U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
Commission file number 33-88802
--------
PEOPLES FINANCIAL CORP., INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 25-1469914
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Ford Street and Fourth Avenue, Ford City, PA 16226
--------------------------------------------------
(Address of principal executive offices)
(724) 763-1221
---------------------------
(Issuer's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) 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 XX No __
----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable dates: August 1, 1999
--------------
As of August 1, 1999, there were 1,768,694 shares of the Registrant's
common stock, $0.30 par value, outstanding.
<PAGE>
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets -
June 30, 1999 (unaudited), December 31, 1998 and June 30, 1998 (unaudited .............. 1
Consolidated Statements of Income -
Six months ended June 30, 1999 and 1998 (unaudited) .................................... 2
Consolidated Statements of Income -
Three months ended June 30, 1999 and 1998 (unaudited) .................................. 3
Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998 (unaudited) .................................... 4
Notes to Consolidated Financial Statements ............................................. 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation ........................................... 6
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk .............................. 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ...................................................................... 15
ITEM 2. Changes in Securities .................................................................. 15
ITEM 3. Defaults Upon Senior Securities ........................................................ 15
ITEM 4. Submission of Matters to a Vote of Security Holders .................................... 15
ITEM 5. Other Information ...................................................................... 15
ITEM 6. Exhibits and Reports on Form 8-K ....................................................... 15
SIGNATURES ...................................................................................... 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1999 December 31 1998
ASSETS (Unaudited) 1998 (Unaudited)
------------ ------------- ------------
<S> <C> <C> <C>
Cash and due from banks $ 12,675,588 $ 13,010,077 $ 10,650,978
Federal funds sold 9,150,000 1,900,000 4,800,000
Available-for-sale securities 33,572,947 37,361,888 40,365,087
Held-to-maturity securities 32,068,118 32,628,821 31,002,129
Federal Home Loan Bank stock, at cost 1,101,000 841,500 841,500
Loans receivable, net 187,284,819 174,704,201 161,643,384
Premises and equipment, net 3,172,800 3,331,643 3,234,893
Other assets 3,155,596 2,224,143 2,527,616
------------ ------------- ------------
Total Assets $282,180,868 $ 266,002,273 $255,065,587
============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 27,041,958 $ 26,205,654 $ 25,154,269
Interest bearing 203,874,257 187,153,692 176,619,266
------------ ------------- ------------
Total deposits 230,916,215 213,359,346 201,773,535
Accrued interest and other liabilities 11,212,271 12,068,806 13,232,776
------------ ------------- ------------
Total Liabilities 243,128,486 225,428,152 215,006,311
STOCKHOLDERS' EQUITY
Common stock, par value 530,608 530,608 529,300
Surplus 3,750,044 3,750,044 3,668,006
Retained earnings 20,666,178 18,808,764 16,479,429
Accumulated other comprehensive income 15,105,552 17,484,705 19,382,541
------------ ------------- ------------
Total stockholders' equity 40,574,121 40,059,276
40,052,382
------------ ------------- ------------
Total Liabilities and Stockholders Equity $ 282,180,868 $ 266,002,273 $ 255,065,587
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
Interest Income 1999 1998
---------- ----------
<S> <C> <C>
Loans $7,282,465 $6,791,423
Investment securities 1,454,295 1,476,686
Interest-bearing deposits 136,974 114,937
Federal funds sold 203,124 89,977
---------- ----------
Total interest income 9,076,858 8,473,023
Interest Expense
Deposits 4,582,209 4,076,295
---------- ----------
Net Interest Income 4,494,649 4,396,728
Provision for Loan Losses 90,000 80,000
---------- ----------
Net Interest Income after Provision for Loan Losses 4,404,649 4,316,728
Other Income
Service fees 269,373 305,027
Net investment gains 1,623,111 376,544
Other 25,897 26,580
---------- ----------
1,918,381 708,151
Other Expenses
Salaries 919,680 980,215
Pension and other employee benefits 452,551 448,624
