SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________TO_____________
COMMISSION FILE NUMBER 33-88802
PEOPLES FINANCIAL CORP., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 25-1469914
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
323 FORD STREET, FORD CITY, PA 16226
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(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (814) 275-3133
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value of $0.30 per share None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceeding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
Form 10-K. [X]
The Issuer's revenues for the year ended December 31, 1998, were: $20,982,293.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: $36,782,980 on March 1, 1999
Indicate the number of shares outstanding of the registrant's common stock, as
of March 1, 1999: Peoples Financial Corp., Inc. Common Stock, par value $0.30
per share: 1,768,694 shares
DOCUMENTS INCORPORATED BY REFERENCE
Excerpts from the following documents have been incorporated by reference in
answer or partial answer to certain Items required herein and are attached
hereto as Exhibits:
1) Annual Report to Shareholders, Part I - II.
2) Proxy Statement pursuant to Regulation 14A promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, Part III.
<PAGE>
DESCRIPTION OF PEOPLES FINANCIAL CORP, INC. AND PFC BANK
Part I
ITEM 1 - DESCRIPTION OF BUSINESS
Peoples Financial Corp, Inc., ("PFC", "Corporation" or the "Company") is a
Pennsylvania business corporation, incorporated in June, 1984. PFC was organized
as a holding company for Peoples Bank of PA. Peoples Bank of PA, in turn owned
approximately 53% of New Bethlehem Bank common stock. Effective April 1, 1995,
New Bethlehem merged with and into Peoples and changed its name to PFC Bank (the
"Bank").
The Bank is a Pennsylvania-chartered banking institution and, as successor to
Peoples and New Bethlehem, traces its origins to 1914 and 1895, respectively.
PFC Bank offers a full range of banking services through seven banking offices
in Pennsylvania, two of which are located in Ford City, two in New Bethlehem,
one in each of Clarion and Indiana, and the seventh banking office opened in
Butler, Pennsylvania, in September 1998, as a full service branch. As of
December 31, 1998, the Bank had total assets of $266.0 million and stockholders'
equity of $40.6 million. All of PFC Bank's outstanding common stock is owned by
PFC.
PFC Service Corporation (the "Service Corp") is a Delaware corporation and a
wholly owned subsidiary of the Bank. The Service Corp was incorporated in
Delaware, on May 16, 1997. The primary purpose of the Service Corp is to buy and
sell equity securities, primarily Pennsylvania bank securities. As of December
31, 1998, the Service Corp had total assets of $37.4 million and shareholder's
equity of $27.1 million.
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.
Employees
As of December 31, 1998, PFC, PFC Bank and PFC Service Corp. had 83 full-time
employees and 20 part-time employees.
<PAGE>
Competition
The Financial services industry in the Company's service area is extremely
competitive. The Company's competitors within its service area include
multi-bank holding companies, with resources substantially greater than those of
the Company. Many competitor financial institutions have legal lending limits
substantially higher than the Bank's legal lending limit. In addition, the Bank
competes with savings banks, savings and loan associations, credit unions, money
market and other mutual funds, mortgage companies, leasing companies, finance
companies, and other financial services companies that offer products and
services similar to those offered by the Bank on competitive terms. The Bank is
not dependent on one or a few major competitors.
In September 1994, federal legislation was enacted that is expected to have a
significant effect in restructuring the banking industry in the United States.
As a result, the Company expects the operating environment for
Pennsylvania-based financial institutions to become increasingly competitive.
Additionally, the manner in which banking institutions conduct their operations
may change materially as the activities increase in which bank holding companies
and their banking and nonbanking subsidiaries are permitted to engage, and
funding and investment alternatives continue to broaden, although the long-range
effects of these changes cannot be predicted with reasonable certainty at this
time. These changes probably will further narrow the differences and intensify
competition between and among commercial banks, thrift institutions, and other
financial service companies.
Supervision and Regulation of PFC and PFC Bank
PFC is subject to the provisions of the Bank Holding Company Act of 1956, and to
supervision by the Board of Governors of the Federal Reserve System. Under
Federal Reserve Board policy, PFC, as a holding company, is expected to act as a
source of financial strength to its subsidiaries and to commit resources to
support the subsidiaries. This support may be required at times when, absent
such Federal Reserve Board policy, PFC may not be in a position to provide it.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" (as defined
by regulations) with the terms of any capital restoration plan filed by such
subsidiary with its appropriate federal banking agency, up to specified limits.
Under the Bank Holding Company Act, the Federal Reserve Board has the authority
to require a bank holding company to terminate any activity or relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve Board's determination that such activity or control
constitutes a serious risk to the financial soundness and stability of any bank
subsidiary of the bank holding company.
The Bank Holding Company Act prohibits the Company from acquiring direct or
indirect control of more than 5% of the outstanding shares of any class of
voting stock or substantially all of the assets of any bank or merging or
consolidating with another bank holding company without prior approval of the
Federal Reserve Board. Such a transaction would also require approval of the
Pennsylvania Department of Banking. Pennsylvania law permits Pennsylvania bank
holding companies to control an unlimited number of banks.
Additionally, the Bank Holding Company Act prohibits the Company from engaging
in or from acquiring ownership or control of more than 5% of the outstanding
shares of any class of voting stock of any company engaged in a nonbanking
business unless such business is determined by the Federal Reserve Board to be
so closely related to banking as to be a proper incident thereto.
<PAGE>
As a bank holding company, PFC is prohibited from engaging in or acquiring
direct or indirect control of more than 5 percent of the voting shares of any
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
making this determination, the Federal Reserve Board considers whether the
performance of these activities by a bank holding company would offer benefits
to the public that outweigh possible adverse effects.
As a bank holding company, PFC is required to file reports with the Federal
Reserve Board and is subject to examinations thereby.
The activities that the Federal Reserve has determined by regulation to be
permissible are:
(1) making, acquiring, or servicing loans or other extensions of
credit for its own account or for the account of others;
(2) operating an industrial bank, Morris Plan bank, or industrial
loan company, in the manner authorized by state law, so long as
the institution is not a bank;
(3) operating as a trust company in the manner authorized by
federal or state law so long as the institution is not a bank
and does not make loans or investments or accept deposits,
except as may be permitted by the Federal Reserve Board;
(4) subject to limitations, acting as an investment or financial
advisor (i) to a mortgage or real estate investment trust, (ii)
to certain registered investment companies, (iii) by providing
portfolio investment advice to other persons, (iv) by
furnishing general economic information and advice, general
economic statistical forecasting services, and industry
studies, (v) by providing financial advice to state and local
governments, or (vi) by providing financial and transaction
advice to corporations, institutions, and certain persons in
connection with mergers, acquisitions, and other financial
transactions;
(5) subject to limitations, leasing real or personal property or
acting as agent, broker, or adviser in leasing such property in
accordance with prescribed conditions;
(6) investing in corporations or projects designed primarily to
promote community welfare;
(7) providing to others data processing services and data
transmission services, data bases, and facilities, within
certain limitations;
(8) subject to limitations, engaging in certain agency and
underwriting activities with respect to credit insurance, and
certain other insurance activities as permitted by the Federal
Reserve Board;
(9) owning, controlling, or operating a savings association, if the
savings association engages only in deposit-taking activities
and lending and other activities that are permissible for bank
holding companies under Federal Reserve Board regulations;
(10) providing courier services for certain financial documents;
(11) subject to limitations, providing management consulting advice
to nonaffiliated bank and nonbank depository institutions;
<PAGE>
(12) retail selling of money orders and similar consumer-type
payment instruments having a face value of $1,000 or less,
selling U.S. Savings Bonds, and issuing and selling traveler's
checks;
(13) performing appraisals of real estate and personal property;
(14) subject to limitations, acting as intermediary for the
financing of commercial or industrial income-producing real
estate by arranging for the transfer of the title, control, and
risk of such a real estate project to one or more investors;
(15) providing certain securities brokerage services;
(16) subject to limitations, underwriting and dealing in government
obligations and certain other instruments;
(17) subject to limitations, providing foreign exchange and
transactional services;
(18) subject to limitations, acting as a futures commission merchant
for nonaffiliated persons;
(19) subject to limitations, providing investment advice on
financial futures and options to futures;
(20) subject to limitations, providing consumer financial
counseling;
(21) subject to limitations, tax planning and preparation;
(22) providing check guaranty services;
(23) subject to limitations, operating a collection agency; and,
(24) operating a credit bureau.
Federal Reserve Board approval may be required before the Company or its nonbank
subsidiaries may begin to engage in any such activity and before any such
business may be acquired.
