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, 1997
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 small business issuer as specified in its charter)
Ohio 34-1822228
_______________________________ ______________________
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
211 Lincoln Way East
Massillon, Ohio 44646
_____________________ __________
(Address of principal (Zip Code)
executive office)
Issuer's 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 2, 1997, the latest practicable date, 1,491,012 common shares of the
registrant, no par value, were issued and outstanding.
Page 1 of 20 Pages
<PAGE>
INDEX
PEOPLES FINANCIAL CORPORATION
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition ................ 3
Consolidated Statements of Earnings ........................... 4
Consolidated Statements of Cash Flows ......................... 5
Notes to Consolidated Financial Statements .................... 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 11
PART II - OTHER INFORMATION ............................................ 18
SIGNATURES ................................................................ 20
Page 2 of 20 Pages
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<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PEOPLES FINANCIAL CORPORATION
(In thousands, except share data)
MARCH 31, SEPTEMBER 30,
ASSETS 1997 1996
---------------- ---------------
<S> <C> <C>
Cash and due from banks $ 245 $ 276
Interest-bearing deposits in other financial institutions 6,113 12,257
-------- --------
Cash and cash equivalents 6,358 12,533
Investment securities designated as available
for sale - at market 6,551 5,087
Investment securities - at cost, approximate market value
of $2,000 and $1,712 as of March 31, 1997 and
September 30, 1996 1,977 1,688
Mortgage-backed and related securities designated
as available for sale - at market 16,232 14,113
Mortgage-backed and related securities - at amortized cost,
approximate market value of $7,938 and $9,011 as of
March 31, 1997 and September 30, 1996 7,774 8,875
Loans receivable - net 48,047 44,206
Office premises and equipment - at depreciated cost 1,467 1,515
Stock in Federal Home Loan Bank - at cost 774 748
Accrued interest receivable 362 397
Prepaid expenses and other assets 145 95
-------- --------
Total assets $ 89,687 $ 89,257
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 64,632 $ 64,355
Other liabilities 201 667
Accrued federal income taxes 17 32
Deferred federal income taxes 709 497
-------- --------
Total liabilities 65,559 65,551
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 and outstanding -- --
Additional paid-in capital 14,203 14,203
Retained earnings - restricted 9,782 9,455
Unrealized gains on securities designated as available
for sale, net of related tax effects 740 645
Shares acquired by Employee Stock Ownership Plan (597) (597)
-------- --------
Total shareholders' equity 24,128 23,706
-------- --------
Total liabilities and shareholders' equity $ 89,687 $ 89,257
======== ========
</TABLE>
Page 3 of 20 Pages
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
PEOPLES FINANCIAL CORPORATION
(In thousands, except share data)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income
Loans $ 941 $ 773 $1,881 $ 1,568
Mortgage-backed and related securities 390 400 791 807
Investment securities 126 133 234 270
Interest-bearing deposits and other 88 61 205 102
------- ------- ------ -------
Total interest income 1,545 1,367 3,111 2,747
Interest expense on deposit accounts 757 851 1,539 1,721
------- ------- ------ -------
Net interest income 788 516 1,572 1,026
Provision for losses on loans 3 -- 6 105
------- ------- ------ -------
Net interest income after
provision for losses on loans 785 516 1,566 921
Other operating income 7 6 21 12
------- ------- ------ -------
792 522 1,587 933
General, administrative and other expense
Employee compensation and benefits 237 174 449 351
Occupancy and equipment 54 49 113 106
Franchise taxes 66 37 102 54
Federal deposit insurance premiums 14 38 37 76
Data processing 19 16 38 32
Advertising 9 6 20 19
Other operating 97 66 166 135
------- ------- ------ -------
Total general, administrative and other expense 496 386 925 773
------- ------- ------ -------
Earnings before income taxes 296 136 662 160
Federal income taxes
Current (52) (21) 60 (17)
Deferred 153 64 163 65
------- ------- ------ -------
Total federal income taxes 101 43 223 48
------- ------- ------ -------
Net earnings $ 195 $ 93 $ 439 $ 112
======= ======= ====== =======
Earnings per share $ 0.14 N/A $ 0.31 N/A
======= ======= ====== =======
</TABLE>
Page 4 of 20 Pages