Occupancy expense 553,931 527,126
Legal and professional 75,452 96,633
Regulatory fees 29,121 28,095
Data processing 95,691 90,620
Other 886,925 793,887
---------- ----------
3,013,351 2,965,200
Income Before Income Taxes 3,309,679 2,059,679
Provision for Income Taxes 992,424 517,883
---------- ----------
Net Income $2,317,255 $1,541,796
========== ==========
Net Income per Share of Common Stock $ 1.31 $ 0.87
========== ==========
Net Income per Share of Common Stock (fully diluted) $ 1.31 $ 0.87
========== ==========
Weighted Average Shares Used in Computing Net Income
per Share of Common Stock (1) 1,768,694 1,764,336
========== ==========
</TABLE>
(1) Adjusted to reflect retroactive treatment of 100% stock dividend in the form
of a 2 for 1 stock split.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------
Interest Income 1999 1998
---------- ----------
<S> <C> <C>
Loans $3,707,883 $3,446,399
Investment securities 697,213 761,022
Interest-bearing deposits 108,898 82,272
Federal funds sold 110,843 17,451
---------- ----------
Total interest income 4,624,837 4,307,144
Interest Expense
Deposits 2,341,347 2,069,387
---------- ----------
Net Interest Income 2,283,490 2,237,757
Provision for Loan Losses 30,000 50,000
---------- ----------
Net Interest Income after Provision for Loan Losses 2,253,490 2,187,757
Other Income
Service fees 139,491 144,817
Net investment gains 7,904 140,332
Other 9,709 18,971
---------- ----------
157,104 304,120
Other Expenses
Salaries 458,762 454,941
Pension and other employee benefits 225,040 239,276
Occupancy expense 281,993 257,285
Legal and professional 34,347 40,460
Regulatory fees 14,583 14,350
Data processing 47,638 47,063
Other 491,702 414,068
---------- ----------
1,554,065 1,467,443
Income Before Income Taxes 856,529 1,024,434
Provision for Income Taxes 221,782 251,558
---------- ----------
Net Income $ 634,747 $ 772,876
========== ==========
Net Income per Share of Common Stock $ 0.36 $ 0.44
========== ==========
Net Income per Share of Common Stock (fully diluted) $ 0.36 $ 0.44
========== ==========
Weighted Average Shares Used in Computing Net Income
per Share of Common Stock (1) 1,768,694 1,764,336
========== ==========
</TABLE>
(1) Adjusted to reflect retroactive treatment of 100% stock dividend in the form
of a 2 for 1 stock split.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998
----------- -----------
<S> <C> <C>
Net Income $ 2,317,255 $1,541,796
Adjustments to reconcile net cash from operating activities:
Depreciation and amortization 313,441 277,938
Net accretion/amortization of
premiums and discounts 11,500 (6,798)
Provision for loan losses 90,000 80,000
Loss on sale / disposal of assets 93,399 3,612
Reinvestment of stock dividends (52,854) (12,811)
Increase (decrease) in cash due to changes in assets and liabilities:
Other assets (729,964) (147,803)
Accrued interest and other liabilities 161,922 (80,037)
----------- -----------
Net Cash From Operating Activities 2,204,699 1,655,897
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 132,632 33,463
Proceeds from maturities of securities held to maturity 6,680,000 9,745,262
Purchase of securities held to maturity (6,113,220) (8,328,138)
Purchase of FHLB stock (259,500) (101,300)
Net loans made to customers (12,683,867) (9,347,591)
Purchases of Premises and equipment (145,196) (56,764)
----------- -----------
Net Cash Used By Investing Activities (12,389,151) (8,055,068)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 17,559,823 11,212,698
Dividends paid (459,860) (441,084)
----------- -----------
Net Cash From Financing Activities 17,099,963 10,771,614
----------- -----------
Net Change in Cash and Cash Equivalents 6,915,511 4,372,443
Cash and Cash Equivalents at Beginning of Period 14,910,077 11,078,535
----------- -----------
Cash and Cash Equivalents at End of Period $21,825,588 $15,450,978
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include Peoples
Financial Corp., Inc., (the Corporation) and its wholly owned subsidiary, PFC
Bank (the Bank), and have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions to
Form 10-Q. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the Corporations consolidated
year-end financial statements, including notes thereto, which are included in
the Corporations 1998 Annual Report on Form 10-K. In the opinion of the
Corporation, the unaudited consolidated interim financial statements contain all
significant adjustments necessary to present fairly the financial position as of
June 30, 1999, the results of operation for the three and six months ended June
30, 1999 and 1998, and cash flows for the six months ended June 30, 1999 and
1998.