PFC is a legal entity separate and distinct from the Bank. The Company's
revenues (on a parent Company only basis) result almost entirely from dividends
paid to the Company by its subsidiary. The right of the Company, and
consequently the right of creditors and shareholders of the Company, to
participate in any distribution of the assets or earnings of any subsidiary
through the payment of such dividends or otherwise is necessarily subject to the
prior claims of creditors of the subsidiary (including depositors, in the case
of the Bank), except to the extent that claims of the Company in its capacity as
a creditor may be recognized.
Federal and state laws regulate the payment of dividends by the Company's
subsidiaries.
Further, it is the policy of the Federal Reserve Board that bank holding
companies should pay dividends only out of current earnings. Federal banking
regulators also have the authority to prohibit banks and bank holding companies
from paying a dividend if they should deem such payment to be an unsafe or
unsound practice.
<PAGE>
Capital Adequacy
Bank holding companies are required to comply with the Federal Reserve Board's
risk-based capital guidelines. The required minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half (4%) of the total capital is
required to be "Tier 1 capital," consisting principally of common stockholders'
equity, noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock, and minority interests in the equity accounts of
consolidated subsidiaries, less certain intangible assets. The remainder ("Tier
2 capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock, and a limited amount of the general
loan loss allowance. In addition to the risk-based capital guidelines, the
Federal Reserve Board requires a bank holding company to maintain a minimum
"leverage ratio." This requires a minimum level of Tier 1 capital (as determined
under the risk-based capital rules) to average total consolidated assets of 3%
for those bank holding companies that have the highest regulatory examination
ratings and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies that have the highest regulatory
examination ratings and are not contemplating or experiencing significant growth
or expansion. All other bank holding companies are expected to maintain a ratio
of at least 1% to 2% above the stated minimum. Further, the Federal Reserve
Board has indicated that it will consider a "tangible Tier 1 capital leverage
ratio" (deducting all intangibles) and other indicia of capital strength in
evaluating proposals for expansion or new activities. The Federal Reserve Board
has not advised management of any specific minimum leverage ratio applicable to
PFC.
Pursuant to Federal Deposit Insurance Corporation Improvement Act, the federal
banking agencies have specified, by regulation, the levels at which an insured
institution is considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or critically
undercapitalized." Under these regulations, an institution is considered "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 risk-based capital ratio of 6% or greater, a leverage ratio of 5% or
greater, and is not subject to any order or written directive to meet and
maintain a specific capital level. PFC and PFC Bank, at December 31, 1998,
qualify as "well capitalized" under these regulatory standards.
PFC Bank is subject to supervision, regulation and examination by the
Commonwealth of Pennsylvania Department of Banking (the "Department of Banking")
and the Federal Deposit Insurance Corporation ("FDIC"). In addition, the Bank is
subject to a variety of local, state and federal laws that affect its operation.
The laws of the Department of Banking applicable to PFC Bank include, among
other things, provisions that:
o require the maintenance of certain reserves against deposits;
o limit the type and amount of loans that may be made and the interest that
may be charged thereon
o restrict investments and other activities; and,
o limit the payment of dividends. The amount of funds that the Bank may lend
to a single borrower is generally limited under Pennsylvania law to 15% of
the aggregate of its capital, surplus, undivided profits, loan loss
reserves and capital securities of the Bank, all as defined by statute and
regulation.
Applicable Pennsylvania law also requires that a bank obtain the approval of the
Department of Banking prior to effecting any merger where the surviving bank
would be a Pennsylvania-chartered bank. In reviewing merger applications,
consideration is given, among other things, to whether the merger would be
consistent with adequate and sound banking practices and in the public interest
on the basis of several factors, including the potential effect of the merger on
competition and the convenience and needs of the area primarily to be served by
the bank resulting from the merger.
<PAGE>
Applicable Pennsylvania law permits Pennsylvania-chartered banks to engage in
banking activity in other states (interstate banking) provided that such
activity is within a state that permits reciprocal privileges.
The FDIC, which has primary supervisory authority over the Bank, regularly
examines banks in such areas as reserves, loans, investments, management
practices, and other aspects of operations. These examinations are designed for
the protection of the Bank's depositors rather than the Company's stockholders.
The Bank must furnish annual and quarterly reports to the FDIC, which has the
authority under the Financial Institutions Supervisory Act to prevent a state
non-member bank from engaging in an unsafe or unsound practice in conducting its
business.
Federal and state banking laws and regulations govern, among other things, the
scope of a bank's business, the investments a bank may take, the reserves
against deposits a bank must maintain, the types and terms of loans a bank may
make and the collateral it may take, the activities of a bank with respect to
mergers and consolidations, and the establishment of branches. Pennsylvania law
permits statewide branching.
Under the Federal Deposit Insurance Act, as amended, the Bank is required to
obtain the prior approval of the FDIC for the payment of dividends if the total
of all dividends declared by the Bank in one year would exceed the Bank's net
profits (as defined and interpreted by regulation) for the current year plus its
retained net profits (as defined and interpreted by regulation) for the two
preceding years, less any required transfers to surplus. In addition, the Bank
may only pay dividends to the extent that its retained net profits (including
the portion transferred to surplus) exceed statutory bad debts (as defined by
regulation). Under Federal Deposit Insurance Corporation Improvement Act, any
depository institution, including the Bank, is prohibited from paying any
dividends, making other distributions or paying any management fees if, after
such payment, it would fail to satisfy its minimum capital requirements.
A subsidiary bank of a bank holding company, such as the Bank, is subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries, and
on taking such stock or securities as collateral for loans. The Federal Reserve
Act and Federal Reserve Board regulations also place certain limitations and
reporting requirements on extensions of credit by a bank to the principal
shareholders of its parent holding company, among others, and to related
interests of such principal shareholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming a principal
shareholder of a holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
The Bank, and the banking industry in general, are affected by the monetary and
fiscal policies of government agencies, including the Federal Reserve Board.
Through open market securities transactions and changes in its discount rate and
reserve requirements, the Board of Governors of the Federal Reserve exerts
considerable influence over the cost and availability of funds for lending and
investment.
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
<PAGE>
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 on a periodic basis.
Corporation's State of 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 can be
mitigated. However, if such modifications and conversions are not made, or are
not completed on a timely basis, the Year 2000 Problem could have a material
adverse impact on the operations of the Corporation.
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
noncomputer related systems (such as postage meters and fax machines). This
assessment identified 112 systems, processes or proprietary programs, which
could be impacted by the century date change. As of March 1, 1999, the
Corporation has remedied 110 or 98% of the programs, systems to be Year 2000
ready, with all systems expected to be ready/compliant by April 30, 1999.
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 and plans to retest their
systems for Y2K compliance in 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.
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. The Y2K Project Manager has available each
vendor's Y2K readiness efforts. 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
<PAGE>
Corporation will validate that they are Year 2000 compliant by March 31, 1999,
or make plans to switch to a new vendor or system that is compliant. For
insignificant vendors, the Corporation will not necessarily validate that they
are Year 2000 compliant. However, for any insignificant vendor who responds that
they will not be compliant by March 31, 1999, the Corporation will seek a new
vendor or system that is compliant.
Year 2000 Issues also affect 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 Corporation 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, not
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
The Corporation will use both internal and external resources to reprogram, or
replace, and test its software and hardware for the Year 2000 modifications.
Concurrent with the Year 2000 project, the Corporation will also be converting
all its major data processing systems, both hardware and software, to current
technology. The Corporation plans to complete both the Year 2000 and systems
conversion projects no later than June 30, 1999, for all critical systems.
As of March 1, 1999, $27,500 has been expended as Year 2000 costs. Management
expects to spend a total of $110,000 for the entire project. Of the total
project's cost, approximately $61,000 is attributable to the purchase of new
software which will be capitalized. The remaining $21,500 will be expensed as
incurred through December 31, 1999. 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 amounts
required to be expensed through December 31, 1999 to have a material effect on
the financial position or results of operation. However, if compliance is not
achieved in a timely manner by the Corporation or any of its significant related
third-parties, be it a supplier of services or 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.
<PAGE>
Risks of Year 2000
At present, management believes it's progress is 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.
Contingency Plans
The Corporation is in the process of obtaining back-up service providers,
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.
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. The plan was ratified by the Board of
Directors on October 21, 1998.
FDIC Insurance
PFC Bank's deposits are insured by the FDIC pursuant to the system of federal
deposit insurance initially established by the Banking Act of 1933. This
insurance covers $100,000 per deposit account. The Bank pays insurance premiums
into a fund according to rates established by the FDIC. The Federal Deposit
Insurance Corporation Improvement Act was enacted, in part, to prevent the
deposit insurance funds related to savings institutions from becoming insolvent.