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<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
PEOPLES FINANCIAL CORPORATION
(In thousands)
SIX MONTHS ENDED
MARCH 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 439 $ 112
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation of premises and equipment 51 45
Amortization of premiums and discounts on investment securities and
mortgage-backed securities, net 24 30
Amortization of deferred loan costs -- 13
Provision for losses on loans 6 105
Federal Home Loan Bank stock dividends (26) (37)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 35 20
Prepaid expenses and other assets (51) (125)
Other liabilities (470) (266)
Accrued interest payable 5 (2)
Federal income taxes:
Current (15) (90)
Deferred 163 65
-------- -------
Net cash provided by (used in) operating activities 161 (130)
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed and related securities designated as
available for sale (3,499) --
Principal repayments on mortgage-backed and related securities 2,490 2,581
Purchase of investment securities (1,000) --
Purchase of investment securities designated as available for sale (1,500) --
Principal repayments and maturities of investment securities 859 481
Loan principal repayments 7,372 3,515
Loan disbursements (11,220) (3,920)
Purchase of office premises and equipment (2) (6)
-------- -------
Net cash provided by (used in) investing activities (6,500) 2,651
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 276 811
Cash dividends paid (112) --
-------- -------
Net cash provided by financing activities 164 811
-------- -------
Net increase (decrease) in cash and cash equivalents (6,175) 3,332
Cash and cash equivalents at beginning of period 12,533 1,864
-------- -------
Cash and cash equivalents at end of period $ 6,358 $ 5,196
======== =======
</TABLE>
Page 5 of 20 Pages
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
(In thousands)
SIX MONTHS ENDED
MARCH 31,
1997 1996
------ ------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 75 $ 73
====== ======
Interest on deposits $1,534 $1,724
====== ======
Supplemental disclosure of non cash investing activities:
Unrealized gains on securities designated as available
for sale, net of related tax effects $ 95 $ 57
====== ======
Page 6 of 20 Pages
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PEOPLES FINANCIAL CORPORATION
For the three- and six-month periods ended
March 31, 1997 and 1996
On October 16, 1995, the Board of Directors of Peoples Federal Savings and Loan
Association of Massillon ("Peoples Federal" or the "Association") adopted a Plan
of Conversion (the "Plan") whereby Peoples Federal would convert to the stock
form of ownership and issue all of Peoples Federal's outstanding stock to a
newly formed holding company, Peoples Financial Corporation ("PFC"). Pursuant to
the Plan, PFC offered for sale up to 1,495,000 common shares to certain
depositors of Peoples Federal and members of the community. The conversion was
completed on September 12, 1996, and resulted in the issuance of 1,491,012
common shares of PFC, which, after consideration of offering expenses totaling
approximately $707,000, and share purchases by the Peoples Financial Corporation
Employee Stock Ownership Plan (the "ESOP") totaling $597,000, resulted in net
equity proceeds of $13.6 million.
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 for the year ended September 30, 1996.
However, in the opinion of management, all adjustments (consisting of only
normal recurring accruals) which are necessary for a fair presentation of the
consolidated financial statements have been included. The results of operations
for the three-and six-month periods ended March 31, 1997 and 1996, 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 PFC
and Peoples Federal. All significant intercompany items have been eliminated.
Page 7 of 20 Pages
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the three- and six-month periods ended
March 31, 1997 and 1996
3. Approval of Peoples Financial Corporation 1997 Stock Option and Incentive
Plan and Peoples Financial Corporation Recognition and Retention Plan and
Trust Agreement.
On March 19, 1997, the shareholders approved the Peoples Financial Corporation
Stock Option and Incentive Plan ("Stock Option Plan") and the Peoples Financial
Corporation Recognition and Retention Plan and Trust Agreement ("Recognition and
Retention Plan"). Under the Stock Option Plan, options to purchase a total of
104,371 shares were granted to directors, officers and employees. Under the
Recognition and Retention Plan, 47,712 shares were awarded to directors,
officers and other key employees.