NOTE B - EARNINGS PER SHARE
Shares used in the earnings per share computation are the weighted average
number of shares outstanding during the periods in question. All share and per
share data has been adjusted for the 100% stock dividend in the form of a
two-for-one stock split approved by the Board of Directors for all shareholders
of record January 20, 1999, paid February 10, 1999.
NOTE C - RECLASSIFICATIONS
Certain previously reported items have been reclassified to conform to the
current year's classifications. Specifically, the Company discloses certain
non-income statement changes to equity balances under the classification of
"Accumulated Other Comprehensive Income" in accordance with Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
The reclassifications have no effect on total assets, total liabilities and
stockholders' equity, or net income.
<PAGE>
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
For the six months ended June 30, 1999, the Corporation's total assets increased
over December 31, 1998 by $16.2 million resulting primarily from increases of
approximately $12.6 million in net loans, $6.9 million in liquid assets such as
cash and due from banks and federal funds sold, and $0.9 million in other
assets. These increases are offset by a decrease in investments of over $4.3
million. The Corporation's total assets increased over June 30, 1998 by $27.1
million resulting from increases of $25.6 million in net loans and $6.4 million
in cash and due from bank and federal funds sold offset by a decrease in
investments of $5.7 million.
The increase in total liabilities of approximately $16.7 million from December
31, 1998 to June 30, 1999 is attributable to an increase in deposits of $17.6
million offset by a decrease in other liabilities of $0.9 million. The increase
in total liabilities of $27.1 million from June 30, 1998 to June 30, 1999 is
primarily attributable to an increase in deposits of $29.1 million offset by a
decrease in other liabilities of $2.0 million.
As of June 30, 1999, PFC Bank, the Corporation's wholly owned subsidiary, had a
ratio of non-performing loans to total loans of 0.15% as compared to a ratio of
0.30% as of December 31, 1998 and 0.26% at June 30, 1998. Non-performing loan
totals at June 30, 1999 were $290,000 that were delinquent more than 90 days or
held on non-accrual status as compared to $527,000 and $662,000 at December 31,
1998 and June 30, 1998, respectively. At June 30, 1999, the allowance for
possible loan losses was $1,323,000, which represented 0.71% of net loans as
compared to 0.70% at December 31, 1998 and 0.69% at June 30, 1998.
Non-performing loans totaled 7.86% of the allowance for possible loan losses, as
compared to 7.51% at December 31, 1998 and 16.22% at June 30, 1998.
In management's opinion, the allowance for possible loan losses at June 30, 1999
is adequate to absorb future loan losses based on information presently known.
Management cannot assure, however, that additions to the allowance will not be
required in the future to cover losses that are presently unforeseen.
<PAGE>
RESULTS OF OPERATIONS
Net Income
For the six-month period ended June 30, 1999, the Corporation recognized net
income of $2.3 million, an increase of $775,000 over the same period in the
prior year. Much of this increase is attributable to capital gains taken from
the sale of available-for-sale securities. Net income for the three-month period
ended June 30, 1999 totaled $635,000, a decrease of $138,000 compared with the
three-months ended June 30, 1998. This decrease was primarily attributable to a
decrease in capital gains taken from the sale of available-for-sale securities.