The act authorized the FDIC to raise insurance premium assessments in order to
achieve and maintain an adequate level of funds. The depletion of the deposit
insurance funds had been due, in part, to a large number of failed financial
institutions in the 1980's, as well as increases in coverage per deposit
account. As a result, the future cost of deposit insurance for the Bank is in
large part dependent upon the extent of future banking failures and the amount
of insurance coverage provided by the FDIC per deposit account, neither of which
is within the Bank's control. Moreover, the act required the FDIC to establish a
risk-based insurance premium assessment system in order to differentiate between
higher and lower risk institutions and to assess lower premiums against
institutions in a lower risk category. As a result, the Bank's future cost of
deposit insurance will depend, in part, upon its risk rating.
Interstate Banking Legislation
In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency
Act was enacted. The Interstate Banking Act facilitates the interstate expansion
and consolidation of banking organizations:
o by permitting bank holding companies that are adequately capitalized and
adequately managed, beginning September 29, 1995, to acquire banks located
in states outside their home states regardless of whether such acquisitions
are authorized under the law of the host state;
o by permitting the interstate merger of banks after June 1, 1997, subject to
the right of individual states to "opt in" or "opt out" of this authority
before that date;
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o by permitting banks to establish new branches on an interstate basis
provided that such action is specifically authorized by the law of the host
state;
o by permitting, beginning September 29, 1995, a bank to engage in certain
agency relationships (i.e., to receive deposits, renew time deposits, close
loans (but not including loan approvals or disbursements), service loans,
and receive payments on loans and other obligations) as agent for any bank
or thrift affiliate, whether the affiliate is located in the same state or
a different state then the agent bank; and
o by permitting foreign banks to establish, with approval of the regulators
in the United States, branches outside their "home" states to the same
extent that national or state banks located in the home state would be
authorized to do so. One effect of this legislation will be to permit the
Company to acquire banks and bank holding companies located in any state
and to permit qualified banking organizations located in any state to
acquire banks and bank holding companies located in Pennsylvania,
irrespective of state law.
Since 1995, the Pennsylvania Banking Code has authorized full interstate banking
and branching under Pennsylvania law. Specifically, the legislation:
o eliminates the "reciprocity" requirement previously applicable to
interstate commercial bank acquisitions by bank holding companies,
o authorizes interstate bank mergers and reciprocal interstate branching into
Pennsylvania by interstate banks, and
o permits Pennsylvania institutions to branch into other states with the
prior approval of the Pennsylvania Department of Banking.
Overall, this federal and state legislation has, as was predicted, had the
effect of increasing consolidation and competition and promoting geographic
diversification in the banking industry.
Proposed Legislation and Regulations
From time to time, various federal and state legislation is proposed that could
result in additional regulation of, and restrictions on, the business of the
Company and the Bank, or otherwise change the business environment.
Management cannot predict whether any of this legislation, if enacted, will have
a material effect on the business of the Company.
Environmental Laws
Neither PFC nor the Bank anticipate that compliance with environmental laws and
regulations will have any material effect on capital, expenditures, or earnings.
However, environmentally related hazards have become a source of high risk and
potentially unlimited liability for financial institutions. Environmentally
contaminated properties owned by an institution's borrowers may result in a
drastic reduction in the value of the collateral securing the institution's
loans to such borrowers, high environmental clean up costs to the borrower
affecting its ability to repay the loans, the subordination of any lien in favor
of the institution to a state or federal lien securing clean up costs, and
liability to the institution for clean up costs if it forecloses on the
contaminated property or becomes involved in the management of the borrower. To
minimize this risk, the Bank may require an environmental examination of and
report with respect to the property of any borrower or prospective borrower if
circumstances affecting the property indicate a potential for contamination
taking into consideration a potential loss to the institution in relation to the
borrower. Such examination must be performed by an engineering firm experienced
in environmental risk studies and acceptable to the institution, and the cost of
<PAGE>
such examinations and reports are the responsibility of the borrower. These
costs may be substantial and may deter prospective borrowers from entering into
a loan transaction with the Bank. PFC is not aware of any borrower who is
currently subject to any environmental investigation or clean up proceeding that
is likely to have a material adverse effect on the financial condition or
results of operations of the Bank.
In 1995, the Pennsylvania General Assembly enacted the Economic Development
Agency, Fiduciary and Lender Environmental Liability Protection Act which, among
other things, provides protection to lenders from environmental liability and
remediation costs under the environmental laws for releases and contamination
caused by others. A lender who engages in activities involved in the routine
practices of commercial lending, including, but not limited to, the providing of
financial services, holding of security interests, workout practices,
foreclosure or the recovery of funds from the sale of property shall not be
liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental Resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practice.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substances on
or from the property, or knowingly and willfully compel a borrower to commit an
action which caused such release or violate an environmental act. The Economic
Development Agency, Fiduciary and Lender Environmental Liability Protection Act,
however, does not limit federal liability which still exists under certain
circumstances.
ITEM 2 - DESCRIPTION OF PROPERTIES
The Corporation has seven full service offices at the following locations:
1. Ford City Office, 323 Ford Street, Ford City, Pennsylvania, Corporate
office, containing 8,300 square feet;
2. New Bethlehem Office, 363 Broad Street, New Bethlehem, Pennsylvania,
Operations Office, containing 11,867 square feet;
3. Clarion Office, 650 Main Street, Clarion, Pennsylvania, containing 7,101
square feet;
4. Butler Office, 181 New Castle Road, Butler, Pennsylvania, containing 1,400
square feet;
5 Indiana Office, 500 Philadelphia Street, Indiana, Pennsylvania, containing
4,000 square feet;
6. New Bethlehem Branch Office, 628 Broad Street, New Bethlehem, Pennsylvania,
containing 2,800 square feet;
7. Manor Township Office, Pleasantview Drive, Ford City, Pennsylvania,
containing 1,600 square feet;
All properties listed are owned by the Company and are used by the Company in
its operations. In management's opinion, the above properties are in good
condition and are adequate for the Bank's purposes.
ITEM 3 - LEGAL PROCEEDINGS
Management believes there are no proceedings pending to which PFC or the Bank is
a party or to which its property is subject, which, if determined adversely,
would be material in relation to its undivided profits or financial condition.
There are no proceedings pending other than routine litigation incidental to the
<PAGE>
business of PFC and the Bank. In addition, no material proceedings are pending
or are known to be threatened or contemplated against PFC or the Bank by
governmental authorities.
ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
<PAGE>
Part II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PFC's common stock is held by 385 stockholders of record as of March 1, 1999,
and is rarely traded. Management of PFC believes that a few securities dealers
are attempting to form a market for the PFC Common Stock even though there are
very few trades recorded. As of March 1, 1999, there were 1,768,694 shares
outstanding after payment of a 100% stock dividend, in the form of a 2 for 1
stock split, payable February 10, 1999, to stockholders of record January 20,
1999. PFC paid dividends of $0.24 per share the first and second quarters of
1997 followed by dividends in each of the third and fourth quarters of 1997 of
$0.25 per share. A special dividend of $0.15 per share was paid December 22,
1997. A dividend of $0.25 per share was paid in each of the first two quarters
of 1998 followed by a $0.26 per share dividend in the third and fourth quarters.
A special dividend of $0.15 per share was paid December 22, 1998. Because
corporate and banking laws limit the amount of dividends that can be paid
generally, there can be no assurance that dividends will be paid in the future
and, if paid, the amount of such dividends. See Note 11, Regulatory Matters, in
the footnotes to PFC's financial statement attached at Exhibit 13.
The following table sets forth quarterly highs and lows of PFC Common Stock for
the years 1996 through 1998. Quotations were received from Elmer Powell and
Associates and reflect inter-dealer prices, without retail markup, mark down or
commission and may not represent actual transactions.
Common Stock
Market Performance
(in dollars)
--------------------------------------
Qtr. High Low
--------------------------------------
1996
--------------------------------------
1 25.25 24.00
2 27.00 24.00
3 29.75 28.25
4 38.25 29.00
--------------------------------------
1997
--------------------------------------
1 38.25 36.50
2 38.25 38.25
3 38.25 38.25
4 38.25 38.25
--------------------------------------
1998
--------------------------------------
1 43.00 42.00
2 42.00 42.00
3 50.00 50.00
4 * 30.00 * 30.00
--------------------------------------
* Adjusted stock price to reflect retroactive treatment of 100% stock dividend
in the form of a stock split.
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
The following is selected financial data of PFC and its wholly owned subsidiary,
PFC Bank. Dollar amounts are in thousands, except per share data. The average
balances shown consist of daily average balances.