4. Effects of Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost
for all employee stock compensation plans based on the estimated fair value of
the award at the date it is granted. Companies are, however allowed to continue
to measure compensation cost for those plans using the intrinsic value based
method of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net earnings and, if presented, earnings per share, as if SFAS No. 123
had been adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995, although companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that PFC will continue to account for stock-based compensation
pursuant to Accounting Principles Board Opinion No. 25, and therefore the
disclosure provisions of SFAS No. 123 will have no effect on its consolidated
financial position or results of operations.
Page 8 of 20 Pages
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the three- and six-month periods ended
March 31, 1997 and 1996
4. Effects of Recent Accounting Pronouncements (continued)
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities", that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing assets
and liabilities are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are subject to subsequent
assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet only if
the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on PFC's consolidated financial position or results of
operations.
Page 9 of 20 Pages
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the three- and six-month periods ended
March 31, 1997 and 1996
4. Effects of Recent Accounting Pronouncements (continued)
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share is computed without including
potential common shares, i.e., no dilutive effect. Diluted earnings per share is
computed taking into consideration common shares outstanding and dilutive
potential common shares, including options, warrants, convertible securities and
contingent stock agreements. SFAS No. 128 is effective for periods ending after
December 15, 1997. Early application is not permitted. Based upon the provisions
of SFAS NO. 128, the PFC's basic and diluted earnings per share for the six- and
three-month periods ended March 31, 1997 would have been $.31 and $.14,
respectively.
5. Pending Legislative Changes
Congress has enacted legislation that would merge the Savings Association
Insurance Fund (the "SAIF") and the Bank Insurance Fund (the "BIF") on January
1, 1999. The legislation currently provides for the elimination of the thrift
charter or separate thrift regulation under federal law prior to the merger of
the deposit insurance funds. Peoples Federal would then be regulated as a bank
under federal law and subject to the more restrictive activity limits imposed on
national banks.
6. Earnings Per Share
Earnings per share for the three and six months ended March 31, 1997, is 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 deemed outstanding, which gives effect to 59,678 unallocated ESOP
shares, totaled 1,431,334 for the three and six months ended March 31, 1997.
The provisions of Accounting Principles Board Opinion No. 15, "Earnings per
Share" are not applicable to the three- and six-month periods ended March
31,1996, as the Corporation completed its conversion to stock form in September
1996.
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 of allowance for losses on
loans, legislative changes with respect to the federal thrift charter and the
effect of certain accounting pronouncements.
Discussion of Financial Condition Changes from
September 30, 1996 to March 31,1997
PFC's assets totaled $89.7 million as of March 31, 1997, an increase of
$430,000, or .5% over the September 30, 1996 total. Changes in operating assets
from September 30, 1996 levels consisted of increases of $1.8 million in
investment securities, $1.0 million in mortgage-backed securities and $3.8
million in net loans receivable, which were offset by a decrease in cash and
cash equivalents of $6.2 million. This increase in assets was funded by growth
in deposits of $277,000 and undistributed net earnings of $327,000.
Cash and cash equivalents totaled $6.4 million at March 31, 1997, a decrease of
$6.2 million, or 49.3%, from the total at September 30, 1996. Excess funds were
redeployed primarily to higher-yielding investment securities, mortgage-backed
securities and loans.
Investment securities totaled $8.5 million at March 31, 1997, an increase of
$1.8 million, or 25.9%, over the total at September 30, 1996. This increase
resulted primarily from purchases of $2.5 million and net fair value
appreciation of $112,000, offset by maturities of $712,000 and principal
repayments of $147,000.
Mortgage-backed securities totaled $24.0 million at March 31, 1997, an increase
of $1.0 million, or 4.4%, over the total at September 30, 1996. This increase
resulted primarily from purchases of $3.5 million and net fair value
appreciation of $32,000, which were partially offset by principal repayments of
$2.5 million.