The operating results of the Corporation are largely dependent upon the net
income generated by its subsidiary, PFC Bank. PFC Bank has the benefit of a
substantially appreciated available-for-sale investment portfolio, the strategic
liquidation of portions of which enable the Corporation to absorb the negative
effects of interest rate fluctuation and still maintain profitable operations.
Net Interest Income
Interest income for the six-month period ended June 30, 1999 was $9.1 million,
an increase of $604,000 from the six-month period ended June 31, 1998. This
increase is primarily attributed to a $491,000 increase in interest on the loan
portfolio in addition to an increase of $113,000 in interest on federal funds
sold. Interest expense for the six-month period ended June 30, 1999 was
approximately $4.6 million, a $506,000 increase over the same six-month period
ended June 30, 1998. Management attributes this increase primarily to the $27.3
million increase in interest bearing deposits since June 30, 1998. For the
three-month period ended June 30, 1999, interest income was $4.6 million, a
$318,000 increase as compared to the three-month period ended June 30, 1998.
This increase is due to an increase in interest on loans of $261,000. Interest
expense for the three-months ended June 30, 1999 of $2.3 million is an increase
over the same period in 1998 of $272,000 due to an increase in interest bearing
deposits.
Provision for Loan Losses
The provision for loan losses is based upon management's ongoing assessment of
the inherent risk of loss in the outstanding loan portfolio. Management's risk
assessment is based on the evaluation of individual loans, past loss experience,
current economic conditions, and other relevant factors. While management uses
the best information available to make such evaluations, future adjustments to
the allowance for possible loan losses may be necessary. PFC Bank continues to
monitor its loan portfolio on a regular basis and will make additions to its
allowance based on its determination of the necessary level of the allowance.
For the six-month period ended June 30, 1999, PFC Bank recorded $90,000 to the
provision for loan losses as compared to $80,000 for the same period in the
previous year. Net charge-offs for the six month period ended June 30, 1999
amounted to $4,800 as compared to $206,000 for the six-month period ended June
30, 1998. For the three-month period ended June 30, 1999, PFC Bank recorded
$30,000 to the provision for loan losses as compared to $50,000 for the same
period in the previous year. Net charge-offs for the three-month period ended
June 30, 1999 amounted to $200 as compared to $172,000 for the three-month
period ended June 30, 1998.
<PAGE>
Activity in the allowance for loan losses was as follows:
Six-Months Ended Year Ended
June 30, 1999 December 31, 1998
----------------- -----------------
Balance, beginning of period $1,238 $1,249
Provision 90 200
Charge-offs (27) (246)
Recoveries 22 35
------ ------
Balance, end of period $1,323 $1,238
====== ======
Other Income
Other income for the six-month period ended June 30, 1999 was approximately $1.9
million, an increase of over $1.2 million over the six-month period ended June
30, 1998. This increase is primarily attributable to capital gains from the sale
of available-for-sale securities of $1.6 million for the six-month period ended
June 30, 1999 as compared with capital gains of $377,000 for the same period of
1998. These net gains were primarily the result of the liquidation of a portion
of PFC Bank's stock portfolio. The gains were offset by a decrease of $36,000,
attributable to a decrease in fees and commissions. Other income for the
three-month period ended June 30, 1999 was $157,000, a decrease of $147,000 as
compared to the same period in 1998. This decrease was due to a $132,000
decrease in capital gains from the sale of available-for-sale securities and a
$5,000 decrease in fees and commissions.
Other Expenses
Total other expenses increased $48,000 for the six-month period ended June 30,
1999 when compared to the same period in the prior year. This increase was the
result of increases in various miscellaneous operating expenses of $78,000 and
occupancy expense of $27,000, offsetting a decrease in salaries and employee
benefits of $57,000. Other expenses for the three-months ended June 30, 1999 of
$1.6 million increased $87,000 over the three-month period ended June 30, 1998.
This increase was the result of increases in occupancy expense of $25,000 and
miscellaneous operating expenses of $78,000 partially offset by decreases in
salaries and employee benefits of $10,000 and legal and professional expenses of
$6,000.