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------------------
Summary of Operations 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 17,355 $ 15,571 $ 13,933 $ 13,168 $ 12,792
Net interest income 8,905 8,082 7,457 6,869 7,506
Provision for loan losses 200 80 75 60 192
Gains on securities 3,001 1,065 1,053 1,253 2,405
Other operating income 626 870 1,067 661 568
Other operating expenses 6,037 5,934 6,830 6,835 6,578
Net income before deducting minority interest 4,464 2,997 2,110 1,542 2,679
Net income 4,464 2,997 2,110 1,378 1,872
Earnings per share (2) 2.53 1.70 1.20 .88 1.52
Earnings per share (fully diluted) (2) 2.53 1.70 1.20 .88 1.52
Average Balance Sheet Totals
Total assets (1) 227,803 206,871 185,907 180,598 190,810
Investment securities (1) 43,337 41,946 41,846 56,678 70,088
Loans & leases (net of unearned income
and allowance for loan losses) 163,520 142,266 123,115 110,803 106,390
Total deposits 203,096 183,770 164,496 156,450 155,774
Stockholders' equity (1) 21,230 18,505 17,737 19,075 24,980
Historical number of shares outstanding
at period end (2) 1,768,694 1,764,336 1,759,980 1,759,980 997,728
Weighted average number of shares
outstanding (2) 1,765,792 1,761,126 1,759,980 1,570,114 1,234,084
Period End Total Assets (3) 266,002 240,271 210,812 186,888 181,259
</TABLE>
(1) Excludes the effect of SFAS No. 115 (Statement of Financial Accounting
Standards No. 115 - Accounting for Certain Debt and Equity Securities).
(2) Reflects retroactive effect of 333 to 1 stock split in August 1994 and 100%
stock dividend in the form of a stock split in February 1999.
(3) Reflects the effect of SFAS No. 115.
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the consolidated
financial condition and results of operations of PFC and its wholly owned
subsidiary, PFC Bank. The consolidated financial information should be read in
conjunction with PFC's the consolidated financial statements included at Exhibit
13 to this report. Substantially all of the income and expenses of PFC are
attributable to PFC Bank and the Bank's subsidiary, PFC Service Corporation.
Financial Condition
The total assets of PFC at December 31, 1998 were $266.0 million, an increase of
$25.7 million, or 10.70% over total assets at December 31, 1997 of $240.3
million. Total assets at December 31, 1997 increased by $29.5 million or 13.99%
over December 31, 1996.
The increase in total assets from December 31, 1997 to December 31, 1998 was
comprised primarily of an increase in the loan portfolio of over $22.3 million
and an increase in interest-bearing balances with depository institutions of
over $8.2 million offsetting a decrease in federal funds sold of $2.2 million.
The increase in total assets as of December 31, 1997 over December 31, 1996 was
comprised primarily of an increase of over $16.3 million in loan balances in
addition to increases of $12.8 million in securities available-for-sale and $6.7
million in securities held to maturity. These increases more than offset a
decrease of over $3.2 million in federal funds sold.
Total liabilities of PFC increased by $22.5 million from $202.9 million at
December 31, 1997 to $225.4 million at December 31, 1998. This increase was due
to an increase in interest-bearing deposits of $20.0 million and an increase in
non-interest bearing deposits of $2.9 million.
The total liabilities of PFC at December 31, 1997 were $202.9 million, an
increase of $18.9 or 10.28% over total liabilities at December 31, 1996 of
$183.9 million. The increase in liabilities during the 12 months ended December
31, 1997 resulted primarily from interest bearing deposit increases of $11.8
million and a deferred tax increase of almost $4.6 million due primarily to the
tax effects of Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
Net Income
PFC reported net income, before deducting the income taxes for the 12 month
period ended December 31, 1998 of $6,295,000 as compared to $4,003,000 for the
12 month period ended December 31, 1997, an increase of $2,292,000 or 57.26%. An
increase in interest income of $1,784,000 was slightly offset by an increase in
interest expense of $961,000. PFC's net income for the period ended December 31,
1998, after deducting taxes, was $4,464,000 as compared to $2,996,000 for the
year ended December 31, 1997. PFC reported net income, before deducting income
taxes, for the year ended December 31, 1997 of $4,003,000 which was an increase
of $1,330,000 or 49.76% as compared to $2,673,000 reported for the year ended
December 31, 1996. PFC's net income, after taxes, for the year ended December
31, 1997 was $886,000 higher than for the year ended December 31, 1996.
Earnings per share adjusted for the 100% stock dividend in the form of a 2 for 1
stock split effective February 10, 1999 to shareholders of record January 20,
1999, for the 12 month periods ended December 31, 1998, 1997 and 1996 was $2.53,
$1.70 and $1.20, respectively.
<PAGE>
Since most of the assets and liabilities of banks are monetary in nature,
changes in interest rates can have a significant effect on earnings. PFC,
through its asset and liability management, positions itself to react and
compensate for the volatility of interest rates. See additional analysis of
interest rate sensitivity presented on page 25.
Interest Income and Expenses
Total interest income increased to $17,355,000 in 1998 from $15,571,000 in 1997,
an increase of $1,784,000 or 11.46%. This increase is primarily attributable to
an increase in interest earned on loans of $1,523,000 or 12.35% along with an
increase in interest on interest bearing deposits of $292,000 and investment
securities of $188,000. The average yield on interest-earning assets decreased
from 7.31% for the 12 month period ended December 31, 1997 to 7.07% for the 12
month period ended December 31, 1998. The average yield on interest-earning
assets decreased from 7.53% for the 12 month period ended December 31, 1996 to
7.31% for the 12 month period ended December 31, 1997. The increase in total
interest income from 1997 to 1998 results from an increase in average earning
assets of $33.0 million. Total average loans increased by $20.0 million while
average investment securities and interest-bearing deposits increased by $8.8
and $7.7 million, respectively.
Total interest income increased to $15,571,000 in 1997 from $13,933,000 for the
year ended December 31, 1996, an increase of $1,638,000 or 11.76%. The increase
in total interest income from 1996 to 1997 results from an increase in earning
assets of $32.7 million. Total securities increased by $19.5 million while gross
loans increased by over $16.3 million.
Total interest expense increased to $8,450,000 in 1998 from $7,489,000 in 1997,
an increase of $961,000, or 12.83%. This increase is the result of an increase
in interest bearing deposits of $19.9 million. Total interest expense increased
to $7,489,000 in 1997 from $6,475,000 in 1996, an increase of $1,014,000 or
15.66%. The increase is primarily the result of an increase in interest bearing
deposits of $11.8 million for the year ended December 31, 1997. The average rate
on interest-bearing liabilities was 4.74% for the 12 months ended December 31,
1998 and 4.66% and 4.52% for the 12 month periods ended December 31, 1997 and
1996, respectively.
Net interest income is the difference between the interest earned on loans and
other investments, including dividends received on equity securities, and the
interest paid on deposits and other sources of funds. Net interest income for
the 12 month period ended December 31, 1998 was $8,905,000 as compared to
$8,082,000 for the 12 month period ended December 31, 1997, an increase of
$823,000 or 10.18%. Net interest income increased $625,000 or 8.38% in 1997 as
compared to $7,457,000 for the year ended December 31, 1996.
PFC obtains a portion of its funds from non-interest bearing deposits.
Therefore, the rate paid for all funds is lower than the rate on interest
bearing funds alone. PFC has been able to retain a significant base of
inexpensive deposits, which consists of checking and savings accounts. These
deposits for the years ended December 31, 1998, 1997 and 1996 comprise
approximately 50.20%, 52.56% and 56.02% of total deposits, respectively.
<PAGE>
Interest Income and Expenses (continued)
The following tables present the average major asset and liability categories
for the 12 month periods ended December 31, 1998, 1997 and 1996 along with
interest income and yields. The average balances shown consist of daily average
balances. Non-performing loans are included in the average balance and yield
calculations.