Page 11 of 20 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, 1996 to March 31,1997 (continued)
Net loans receivable totaled $48.0 million at March 31, 1997, an increase of
$3.8 million, or 8.7%, over the September 30, 1996, total. The increase is
attributed to Peoples Federal's continued focus on its marketing program to
originate new mortgage and home equity loans at the main office and the branch
lending office. The allowance for loan losses totaled $199,000 at March 31,
1997, an increase of $6,000 over the balance at September 30, 1996. The
allowance represented .4% of total loans at March 31, 1997 and 1715.4% of
nonperforming loans at that date, as compared to .4% of total loans and 772.0%
of nonperforming loans at September 30, 1996. Nonperforming loans totaled
$12,000 and $25,000 at March 31, 1997 and September 30, 1996, respectively.
Deposits totaled $64.6 million at March 31, 1997, an increase of $277,000, or
..4%, over the September 30, 1996, amount. During the six months ended March 31,
1997, Peoples Federal offered deposits at interest rates designed to reduce the
cost of funds, while management monitors deposit levels to minimize deposit
outflows.
Peoples Federal is required to meet each of three minimum capital standards
promulgated by the Office of Thrift Supervision (the "OTS"), hereinafter
described as the tangible capital requirement, the core capital requirement and
the risk-based capital requirement. The tangible capital requirement provides
for the maintenance of shareholders' equity less all intangible assets equal to
1.5% of adjusted total assets. The core capital requirement provides for the
maintenance of tangible capital plus certain forms of supervisory goodwill equal
to 3% of adjusted total assets, while the risk-based capital requirement
mandates maintenance of core capital plus general loan loss allowances equal to
8% of risk-weighted assets as defined by OTS regulations. As of March 31, 1997,
the Association's tangible and core capital totaled $15.6 million, or 19.2%,
which exceeded the minimum requirements of $1.2 million and $2.4 million by
$14.4 million and $13.2 million, respectively. As of March 31, 1997, the
Association's risk-based capital was $15.8 million, or 46.0% of risk-weighted
assets, exceeding the minimum requirement by $13.1 million.
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, 1997 and 1996.
General
Net earnings for the six months ended March 31, 1997, totaled $439,000, compared
to $112,000 for the same period in 1996, an increase of $327,000, or 292.0%. The
primary reasons for the increase in net earnings were an increase in net
interest income of $546,000, or 53.2%, and a decrease in provision for losses on
loans of $99,000, or 94.3%, which were partially offset by an increase in
general, administrative and other expense of $152,000, or 19.7% and an increase
in the federal income tax provision of $175,000.
Net Interest Income
Interest income on loans for the six months ended March 31, 1997, increased by
$313,000, or 20.0%, over the 1996 period. This increase resulted from an $8.5
million increase in the average portfolio balance outstanding, partially offset
by a decrease in weighted average yield. Interest income on mortgage-backed and
related securities, investment securities and deposits increased by $51,000, or
4.3%, over the 1996 period. This increase resulted from a $2.5 million increase
in average portfolio balances outstanding, partially offset by a decrease in
weighted average yield.
Interest expense on deposits decreased by $182,000, or 10.6%, for the six months
ended March 31, 1997, as compared to 1996. This decrease resulted from a $3.2
million decline in average deposit balances and a .32% decrease in weighted
average cost of funds.
As a result of the foregoing, net interest income increased by $546,000, or
53.2%, for the six months ended March 31, 1997, compared to 1996. The interest
rate spread increased to 2.34% for the six months ended March 31, 1997, as
compared to 2.10% for the comparable 1996 six-month period. The net interest
margin increased to 3.62% for the three months ended March 31, 1997, as compared
to 2.70% for the comparable 1996 period.
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, 1997 and 1996 (continued)
Allowance 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, 1997. The provision for the six-month period ended March 31, 1996,
totaled $105,000. This increase during the six months ended March 31, 1996 was
primarily due to the fact that 90-day delinquent loans increased by $681,000.
The properties securing these loans were sold at a sheriff's sale in October,
1996, with Peoples Federal receiving full repayment in December 1996. 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 Operating Income
Other operating income was $21,000 for the six months ended March 31, 1997, an
increase of $9,000 over the 1996 amount. The increase was primarily due to late
payment fees on the delinquent loans collected in December 1996. Also included
in other operating income are safe deposit box rentals, negotiable order of
withdrawal account fees and service fees.