Maintaining a focus on operating cost control has become increasingly important
and the Corporation has succeeded in maintaining a relatively stable overhead
burden.
<PAGE>
Provision for Income Taxes
The Corporation incurred a provision for income taxes of $992,000 for the
six-month period ended June 30, 1999, as compared to $518,000 for the same
period ended June 30, 1998. During the three-month period ended June 30, 1999,
the Corporation incurred a provision for income taxes of $222,000 as compared to
$252,000 for the same period the previous year. State tax liabilities are
incurred both by PFC Bank, in the form of Pennsylvania Bank Shares tax, and by
the Corporation, as a separate entity.
Liquidity
Liquidity is the availability of funds to meet the daily requirements of the
business. For financial institutions, demand for funds comes principally from
extensions of credit and withdrawal of deposits. Liquidity is provided by asset
maturities, sales of investment securities, deposit growth or short-term
borrowings. Liquidity measures are formally reviewed by management monthly, and
they continue to show adequate liquidity in all areas of the organization.
Capital Adequacy
PFC Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Quantitative measures established by regulation to
ensure capital adequacy require the Bank to maintain minimum amounts and ratios
of total capital and Tier I capital to risk-weighted assets and leverage ratio.
Equity and risk-based capital ratios for the Bank exceed these minimums ratios
and are as follows:
June 30 December 31 June 30
1999 1998 1998
------- ----------- -------
Leverage Ratio 9.54% 9.48% 9.07%
Risk-Based Capital 21.18% 20.91% 13.28%
Tier I Capital 14.36% 13.18% 12.59%
<PAGE>
Regulatory Activity
In recent years, Pennsylvania enacted a law to permit state chartered banking
institutions to sell insurance. This follows a U.S. Supreme Court decision in
favor of nationwide insurance sales by banks. The decision also bars states from
blocking insurance sales by national banks in towns with populations of no more
than 5,000. PFC Bank does not currently have plans to enter the insurance field
but continue to review this option.
Congress is currently considering legislative reforms to modernize the financial
services industry, including repealing the Glass Steagall Act, which prohibits
commercial banks from engaging in the securities industry. Consequently, equity
underwriting activities of banks may increase in the near future. However, the
Corporation does not currently anticipate entering into these activities.
Management estimates that changes in PFC Bank's FDIC assessment rate, resulting
from the enactment of the Deposit Insurance Funds Act of 1996, will adversely
impact the results of operations net of income taxes. Prior to this enactment,
PFC Bank was not required to pay any FDIC assessment. Although the Bank is in
the minimum assessment bracket, income will be impacted in the amount of $25,500
for the year ended December 31, 1999. The act also provides regulatory relief to
the financial services industry relative to environmental risks, frequency of
examinations, and simplification of forms and disclosures.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulation of, and restrictions on, the
business of the Corporation and of PFC Bank. Management cannot predict whether
such legislation will be adopted or, if adopted, how such legislation would
affect the business of the Corporation and PFC Bank. As a consequence of the
extensive regulation of commercial banking activities in the United States, the
Corporation's and PFC Bank's business is particularly susceptible to federal
legislation and regulations that may increase the costs of doing business.
Except as specifically described above, Management believes that the affect of
the provisions of the aforementioned legislation on liquidity, capital
resources, and results of operation of the Corporation will be immaterial.
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation, which, if they were implemented,
would have a material adverse effect upon liquidity, capital resources, or
results of operation, although the general cost of compliance with the numerous
and multiple federal and state laws and regulations does have, and in the future
may have, a negative impact on the Corporation's results of operations.
Further, the business of the Corporation is also affected by the state of the
financial services industry in general. As a result of legal and industry
changes, Management expects the industry will continue to experience an increase
in consolidations and mergers as the financial services industry strives for
greater cost efficiencies and market share. Management also expects increased
diversification of financial products and services offered by the Bank and its
competitors. Management believes that such consolidations and mergers, and
diversification of products and services may enhance PFC Bank's competitive
position as a community bank.