Average Balance Sheets & Net Interest Analysis for 1998
(in thousands)
<TABLE>
<CAPTION>
Selected Asset Categories Average Balances Interest Yield/rate
- ------------------------- ---------------- -------- ----------
Interest-bearing assets
<S> <C> <C> <C>
Loans & direct lease financing $163,520 $ 13,846 8.47%
(net of unearned discount)
Investment securities 70,696 3,018 4.27%
Federal funds sold 3,743 198 5.29%
Due from banks 7,684 293 3.81%
Non-interest bearing assets
Cash and due from banks 4,242 N/A N/A
Premises and equipment 3,354 N/A N/A
Other assets 2,436 N/A N/A
Selected Liability Categories
Interest-bearing liabilities
Demand deposits $ 48,843 $ 1,752 3.59%
Savings deposits 28,138 894 3.18%
Time deposits 101,135 5,804 5.74%
Short-term borrowings 0 0 0
Non-interest-bearing liabilities
Demand deposits 24,980 N/A N/A
Other 12,779 N/A N/A
Net interest income $ 8,905
Net interest margin 3.63%
Average yield on interest-bearing assets 7.07%
Average rate on interest-bearing liabilities 4.74%
</TABLE>
<PAGE>
Interest Income and Expenses (continued)
<TABLE>
<CAPTION>
Average Balance Sheets & Net Interest Analysis for 1997
(in thousands)
Selected Asset Categories Average Balances Interest Yield/rate
- ------------------------- ---------------- -------- ----------
Interest-bearing assets
<S> <C> <C> <C>
Loans & direct lease financing $143,529 $ 12,323 8.59%
(net of unearned discount)
Investment securities 61,864 2,831 4.58%
Federal funds sold 7,637 417 5.46%
Due from banks 0 0 0
Non-interest bearing assets
Cash and due from banks 7,100 N/A N/A
Premises and equipment 3,598 N/A N/A
Other assets 3,047 N/A N/A
Selected Liability Categories
Interest-bearing liabilities
Demand deposits $ 45,058 $ 1,590 3.53%
Savings deposits 28,353 901 3.18%
Time deposits 87,246 4,998 5.73%
Short-term borrowings 0 0 0
Non-interest-bearing liabilities
Demand deposits 23,113 N/A N/A
Other 10,168 N/A N/A
Net interest income $ 8,082
Net interest margin 3.79%
Average yield on interest-bearing assets 7.31%
Average rate on interest-bearing liabilities 4.66%
</TABLE>
<PAGE>
Interest Income and Expenses (continued)
<TABLE>
<CAPTION>
Average Balance Sheets & Net Interest Analysis for 1996
(in thousands)
Selected Asset Categories Average Balances Interest Yield/rate
- ------------------------- ---------------- -------- ----------
Interest-bearing assets
<S> <C> <C> <C>
Loans & direct lease financing $124,380 $ 10,891 8.76%
(net of unearned discount)
Investment securities 54,657 2,738 5.00%
Federal funds sold 5,885 304 5.17%
Due from banks 0 0 0
Non-interest bearing assets
Cash and due from banks 7,101 N/A N/A
Premises and equipment 3,788 N/A N/A
Other assets 2,907 N/A N/A
Selected Liability Categories
Interest-bearing liabilities
Demand deposits $ 41,665 $ 1,465 3.52%
Savings deposits 29,172 921 3.19%
Time deposits 72,339 4,089 5.65%
Short-term borrowings 27 2 7.41%
Non-interest-bearing liabilities
Demand deposits 21,320 N/A N/A
Other 7,673 N/A N/A
Net interest income $ 7,457
Net interest margin 4.03%
Average yield on interest-bearing assets 7.53%
Average rate on interest-bearing liabilities 4.52%
</TABLE>
<PAGE>
Non-interest income
Non-interest income for the twelve month period ended December 31, 1998 totaled
$3,627,000 as compared to $1,935,000 for the same period ended 1997, an increase
of $1,692,000 or 88.44%. Non-interest income for the year ended December 31,
1997 decreased from the total in 1996 of $2,121,000 by $186,000. Changes in the
level of non-interest income during 1998 is primarily attributable to an
increase in net investment gains of $1,936,000 from 1997 to 1998. Changes in the
level of non-interest income during 1997 is primarily attributable to a decrease
in flood proceeds of $153,000 from 1996 to 1997.
Non-interest Expenses
Non-interest expenses for the twelve month period ended December 31, 1998
totaled $6,037,000 as compared to $5,934,000 for the same period in 1997, an
increase of $103,000 or 1.74%. The increase is primarily related to the net of
an increase in salaries and employee benefits of $199,000 and decreases of
$69,000 in legal and professional fees and $48,000 in miscellaneous operating
expenses. Non-interest expense for the twelve month period ended December 31,
1997 registered a decrease of $896,000 or 13.12% as compared to the same period
in 1996. The decrease is primarily related to a $544,000 decrease in early
retirement expenses from 1996 to 1997. Other expenses for the year ended
December 31, 1996 were substantially the same as 1995.
Investment Securities
Investments are second only to the loan portfolio when analyzing the source of
PFC's earning assets. In addition to generating revenue, securities provide the
primary source of liquidity and also serve as collateral for public deposits.
PFC historically invests in U.S. Treasury securities, obligations of U.S.
government agencies, obligations of state and political subdivisions, selected
corporate notes and equity securities of other local and regional financial
institutions. PFC accounts for investments in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, which requires
PFC to classify investment securities as either held to maturity, available for
sale or trading. Management has the ability and intent to hold held-to-maturity
securities until maturity. PFC has classified all equity securities as available
for sale. Substantially all of these securities are held in PFC Service
Corporation, Inc. There are no securities held in PFC's investment portfolio
which are considered trading securities. Under SFAS No. 115, PFC is required to
adjust the carrying value of its available-for-sale securities to market value.
These unrealized gains (losses) are recognized as an increase (decrease) to the
carrying value of such securities; the offset of which is an increase (decrease)
to PFC's stockholder's equity, adjusted for the deferred income tax effects
thereon. For the period ended December 31, 1998, PFC's net unrealized gain on
available-for-sale securities was $26.7 million. As of December 31, 1997
the net unrealized gain was $27.1.
PFC's investment securities balance for the period ended December 31, 1998 was
$70.8 million, a $400,000 or 0.50% decrease compared to the period ended
December 31, 1997. The December 31, 1997 securities balance of $71.2 million was
an incease of $19.6 million over the same time period in 1996. This increase was
due to increased pledging needs as well as a 91.08% increase in unrealized gains
on available-for-sale securities.
Average federal funds sold and securities sold under agreement to repurchase
were $3.7 million and $7.6 million for the year ended December 31, 1998 and
1997, respectively.
The table on the following page summarizes the maturity distribution and
itemized breakdown of the investment portfolio as of December 31, 1998.
<PAGE>
Maturity Distribution of Investment Securities for 1998
(in thousands and excluding SFAS No. 115)
<TABLE>
<CAPTION>
No Within 1 to 5 5 to 10
Maturity Yield 1 Year Yield Years Yield Years Yield Total
-------- ----- ------- ----- ------- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries/Agencies $7,248 6.16% $22,494 5.78% $ 997 7.33% $30,739
State/Municipal 805 4.02% 310 4.73% 25 4.65% 1,140
Other Securities 750 7.28% -- 0.00% -- 0.00% 750
Equity Securities $11,515 9.41% 11,515
--------------------------------------------------------------------------------------------------
Totals $11,515 9.41% $8,803 6.06% $22,804 5.77% $1,022 7.26% $44,144
==================================================================================================
</TABLE>
Short-term Borrowings
(in thousands)
For each period: 1998 1997 1996
---- ---- ----
Balance at period end $ 0 $ 0 $ 0
Weighted average interest rate 0 0 5.67%
Maximum amount outstanding 0 0 2,100
Maximum amount at any month end 0 0 0
Average amount outstanding 0 0 27
<PAGE>
Loans
As of December 31, 1998, the net loan portfolio of PFC Bank comprised 65.67% of
total consolidated assets as compared with 63.43% for the year ending December
31, 1997.
Traditionally, PFC Bank has been highly dependent on home mortgage lending.
While this type of loan comprises a large portion of the loan portfolio, PFC
Bank has a wide range of other loans.
While the Bank offers a variety of loans to individual and corporate customers
in Armstrong, Butler, Clarion and Indiana Counties of Pennsylvania, they
concentrate their lending activities in residential mortgages in their local
market area. These loans comprised approximately 62.57% of PFC Bank's gross loan
portfolio as of December 31, 1998. As of that date, the remainder of the
portfolio was made up of real estate construction loans comprising loans of
1.39%, commercial and agricultural loans of 19.91%, consumer loans of 13.69%;
and, other loans comprising 2.44% of the loan portfolio. Although PFC Bank has a
significant concentration of residential and commercial mortgage loans
collateralized by first mortgage liens located in the Bank's lending areas,
there is no concentration of loans to borrowers engaged in similar economic
activities which exceed 10% of the loans at December 31, 1998.
The risks associated with the various types of loans placed by PFC Bank are
varied. The practices employed by the Bank in addressing these risks constantly
evolves in response to economic conditions.
With respect to secured real estate lending, PFC Bank has traditionally placed
heavy reliance on collateral value but has tightened its lending policies and is
placing more reliance on the borrower's ability to repay. Because the Bank's
market is comprised largely of an outlying but moderately prosperous section of
Pennsylvania, PFC Bank has been somewhat cushioned from the real estate
recessions as well as real estate booms, leaving values at very conservative
levels through the years. The Bank experienced a decrease in non-performing
assets from 1997 to 1998 of $68,000 or 7.11% following a decrease of $559,000 or
36.87% from 1996 to 1997. Restructured loans, non-accrual loans and loans 90
days or more past-due decreased by 7.64%, 57.14% and 3.77%, respectively. The
tightening of lending policies has not decreased loan demand. In fact, total
loans as of December 31, 1998, have increased over the balances at December 31,
1997, by $22.3 million following an increase from 1996 to 1997 of $16.3 million.