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 Six-Month
Periods Ended March 31, 1997 and 1996 (continued)
General, Administrative and Other Expense
General, administrative and other expense increased by $152,000, or 19.7%, for
the six months ended March 31, 1997, compared to the same period in 1996. The
principal increases for 1997 over 1996 were $98,000, or 27.9%, in employee
compensation and benefits, due to the hiring of new employees and for costs
accrued relative to stock benefit plans, $48,000, or 88.9%, in Ohio franchise
taxes, based on increased capital from the conversion, $31,000, or 23.0%, in
other operating expenses, from costs of compliance reporting requirements of a
publicly owned corporation, modification of an employee benefit plan and
operation of PFC. Federal deposit insurance premiums decreased by $39,000, or
51.3%, as a result of the decrease in premium rates after the special assessment
by the Federal Deposit Insurance Corporation ("FDIC") recorded in the quarter
ended September 30, 1996.
Federal Income Taxes
Federal income taxes are based on earnings before taxes for the six months ended
March 31, 1997 and 1996. The increase of $175,000 in the provision for income
taxes resulted primarily from the $502,000 increase in earnings before income
taxes. The effective tax rates were 33.7% for 1997, and 30.0% for 1996.
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, 1997 and 1996.
General
Net earnings for the three months ended March 31, 1997, totaled $195,000,
compared to $93,000 for the same period in 1996, an increase of $102,000. The
primary reasons for the increase in net earnings were an increase in net
interest income of $272,000, or 52.7%, which was partially offset by an increase
in general, administrative and other expense of $110,000, or 28.5% and an
increase in the federal income tax provision of $58,000.
Net Interest Income
Interest income on loans for the three months ended March 31, 1997, increased by
$168,000, or 21.7%, over the 1996 period. This increase resulted from a $9.3
million increase in average portfolio balance outstanding, partially offset by a
..20% decrease in weighted average yield. Interest income on mortgage-backed and
related securities, investment securities and deposits increased by $10,000, or
1.7%, over the 1996 period. This increase resulted from a $1.7 million increase
in average portfolio balances outstanding, partially offset by a .16% decrease
in weighted average yield.
Interest paid on deposits decreased by $94,000, or 11.0%, for the six months
ended March 31, 1997. This decrease resulted from a $3.2 million decline in
average deposit balances and a .34% decrease in weighted average cost of funds.
As a result of the foregoing, net interest income increased by $272,000, or
52.7%, for the three months ended March 31, 1997, compared to 1996. The interest
rate spread increased to 2.37% for the three months ended March 31, 1997, as
compared to 2.14% for the comparable 1996 three-month period. The net interest
margin increased to 3.63% for the three months ended March 31, 1997, as compared
to 2.72% for the comparable 1996 period.
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, 1997 and 1996 (continued)
Allowance for Losses on Loans
As the loan portfolio continues to increase, a provision for losses on loans of
$3,000 was recorded for the three months ended March 31, 1997. No provision was
recorded for the comparable three-month 1996 period.
Other Operating Income
Other operating income was $7,000 for the three months ended March 31, 1997, and
$6,000 for 1996. Other operating income is comprised primarily of late payment
fees on loans, safe deposit box rentals, negotiable order of withdrawal account
fees, and service fees.
General, Administrative and Other Expense
General, administrative and other expense increased by $110,000, or 28.5%, for
the three months ended March 31, 1997, compared to the same period in 1996. The
principal increases for 1997 over 1996 were $63,000, or 36.2%, in employee
compensation and benefits, primarily due to costs accrued relative to stock
benefit plans, $29,000, or 78.4%, in Ohio franchise taxes, based on increased
capital from the conversion, $31,000, or 47.0%, in other operating expenses,
from costs of compliance reporting requirements of a publicly owned corporation,
modification of an employee benefit plan and operation of PFC. Federal deposit
insurance premiums decreased by $24,000, or 63.2%, as a result of the decrease
in premium rates after the FDIC special assessment.