<PAGE>
Forward-Looking Statements
From time to time, the Corporation may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Corporation notes that a variety of
factors could cause the Corporation's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Corporation's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Corporation's
business include the following: general economic conditions, including their
impact on capital expenditures; business conditions in the banking industry; the
regulatory environment; rapidly changing technology and evolving banking
industry standards; competitive factors, including increased competition with
community, regional and national financial institutions; new service and product
offerings by competitors and price pressures; the inability of the Corporation
to accurately estimate the cost of systems preparation for Year 2000 compliance;
and similar items.
Year 2000 Issues
The following section contains forward-looking statements which involve risks
and uncertainties. The actual impact on the Corporation of the Year 2000 issue
could materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
The "Year 2000 Problem" (Y2K) arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of the familiar
"19". If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. This could cause entire system
failures, miscalculations, and disruptions of normal business operations
including, among other things, a temporary inability to process transactions,
send statements, or engage in similar day to day business activities. The extent
of the potential impact of the Year 2000 Problem is not yet known, and if not
timely corrected, it could affect the global economy.
The Bank is subject to the regulation and oversight of various banking
regulators, whose oversight includes the provision of specific timetables,
programs and guidance regarding Year 2000 issues. Regulatory examination of the
Bank's Year 2000 programs are conducted periodically and reports are submitted
by the Bank to the banking regulators on request. In addition, reports are
currently submitted on a monthly basis to the Corporation's Board of Directors.
<PAGE>
Corporation's State of Year 2000 Readiness
The Board of Directors is committed to ensuring that the Corporation's daily
operations suffer little or no impact from the century date change. The
Corporation has applied due diligence throughout the Y2K process, following the
guidelines contained in the series of Federal Financial Institutions
Examinations Council's Interagency Guidelines. The guidelines identify the
following phases: awareness, assessment, renovation or remediation, testing or
validation and implementation.
Based on an ongoing assessment, the Corporation has determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly use dates beyond December 31, 1999. The Corporation
presently believes that as a result of modifications to existing software and
hardware and conversions to new software, the Year 2000 Problem has been
mitigated.
Management has initiated an enterprise-wide program to prepare the Corporation's
computer systems and applications for the Year 2000. The Corporation has
developed a comprehensive inventory of all mainframe and PC based applications,
third-party relationships, environmental systems, proprietary programs and
non-computer related systems (such as postage meters and fax machines). This
assessment identified 60 systems, processes or proprietary programs, which could
be impacted by the century date change. As of June 30, 1999, the Corporation has
remedied all 60 or 100% of the programs.
The Corporation has acquired its mission-critical system which supports the
Corporation's core business processes from a highly regarded third-party vendor.
Thus, even though the Corporation does not have direct control over the
renovation process, it is monitoring the progress of its third-party vendors to
assess the status of their Y2K readiness efforts. The Corporation tested these
systems in May 1998 and May 1999. However, because most computer systems are, by
their very nature, interdependent, it is possible that noncompliant third-party
computers could impact the Corporation's computer systems. The Corporation could
be adversely affected by the Y2K problem if it or unrelated parties fail to
successfully address the problem. The Corporation has taken steps to communicate
with the unrelated parties with whom it deals to coordinate Year 2000
compliance. Additionally, the Corporation is dependent on external suppliers,
such as, wire transfer systems, telephone systems, electric companies, and other
utility companies for continuation of service. The Corporation is also assessing
the impact, if any, the century date change may have on its credit risk.
<PAGE>
The Corporation has initiated communications with all of its significant
vendors, suppliers and large commercial customers to determine the extent to
which the Corporation is vulnerable to those third-parties' failure to remedy
their own Year 2000 Problems. In the event that any of the Corporation's
significant vendors, suppliers and large commercial customers do not
successfully achieve Year 2000 compliance in a timely manner, the Corporation's
business or operations could be adversely affected. For significant vendors, the
Corporation verified that they were Year 2000 compliant by May 31, 1999. For
insignificant vendors, the Corporation will not necessarily validate that they
are Year 2000 compliant. However, for any insignificant vendor who responded
that they were not compliant by May 31, 1999, the Corporation is seeking a new
vendor or system that is compliant.