The Bank intends to continue its policy of performing formal credit analyses in
support of loan requests.
PFC's total consolidated loans (net of unearned income and the allowance for
loan losses) at December 31, 1998, were $174,704,000, an increase of $22,308,000
or 14.64% as compared to $152,396,000 at December 31, 1997. The December 31,
1997 balance increased $16,346,000 or 12.01% over the year ended December 31,
1996. The increase in 1998 was due primarily to a $23.0 million increase in
residential property loans. The increase in 1997 was due primarily to increases
in residential loans and commercial loans and changes in PFC's pricing structure
relative to the marketplace, and a general increase in loan demand due to the
economic environment.
<PAGE>
Loans (continued)
<TABLE>
<CAPTION>
(in thousands and net of unearned income, but not the allowance for loan losses)
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial, agriculture $ 12,089 $ 17,200 $ 13,859 $ 9,918 $ 7,555
Real estate-construction 2,439 1,966 2,558 947 1,002
Real estate-mortgage 133,035 102,222 90,129 71,038 73,992
Consumer 24,085 28,646 27,774 30,303 28,403
Other 4,294 3,611 2,984 2,639 1,866
-------- -------- -------- -------- --------
Totals $175,942 $153,645 $137,304 $114,845 $112,818
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Percent of Loan Categories to Total Loans
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial, agriculture 6.87% 11.19% 10.09% 8.63% 6.70%
Consumer/Other 16.13% 21.00% 22.40% 28.69% 26.83%
Real estate 77.00% 67.81% 67.51% 62.68% 66.47%
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Maturity Table as of December 31, 1998
Due
1 year or less 1-5 years After 5 years Totals
---------------------------------------------------------
<S> <C> <C> <C> <C>
Floating rate $ 915 $ -- $ -- $ 915
Fixed rate 28,396 63,053 83,578 175,027
-------- -------- -------- --------
$ 29,311 $ 63,053 $ 83,578 $175,942
</TABLE>
<PAGE>
Allowance/Provision for Loan Losses
An allowance for possible loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon an evaluation of
known and inherent risks in the loan portfolio. Management's judgment is based
upon 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 may be necessary if conditions differ substantially from the
assumptions used in making the evaluation. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgment of information
available to them at the time of their examination.
The evaluation of the adequacy of the allowance for loan losses includes a
consideration of the following factors: the level and trends in loan
delinquencies and non-accrual loans; the current and anticipated local, regional
and national economic outlook; concentrations of credit risk; historical
charge-off and recovery experience; trends in loan classifications; an
assessment of inherent risk and overall portfolio quality; and, consideration of
PFC Bank's loan origination standards.
Based on this information, management concluded that the Bank's allowance for
loan losses was adequate to provide for known and inherent losses which may
exist in the loan portfolio as of December 31, 1998.
The provision for loan losses was $200,000 for the twelve month period ended
December 31, 1998 and $80,000 for the same period ended December 31, 1997. The
allowance for loan losses was $1,238,000 at December 31, 1998, which was $11,000
less than the amount at December 31, 1997.
The provision for loan losses of $80,000 for the twelve month period ended
December 31, 1997 was a $5,000 increase over the provision of $75,000 for the
same period ended December 31, 1996. The allowance for loan losses decreased
$5,000 from $1,254,000 at December 31, 1996 to $1,249,000 at December 1997.
The provision for loan losses for the year ended December 31, 1996 as compared
to the year ended December 31, 1995, increased $15,000 from $60,000 or 25.00%.
The allowance for loan losses of $1,254,000 at December 31, 1996 was $10,000
more than the amount reported at December 31, 1995.
Management recognizes the need to maintain an adequate reserve to meet the
ongoing risks associated with a growing loan portfolio and intends to continue
to maintain the allowance at appropriate levels based on ongoing evaluations of
the loan portfolio. Net loan charge-offs were $211,000 for the twelve month
period ended December 31, 1998 as compared to 1997 and 1996 net charge-offs of
$85,000 and $65,000, respectively. The increase in net charge-offs in 1998 was
due to a single loan charge-off of $151,000 arising from a successor letter of
credit, derived from a letter of credit originally issued in 1985 by past
management.
Non-performing assets of $889,000 were 71.81% of the allowance for loan losses
at December 31, 1998. Non-performing assets compared to the allowance for loan
losses at December 31, 1997 and 1996 were 76.62% and 120.89%, respectively.
Non-performing assets consist of loans no longer accruing interest, loans
accruing interest past due more than 90 days, restructured loans and other real
estate owned (foreclosed assets).
The table on the following page summarizes the loan portfolio and loan
charge-offs for the five years ended December 31, 1998.
<PAGE>
Allowance/Provision for Loan Losses (continued)
<TABLE>
<CAPTION>
Loan Loss Summary
(in thousands) Years Ended
-----------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding at end
of period, net of unearned income $175,942 $153,645 $137,304 $114,845 $112,818
======== ======== ======== ======== ========
Daily average amounts of loans $163,520 $143,529 $124,380 $111,927 $107,758
======== ======== ======== ======== ========
Allowance for loan losses
at the beginning of period $ 1,249 $ 1,254 $ 1,244 $ 1,383 $ 1,311
Loans Charged-off:
Commercial, financial, agriculture 151 4 0 113 164
Real-estate construction 0 0 0 0 0
Real-estate mortgage 0 0 0 0 0
Consumer 95 101 107 110 136
Leasing and other 0 0 0 0 0
-------- -------- -------- -------- --------
Totals 246 105 107 223 300
Recoveries of loans previously charged-off:
Commercial, financial, agriculture 8 8 9 10 148
Real estate - construction 0 0 0 0 0
Real estate - mortgage 0 0 28 2 2
Consumer 27 12 5 12 30
Leasing and other 0 0 0 0 0
-------- -------- -------- -------- --------
Totals 35 20 42 24 180
-------- -------- -------- -------- --------
Net loans charged off $ 211 $ 85 $ 65 $ 199 $ 120
Additions to allowance charged
to operations
200 80 75 60 192
-------- -------- -------- -------- --------
Allowance for loan losses $ 1,238 $ 1,249 $ 1,254 $ 1,244 $ 1,383
======== ======== ======== ======== ========
Ratio of net charge-offs during period
to average loans outstanding 0.13% 0.06% 0.05% 0.17% 0.11%
Ratio of reserves to net loans at end
of period 0.70% 0.81% 0.91% 1.08% 1.23%
Allocation of Allowance for Loan Losses
Loan Type
Commercial. financial, agriculture $ 260 $ 421 $ 600 $ 600 $ 439
Real estate - construction/mortgage
100 100 100 164 193
Consumer and other
180 505 118 140 189
Not allocated
698 223 436 340 562
-------- -------- -------- -------- --------
Totals $ 1,238 $ 1,249 $ 1,254 $ 1,244 $ 1,383
======== ======== ======== ======== ========
</TABLE>
<PAGE>
Non-Performing Assets
The table below presents non-performing assets in each of the five years ended
December 31, 1998. Management is not aware of any significant loans outstanding
which are current, but for which there is a serious doubt as to whether the
customer can comply with loan repayment terms.
PFC Bank's non-performing assets consist of: (i) non-accrual loans; (ii) loans
past due 90 or more days as to interest or principal and still accruing
interest; (iii) restructured loans; and, (iv) other real estate acquired through
foreclosure, including in-substance foreclosures.
As part of its policy, PFC Bank places all loans that are past due 90 days or
more on non-accrual status, unless they are adequately capitalized and in the
process of collection.
Properties acquired by foreclosure, or deed in lieu of foreclosure, and
properties classified as in-substance foreclosed are transferred to other real
estate and recorded at the lower of cost or fair value, less estimated disposal
costs. This method of accounting is consistent with the American Institute of
Certified Public Accountants' Statement of Position 92-3, Accounting for
Foreclosed Assets (SOP 92-3). Management of PFC believes that the adoption of
SOP 92-3 has not had a material impact on the financial statements of PFC Bank
<TABLE>
<CAPTION>
Non-Performing Assets
(in thousands)
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 93 $ 217 $ 332 $ 498 $ 518
Accruing loans past due 90 days or more 434 451 799 819 416
Restructured loans 133 144 155 167 83
Other real estate 229 145 230 82 271
------ ------ ------ ------ ------
Totals $ 889 $ 957 $1,516 $1,566 $1,288
====== ====== ====== ====== ======
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------------------------------------------------------
Interest income which would have been
recorded under original terms $ 7 $26 $27 $32 $34
Interest income recorded during period 40 4 9 14 21
Commitments to lend additional funds N/A N/A N/A N/A N/A
</TABLE>
<PAGE>
Deposits
PFC Bank continues to rely upon deposits as its primary source of funds.
