1998, based on decreased tax rates.
Federal Income Taxes
Federal income taxes are based on earnings before taxes for the six months ended
March 31, 1999 and 1998. The decrease of $62,000, or 21.6%, in the provision for
income taxes resulted primarily from the $176,000, or 21.5%, decrease in
earnings before income taxes. The effective tax rates were 34.9% and 35.0% for
the six month periods ended March 31, 1999 and 1998, respectively.
Page 14 of 20 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, 1999 and 1998
General
Net earnings for the three months ended March 31, 1999, totaled $175,000,
compared to $411,000 for the same period in 1998, a decrease of $236,000, or
57.4%. The primary reason for the decrease in net earnings was a gain on sale of
investment securities of $123,000 in 1999 compared to $501,000 in 1998. Other
items decreasing net earnings were a decrease in net interest income of $18,000,
or 2.6%, and an increase in general, administrative and other expense of $6,000,
or 1.1%. These amounts were partially offset by a decrease of $30,000 in
provision for loan losses, an increase of $7,000 in other operating income and a
decrease in the federal income tax provision of $129,000.
Net Interest Income
Interest income on loans for the three months ended March 31, 1999, increased by
$91,000, or 7.5%, over the 1998 period. This increase resulted from a $7.2
million increase in the average net loan portfolio balance outstanding,
partially offset by a decrease in weighted average yield from 7.96% in the three
months ended March 31, 1998 to 7.64% in the 1999 period. Interest income on
mortgage-backed and related securities, investment securities and
interest-bearing deposits decreased by $62,000, or 20.4%, from the 1998 period.
This decrease resulted from a $2.2 million decrease in average portfolio
balances outstanding and a decrease in weighted average yield from 6.19% to
5.54%.
Interest expense on deposits decreased by $17,000, or 2.1%, for the three months
ended March 31, 1999, as compared to 1998. This decrease resulted from a
decrease in the weighted-average cost of funds from 4.96% in 1998 to 4.74% in
1999, which was partially offset by a $1.5 million increase in average deposit
balances outstanding. Interest expense on borrowings totaled $64,000 for the
three months ended March 31, 1999; there was no interest cost on borrowings for
the three months ended March 31, 1998. The 1999 average advances from Federal
Home Loan Bank totaled $5.3 million, with a weighted-average interest rate of
4.78%.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $18,000, or 2.6%, for the three months ended
March 31, 1999, compared to 1998. The interest rate spread decreased to 2.47%
for the three months ended March 31, 1999, as compared to 2.57% for the
corresponding 1998 three-month period. The net interest margin decreased to
3.21% for the three months ended March 31, 1999, as compared to 3.50% for the
comparable 1998 period.
Page 15 of 20 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, 1999 and 1998 (continued)
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 March 31, 1999 and by $33,000 for the three months ended March 31, 1998.
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.
Other Income
Other income totaled $136,000 for the three months ended March 31, 1999, a
decrease of $371,000 over the 1998 amount. The decrease resulted primarily from
a smaller net gain on the sale of FHLMC common stock during the three months
ended March 31, 1999 than in the comparable 1998 period. FHLMC common stock with
a book value of $2,000 was sold in March 1999 for $125,000 resulting in a
realized gain of $123,000, while FHLMC common stock with a book value of $11,000
was sold in February 1998 for $512,000 resulting in a realized gain of $501,000.
Other operating income increased by $7,000 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 $6,000, or 1.1%, for the
six months ended March 31, 1999, compared to the same period in 1998. Occupancy
and equipment increased by $14,000, or 28.6%, due to depreciation of automatic
teller machine equipment acquired in the fall of 1998, increased maintenance
costs of buildings, grounds and operating equipment, due in part to winter
weather. Data processing increased by $10,000 or 52.6% principally due to
automatic teller machine operation and year 2000 compliance testing. Other
operating expenses increased by $19,000, or 23.8% principally due to year 2000
compliance costs and increased purchases of office supplies. Employee
compensation and benefits decreased by $33,000, or 10.3%, due primarily to a
$42,000 decrease in employee benefit plan costs, which were partially offset by
commission compensation costs and normal wage increases totaling $9,000. Ohio
franchise taxes for the three months ended March 31, 1999 decreased by $4,000,
or 7.4% from 1998, based on decreased tax rates.
Page 16 of 20 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, 1999 and 1998 (continued)
Federal Income Taxes
Federal income taxes are based on earnings before taxes for the three months
ended March 31, 1999 and 1998. The decrease of $129,000, or 57.3%, in the
provision for income taxes resulted primarily from the $365,000, or 57.4%,
decrease in earnings before income taxes. The effective tax rate was 35.4% for
both three month periods ended March 31, 1999 and 1998.
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.
Page 17 of 20 Pages
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Year 2000 Readiness (continued)
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 18 of 20 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
None
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial data schedule for the six months
ended March 31, 1999.
99 Safe Harbor under the Private Securities Litigation
Reform Act of 1995.
(b) Reports on Form 8-K: None.
Page 19 of 20 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, 1999 By: /s/Paul von Gunten
-------------------------- Paul von Gunten
President and Chief
Executive Officer
Date: May 12, 1999 By: /s/James R. Rinehart
-------------------------- James R. Rinehart
Treasurer
Page 20 of 20 Pages
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 219
<INT-BEARING-DEPOSITS> 1,060
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,320
<INVESTMENTS-CARRYING> 4,654
<INVESTMENTS-MARKET> 4,824
<LOANS> 68,497
<ALLOWANCE> 207
<TOTAL-ASSETS> 87,796
<DEPOSITS> 66,972
<SHORT-TERM> 5,500
<LIABILITIES-OTHER> 1,026
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 14,298
<TOTAL-LIABILITIES-AND-EQUITY> 87,796
<INTEREST-LOAN> 2,563
<INTEREST-INVEST> 476
<INTEREST-OTHER> 46
<INTEREST-TOTAL> 3,085
<INTEREST-DEPOSIT> 1,598
<INTEREST-EXPENSE> 1,718
<INTEREST-INCOME-NET> 1,367
<LOAN-LOSSES> 6
<SECURITIES-GAINS> 351
<EXPENSE-OTHER> 1,093
<INCOME-PRETAX> 644
<INCOME-PRE-EXTRAORDINARY> 419
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 419
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<YIELD-ACTUAL> 3.21
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 196
<CHARGE-OFFS> 0
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 207
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 207
</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 March 31, 1999, 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>
For several years, Congress has been considering various changes to the
bank and savings association charters, the activities in which banks and savings
associations and their holding companies and subsidiaries may engage and the
authority of various regulatory authorities over the financial institutions and
their holding companies and subsidiaries. PFC cannot predict at this time
whether and when Congress will actually adopt such "financial modernization
legislation" or in what form it will be adopted. It is expected, however, that
the range of activities in which banks and their affiliated companies may engage
will be expanded, and it is possible that the range of activities in which PFC
and Peoples Federal may engage will be restricted. It is not anticipated that
the current activities of PFC or Peoples Federal will be materially affected by
any such legislation.
Legislation to recapitalize the SAIF, which was enacted in 1996,
provided that the SAIF and the Bank Insurance Fund (the "BIF") would be merged
if the federal savings association charter was eliminated. Although the
elimination of the federal savings association charter has not occurred and is
not now expected in the near future, Congress is still discussing the merger of
the SAIF and the BIF. Although the merger could be expected to change the
deposit insurance premiums paid by Peoples Federal, the effect on Peoples
Federal and PFC cannot be predicted at this time.