Federal Income Taxes
Federal income taxes are based on earnings before taxes for the three months
ended March 31, 1997 and 1996. The increase of $58,000 in the provision for
income taxes resulted primarily from the $160,000 increase in earnings before
income taxes. The effective tax rates were 34.1% for 1997, and 31.6% for 1996.
Page 17 of 20 Pages
<PAGE>
PART II
PEOPLES FINANCIAL CORPORATION
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
On March 19, 1997, the Annual Meeting of PFC's Shareholders
was held. Each of the three directors nominated were elected
to terms expiring in 1999 by the following votes:
Victor C. Baker For: 1,332,082 Withheld 42,784
Vincent G. Matecheck For: 1,332,282 Withheld 42,584
Paul von Gunten For: 1,340,782 Withheld 34,084
Three other matters were submitted to the shareholders, for
which the following votes were cast:
1) Approval of the adoption of the Peoples Financial
Corporation 1997 Stock Option and Incentive Plan.
For: 1,084,579 Against: 98,519 Abstain: 825
2) Approval of the adoption of the Peoples Financial
Corporation Recognition and Retention Plan and Trust
Agreement.
For: 1,033,644 Against: 148,254 Abstain: 2,025
3) Approval of the selection of Grant Thornton LLP as
independent auditors of PFC for the year ending
September 30, 1997.
For: 1,340,150 Against: 23,692 Abstain: 11,024
ITEM 5. Other Materially Important Events
Not applicable
Page 18 of 20 Pages
<PAGE>
PART II (Continued)
PEOPLES FINANCIAL CORPORATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (Incorporated by reference to
Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1 filed by Peoples Financial
Corporation ("PFC") with the Securities and Exchange
Commission on June 28, 1996 (the "S-1"), Exhibit 3.1).
3.2 Code of Regulations (Incorporated by reference to
Exhibit 3.2 of the S-1).
10.1 Peoples Financial Corporation 1997 Stock Option and
Incentive Plan (Incorporated by reference to Proxy
Statement for 1997 Annual Meeting of Shareholders of
PFC, Exhibit A).
10.2 Peoples Financial Corporation Recognition and Retention
Plan and Trust Agreement (Incorporated by reference to
Proxy Statement for 1997 Annual Meeting of Shareholders
of PFC, Exhibit B).
27 Financial data schedule for the six months ended March
31, 1997.
99 Safe Harbor under the Private Securities Litigation
Reform Act of 1995.
(b) Reports on Form 8-K
Not applicable
Page 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 8, 1997 By: /s/ Paul von Gunten
_______________________________________
Paul von Gunten, President and
Chief Executive Officer
Date: May 8, 1997 By: /s/ James R. Rinehart
_______________________________________
James R. Rinehart, Treasurer
Page 20 of 20 Pages
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 245
<INT-BEARING-DEPOSITS> 6,113
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,783
<INVESTMENTS-CARRYING> 9,751
<INVESTMENTS-MARKET> 9,938
<LOANS> 48,047
<ALLOWANCE> 199
<TOTAL-ASSETS> 89,687
<DEPOSITS> 64,632
<SHORT-TERM> 0
<LIABILITIES-OTHER> 927
<LONG-TERM> 0
0
0
<COMMON> 14,203
<OTHER-SE> 9,925
<TOTAL-LIABILITIES-AND-EQUITY> 89,687
<INTEREST-LOAN> 1,881
<INTEREST-INVEST> 1,025
<INTEREST-OTHER> 205
<INTEREST-TOTAL> 3,111
<INTEREST-DEPOSIT> 1,539
<INTEREST-EXPENSE> 1,539
<INTEREST-INCOME-NET> 1,572
<LOAN-LOSSES> 6
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 925
<INCOME-PRETAX> 662
<INCOME-PRE-EXTRAORDINARY> 439
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 439
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
<YIELD-ACTUAL> 3.62
<LOANS-NON> 33
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 193
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 199
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 199
</TABLE>
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 Annual Report on Form 10-KSB for fiscal year
1996 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.
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.
<PAGE>
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.
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.