Deposits consist of interest bearing and non-interest bearing demand deposits,
savings deposits and time deposits.
The table below presents average daily deposits and interest rates and
maturities of time deposits of $100,000 or more for the years ended December 31,
1998, 1997 and 1996.
<TABLE>
<CAPTION>
Deposits
(in thousands)
Average Amount Average Rate
-----------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits $24,980 $23,113 $ 21,320 -- -- --
Interest bearing demand deposits 48,843 45,058 41,665 3.59% 3.53% 3.52%
Savings deposits 28,138 28,353 29,172 3.18% 3.18% 3.19%
Time deposits 101,135 87,246 72,339 5.74% 5.73% 5.64%
----------------------------------------
Totals $203,096 $183,770 $ 164,496
========================================
Maturities of Time Deposits of $100,000 or more
1998 1997 1996
----------------------------------------
Three months or less $20,624 $12,626 $ 6,710
Over three through twelve months 14,871 13,246 6,393
Over 1 year through 5 years 5,987 7,208 9,898
Over 5 years 100 -- 100
----------------------------------------
Totals $41,582 $33,080 $ 23,101
</TABLE>
PFC's consolidated deposit balance as of December 31, 1998 was $213,359,000,
which is a $22,786,000 increase over the December 31, 1997 balance of
$190,573,000. The December 31, 1997 balance was a $14,308,000 increase over the
December 31, 1996 balance of $176,265,000. The majority of the deposit growth
experienced in 1998 and 1997 occurred in time deposits.
Liquidity
PFC Bank's liquidity is a measure of its ability to fund loans, withdrawals of
deposits and other cash outflows in a cost effective and timely manner.
PFC Bank's principal sources of funds are deposits, scheduled payments and
pre-payments of loan principal, maturities of investment securities and
short-term investments, and other funds provided by operations. While loan
payments and maturing investments are a relatively predictable source of funds,
deposit flows are greatly influenced by general interest rates, economic
conditions and competition. In order to meet the cash needs for 1998, PFC Bank
maintained an average balance of federal funds sold of $3.7 million for the 12
months ended December 31, 1998, as compared to $7.6 million at December 31,
1997. At December 31, 1998, PFC held $8.8 million of investment securities and
$29.3 million of loans maturing in less than one year. PFC Bank has the option
to borrow funds from the Federal Home Loan Bank and the Federal Reserve Bank.
The Bank also relies on the sale of bank equities as a secondary source of
liquidity through the planned taking of capital gains. Management believes that
the Bank's liquidity position is adequate at the present time.
<PAGE>
Interest Rate Sensitivity
The objective of interest rate sensitivity management is to minimize the Bank's
risks associated with changing interest rates by managing interest sensitive
assets and liabilities in such a manner that they can be repriced in response to
changes in market interest rates. PFC Bank's objective is to maintain a
reasonable balance between rate sensitive assets and rate sensitive liabilities.
The difference between interest sensitive assets and liabilities (i.e., balance
sheet gap) cannot solely be used to control interest rate sensitivity. Interest
rates themselves must be monitored and adjusted to maintain an acceptable return
on assets. Management's ability to forecast and simulate rate movements allows
changes to be made quickly and advantageously. Although management recognizes
PFC Bank's short-term, highly liability sensitive position, it continues to
evaluate its earning assets versus liabilities to reduce this gap. Management
believes the gap ratio, as indicated in the table below, is acceptable.
Management's study of the Bank's primary core deposit base revealed that even in
times of interest rate fluctuation, the base has remained stable. As a result,
management believes that these core deposits (demand, NOW and savings accounts)
are not necessarily tied to interest rate sensitivity.
<TABLE>
<CAPTION>
Interest Sensitivity Cumulative Gap Analysis
(in thousands)
December 31, 1998
0-3 0-6 0-12 0-5
Assets: Months Months Months Years
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Investments Securities $ 3,754 $ 6,404 $ 9,601 $ 31,456
Loans 9,006 17,016 29,311 92,364
Federal Funds sold 1,900 1,900 1,900 1,900
Interest Bearing Depository Balances 8,268 8,268 8,268 8,268
--------- --------- --------- ---------
Total Earning Assets $ 22,928 $ 33,588 $ 49,080 $ 133,988
Liabilities:
NOW Accounts $ 8,776 $ 8,776 $ 8,776 $ 8,776
MMDA 17,568 17,568 17,568 17,568
>$100,000 20,624 30,264 35,495 41,482
<$100,000 16,067 25,202 43,639 65,780
--------- --------- --------- ---------
Total Interest-bearing Liabilities $ 63,035 $ 81,810 $ 105,478 $ 133,606
Cumulative Gap (40,107) (48,222) (56,398) 382
Cumulative Gap Ratio (15.07) (18.11) (21.19) 0.14
Rate Sensitive Assets/
Rate Sensitive Liabilities 36.37% 41.06% 46.53% 100.29%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Peoples Financial Corp., Inc.
Changes in Interest Income/ Expense
(in thousands) December 31
1998 vs. 1997
Increase/Decrease due
to change in
Interest income on: Volume Rate Net
------- --------- -------
<S> <C> <C> <C>
Loans $ 1,719 $ (196) $ 1,523
Investment securities 408 (219) 189
Due from banks 459 (168) 291
Federal funds sold and securities purchases (213) (6) (219)
------- ------- -------
Total interest-earning assets $ 2,373 $ (589) $ 1,784
Interest expense on:
Demand deposits $ 134 $ 29 $ 163
Savings deposits (7) 0 (7)
Time deposits 795 10 805
Short-term borrowings 0 0 0
------- ------- -------
Total interest-bearing liabilities $ 922 $ 39 $ 961
</TABLE>
<TABLE>
<CAPTION>
December 31
1997 vs. 1996
Increase/Decrease due
to change in
Interest income on: Volume Rate Net
------- --------- -------
<S> <C> <C> <C>
Loans $ 1,677 $ (245) $ 1,432
Investment securities 357 (263) 94
Due from banks 0 0 0
Federal funds sold and securities purchases 91 22 113
------- ------- -------
Total interest-earning assets $ 2,125 $ (486) $ 1,639
Interest expense on:
Demand deposits $ 120 $ 5 $ 125
Savings deposits (17) (3) (20)
Time deposits 822 87 909
Short-term borrowings 0 0 0
------- ------- -------
Total interest-bearing liabilities $ 925 $ 89 $ 1,014
</TABLE>
<TABLE>
<CAPTION>
December 31
1996 vs. 1995
Increase/Decrease due
to change in
Interest income on: Volume Rate Net
------- ------- -------
<S> <C> <C> <C>
Loans $ 1,106 $ (159) $ 947
Investment securities 235 (347) (112)
Due from banks 0 0 0
Federal funds sold and securities purchases (30) (40) (70)
------- ------- -------
Total interest-earning assets $ 1,311 $ (546) $ 765
Interest expense on:
Demand deposits $ 106 $ (17) $ 89
Savings deposits (20) (9) (29)
Time deposits 197 (51) 146
Short-term borrowings (48) 20 (28)
------- ------- -------
Total interest-bearing liabilities $ 235 $ (57) $ 178
</TABLE>
<PAGE>
Capital Resources
Capital resources are provided by common stock, capital surplus and retained
earnings. The objective of management is to emphasize current and future capital
needs based upon anticipated growth.
PFC Bank has historically maintained an adequate capital position. The
regulations of the FDIC require it to maintain a Leverage Ratio, Tier I Capital
to Risk-Weighted Assets Ratio, and a Total Capital to Risk-Weighted Asset Ratio
of 3%, 4%, and 8%, respectively. PFC Bank exceeds each of these ratios as shown
in the following table representing PFC Bank at December 31, 1998, not including
SFAS No. 115.
PFC Bank
Leverage Ratio 9.48%
Tier I Capital to Risk
Weighted Assets 13.18%
Total Capital to Risk
Weighted Assets 20.91%
<TABLE>
<CAPTION>
Return on Equity and Assets
(not including SFAS No. 115)
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- ---------
Return on Assets
<S> <C> <C> <C> <C> <C>
(net income divided by avg total assets) 1.96% 1.45% 1.13% 0.76% 0.98%
Return on Equity
(net income divided by average equity) 21.03% 16.19% 11.90% 7.22% 7.49%
Equity to assets ratio
(average equity divided by avg total assets) 9.32% 9.15% 9.54% 10.56% 13.15%
</TABLE>
ITEM 8 - FINANCIAL STATEMENTS
The financial statements required by this Item are set forth at Exhibit 13, and
incorporated herein by reference.