The Year 2000 Issue also affects certain of the Bank's customers, particularly
in the areas of access to funds and additional expenditures to achieve
compliance. The Bank has engaged in a program of contacting its commercial
customers regarding the customers' awareness of the Year 2000 Issue. The
Corporation cannot guarantee that the inability of loan customers to adequately
correct the Year 2000 Issue will not have an adverse effect on the Corporation.
For large commercial loan customers, the Bank will take appropriate action based
upon their level of readiness for Year 2000. Nevertheless, the Company does not
believe that the cost of addressing the Y2K issues will be a material event or
uncertainty that would cause reported financial information not to be
necessarily indicative of future operating results or financial conditions, nor
does it believe that the costs or the consequences of incomplete or untimely
resolution of its Year 2000 issues represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition.
Costs of Year 2000 Solutions
The Corporation will use both internal and external resources to reprogram, or
replace, and test its software and hardware for Year 2000 modifications.
Concurrent with the Year 2000 project, the Corporation will also be converting
all its major date processing systems, both hardware and software, to current
technology. The Corporation completed both the Year 2000 and systems conversion
projects May 31, 1999, for all critical systems.
Management expects to spend a total of $135,000 for the entire project. As of
June 30, 1999, $35,000 has been expended as Year 2000 costs while $88,000 is
attributable to the purchase of new software which will be capitalized. The
remaining $12,000 will be expensed as incurred over the next six months. The
estimated Year 2000 project costs include the costs and time associated with the
impact of third-parties' Year 2000 issues, and are based on presently available
information. The total cost of the project is being funded through operating
cash flows. The Corporation continues to evaluate appropriate courses of
corrective action, including replacement of certain systems whose associated
costs would be recorded as assets and amortized. Accordingly, the Corporation
does not expect the amount required to be expensed over the next six months to
have a material effect on the financial position or results of operations.
However, if compliance is not achieved in a timely manner by any of the
Corporations' significant related third-parties, be it a supplier of services or
<PAGE>
customer, the Y2K issue could possibly have a material effect on the
Corporation's operations and financial position.
The cost of the projects and the date on which the Corporation plans to complete
both Year 2000 modifications and systems conversions are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
Risks of Year 2000 Issues
At present, management believes it's progress in remedying the Corporation's
systems, programs and applications and installing Y2K compliant upgrades is on
target. The Y2K computer problem creates risk for the Corporation from
unforeseen problems in its own computer systems and from third-party vendors who
provide the majority of mainframe and PC based computer applications. Failure of
third-party systems relative to the Y2K issue could have a material impact on
the Corporation's ability to conduct business.
Year 2000 Contingency Plans
The Corporation is in the process of working up contingency plans and assessing
the potential adverse risks to the Corporation. The Corporation's contingency
plans involve the use of manual labor to compensate for the loss of certain
automated computer systems and inconveniences caused by disruption in command
systems.
A business resumption contingency plan was developed for mission-critical and
required mainframe and PC based applications, third-party relationships,
proprietary programs and non-computer related systems. This contingency plan
identifies scheduled completion dates, test dates and "trigger" dates. A trigger
date is the date the Corporation would implement the contingency plan. The plan
was ratified by the Board of Directors on October 21, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's interest rate risk position
since December 31, 1998. Other types of market risk, such as foreign currency
exchange rate risk and commodity price risk, do not arise in the normal course
of the Company's business activities.
<PAGE>
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
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
There was no submission of matters brought to a vote of security holders in the
second quarter of 1999.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i) Registrant's Articles of Incorporation.
(Incorporated by reference in Registrant's January 27, 1995,
filing of Form S-4).
3(ii) Registrant's By-Laws.
(Incorporated by reference in Registrant's January 27, 1995,
filing of Form S-4).
10(i) Agreement between R.B. Robertson and Bank.
(Incorporated by Reference in the Registrant's September 30,
1997 filing of Form 10-QSB).
10(ii) Settlement Agreement.
(Incorporated by Reference in the Registrant's December 31,
1996 filing of Form 10-KSB).
<PAGE>
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
PART II. OTHER INFORMATION (cont.)
ITEM 6. Exhibits and Reports on Form 8-K (cont.)
10)(iii) General Release
(Incorporated by Reference in the Registrant's December 31,
1996 filing of Form 10-KSB).
11 Statement re: Computation of Earnings Per Share.
(included herein at Part I, Item 1, Page 2 and Page 3 of
this Form 10-Q).
12 Statement re: Computation of Ratios.
(included herein at Part 1, Item 2, Page 9 of this Form
10-Q).
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did note file any current reports on Form 8-K
during the quarter ended June 30, 1999.
<PAGE>
SIGNATURES
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.
Dated: August 5, 1999
---------------
PEOPLES FINANCIAL CORP., INC.
(Registrant)
- -----------------------------------
R.B. Robertson
President & Chief Executive Officer
- ------------------------------------------
James L. Kifer
Executive Vice President & Asst. Secretary
<PAGE>
EXHIBIT INDEX
PAGE NO.
IN MANUALLY
SIGNED
EXHIBIT NO.
ORIGINAL
(a) The following Exhibits are files herewith or incorporated by reference
as a part of this Annual Report.
3(i) Registrant's Articles of Incorporation. (Incorporated by
reference in Registrant's January 27, 1995 filing of Form
S-4).
3(ii) Registrant's By-Laws.
(Incorporated by reference in Registrant's January 27, 1995
filing of Form S-4).
10(i) Agreement between R.B. Robertson and Bank.
(Incorporated by Reference in the Registrant's September 30,
1997 filing of Form 10-QSB).
10(ii) Settlement Agreement.
(Incorporated by Reference in the Registrant's December 31,
1996 filing of Form 10-KSB).
10(iii) General Release
(Incorporated by Reference in the Registrant's December 31,
1996 filing of Form 10-KSB).
11 Statement re: Computation of Earnings Per Share.
(included herein at Part I, Item 1, Page 2 and Page 3 of this
Form 10-Q).
12 Statement re: Computation of Ratios.
(included herein at Part 1, Item 2, Page 9 of this Form
10-Q).
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S.$
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1,000
<CASH> 5,467
<INT-BEARING-DEPOSITS> 7,209
<FED-FUNDS-SOLD> 9,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,068
<INVESTMENTS-CARRYING> 32,230
<INVESTMENTS-MARKET> 34,674
<LOANS> 188,608
<ALLOWANCE> 1,323
<TOTAL-ASSETS> 282,181
<DEPOSITS> 230,916
<SHORT-TERM> 0
<LIABILITIES-OTHER> 11,213
<LONG-TERM> 0
0
0
<COMMON> 531
<OTHER-SE> 39,521
<TOTAL-LIABILITIES-AND-EQUITY> 282,181
<INTEREST-LOAN> 7,282
<INTEREST-INVEST> 1,795
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 9,077
<INTEREST-DEPOSIT> 4,582
<INTEREST-EXPENSE> 4,582
<INTEREST-INCOME-NET> 4,495
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 1,623
<EXPENSE-OTHER> 3,013
<INCOME-PRETAX> 3,310
<INCOME-PRE-EXTRAORDINARY> 3,310
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,317
<EPS-BASIC> 1.31
<EPS-DILUTED> 1.31
<YIELD-ACTUAL> 7.50
<LOANS-NON> 104
<LOANS-PAST> 186
<LOANS-TROUBLED> 128
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,238
<CHARGE-OFFS> 27
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 1,323
<ALLOWANCE-DOMESTIC> 1,323
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