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
Part III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The information required by this Item, relating to directors, executive
officers, control persons is set forth on pages 4 through 7 of the Registrant's
Proxy Statement to be used in connection with the 1999 Annual Meeting of
Shareholders, which pages are incorporated herein by reference.
Section 16(a) Beneficial Ownership Compliance. Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires the Registrant's officers and
directors, and persons who own more than 10% of a registered class of the
Registrant's equity securities, to file reports of ownership with the Securities
and Exchange Commission. Officers, directors and greater than 10% shareholders
are required by SEC regulation to furnish the Registrant with copies of all
Section 16(a) forms they file
Based solely on its review of the copies of such forms received by it or written
representations from certain reporting persons that no Forms 5 were required for
those persons, the Registrant believes that during the period January 1, 1998
through December 31, 1998, its officers and directors were in compliance with
all filing requirements applicable to them.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item, relating to executive compensation, is
set forth in pages 8 and 9 of the Registrant's Proxy Statement to be used in
connection with the 1999 Annual Meeting of Shareholders, which pages are
incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, relating to beneficial ownership of the
Registrant's Common Stock, is set forth in pages 10 and 12 of the Registrant's
Proxy Statement to be used in connection with the 1999 Annual Meeting of
Shareholders, which pages are incorporated herein by reference.
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PFC Bank has a policy of granting loans to eligible directors, officers,
employees and members of their immediate families. Loans are made in the
ordinary course of business and on the same terms, including collateral
requirements and interest rates, as those prevailing at the time for comparable
transactions and do not involve more than the normal risk of collection. The
table below sets forth information concerning each loan made by PFC Bank to
executive officers, directors and major shareholders, for which a loan balance
was outstanding at any time since January 1, 1998.
LARGEST AMOUNT
<TABLE>
<CAPTION>
DATE OF OUTSTANDING BALANCE
NAME POSITION LOAN SINCE JAN. 1, 1998 DEC. 31, 1998
- ---- -------- ---- ------------------ -------------
<S> <C> <C> <C> <C>
Timothy P. Reddinger Secretary various 191,229 155,974(1)
Frank T. Baker Chairman 1998 85,000 82,460
Darl Hetrick Director various 174,260 145,226(2)
James L. Kifer Exec. V.P. 1998 72,339 72,339(3)
R.B. Robertson Pres./CEO -0- -0-(4)
</TABLE>
(1) Comprised primarily of Standby Letters of Credit fully secured by cash on
deposit.
(2) Comprised primarily of third party receivables associated with equipment
sales by Mr. Hetrick's farm supply business. The receivables were purchased
by PFC Bank from Mr. Hetrick with recourse to Mr. Hetrick in the event of
non-payment by the equipment purchaser.
(3) Construction of Residential Mortgage.
(4) Letter of Credit
<PAGE>
Part IV
<TABLE>
<CAPTION>
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K.
<S> <C>
(a) 1. Financial Statements.
The following financial statements are included
by reference in Part II, Item 8 hereof:
Report of Independent Certified Public Accountants.
Consolidated Balance Sheets.
Consolidated Statements of Income.
Consolidated Statements of Changes in Stockholders' Equity.
Consolidated Statement of Cash Flows.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Financial Statement Schedules are omitted because the
required information is either not applicable, not
required or is shown in the respective financial
statements or in the notes thereto.
3. 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 to Registrant's
January 27, 1995, filing of Form S-4.
3(ii) Registrant's By-Laws.
(Incorporated by Reference to Registrant's January 27, 1995,
filing of Form S-4.)
10(i) Agreement between R.B. Robertson and Bank.
(Incorporated by Reference to the Registrant's
September 30, 1997 filing of Form 10-QSB.)
10(ii) Settlement Agreement.
(Incorporated by Reference to the Registrant's
December 31, 1996 filing of Form 10-KSB.)
10(iii) General Release.
(Incorporated by Reference to the Registrant's
December 31, 1996 filing of Form 10-KSB.)
11 Statement re: Computation of Earnings Per Share.
(Refer to Exhibit 13, page 3, Consolidated
Statement of Income.)
13 Annual report to Security Holders.
(Included with Financial Statements, which are
attached as Exhibit 13 hereto.)
21 Subsidiaries of the Registrant.
<PAGE>
23 Consent of Independent Auditors.
27 Financial Data Schedule.
99 Proxy Statement.
(b) Reports on Form 8-K.
(c) The exhibits required herein are included at Item 14(a), above.
(d) Not Applicable.
</TABLE>
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
Peoples Financial Corp., Inc.
(Registrant)
March 26, 1999 By R.B. Robertson
--------------
R.B. Robertson
President/CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- -----
<S> <C> <C>
R.B. Robertson President/CEO March 26, 1999
and Director
Frank Baker Chairman/Director March 26, 1999
Darl Hetrick Vice President and Director March 26, 1999
Timothy Reddinger Secretary and Director March 26, 1999
William H. Toy Director March 26, 1999
R.B. Robertson, Jr Director March 26, 1999
Howard H. Shreckengost Director March 26, 1999
J. Jack Sherman Director March 26, 1999
Francis E. Kane Director March 26, 1999
James L. Kifer Executive Vice President March 26, 1999
Principal Financial Officer
Principal Accounting Officer
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
PAGE NO.
IN MANUALLY
SIGNED
EXHIBIT NO.
ORIGINAL
<S> <C>
(a) 1. Financial Statements.
The following financial statements are included by
reference in Part II, 39 Item 8 hereof:
Report of Independent Certified Public Accountants.
Consolidated Balance Sheets.
Consolidated Statements of Income.
Consolidated Statements of Changes in Stockholders' Equity.
Consolidated Statement of Cash Flows.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Financial Statement Schedules are omitted because the
required information is either not applicable, not
required or is shown in the respective financial
statements or in the notes thereto.
3. 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 to Registrant's
January 27, 1995, filing of Form S-4.
3(ii) Registrant's By-Laws.
(Incorporated by Reference to Registrant's
January 27, 1995, filing of Form S-4.)
10(i) Agreement between R.B. Robertson and Bank.
(Incorporated by Reference to the Registrant's
September 30, 1997 filing of Form 10-QSB.)
10(ii) Settlement Agreement.
(Incorporated by Reference to the Registrant's
December 31, 1996 filing of Form 10-KSB.)
10(iii) General Release.
(Incorporated by Reference to the Registrant's
December 31, 1996 filing of Form 10-KSB.)
11 Statement re: Computation of Earnings Per Share.
(Refer to Exhibit 13, page 3, Consolidated
Statement of Income.)
13 Annual report to Security Holders.
(Included with Financial Statements, which are
attached as Exhibit 13 hereto.)
21 Subsidiaries of the Registrant. 64
<PAGE>
23 Consent of Independent Auditors. 65
27 Financial Data Schedule. 66
99 Proxy Statement. 68
(b) Reports on Form 8-K.
(c) The exhibits required herein are included at Item 14(a), above.
(d) Not Applicable.
</TABLE>
<PAGE>
PEOPLES FINANCIAL CORP., INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
December 31, 1998, 1997 and 1996
CONTENTS PAGE
Independent Auditors' Report.......................................... 1
Consolidated Balance Sheets........................................... 2
Consolidated Statements of Income..................................... 3
Consolidated Statements of Changes in Stockholders' Equity............ 4
Consolidated Statements of Cash Flows................................. 6
Notes to Consolidated Financial Statements............................ 8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Peoples Financial Corp., Inc.
New Bethlehem, Pennsylvania
We have audited the accompanying consolidated balance sheets of Peoples
Financial Corp., Inc. (the Company) and subsidiary as of December 31, 1998 and
1997 and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples Financial
Corp., Inc. and subsidiary as of December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
Pittsburgh, Pennsylvania
February 5, 1999
-1-
<PAGE>
CONSOLIDATED BALANCE SHEETS
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,742,511 $ 6,968,221
Interest-bearing deposits in banks 8,267,566 35,313
Federal funds sold 1,900,000 4,075,000
Available-for-sale securities 37,361,888 38,069,171
Held-to-maturity securities (market value of
$33,407,392 and $32,862,436 at
December 31, 1998 and 1997, respectively) 32,628,821 32,378,224
Federal Home Loan Bank stock, at cost 841,500 740,200
Loans receivable, net 174,704,201 152,395,769
Premises and equipment, net 3,331,643 3,459,173
Other assets 2,224,143 2,149,627
------------ ------------
Total Assets $266,002,273 $240,270,698
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 26,205,654 $ 23,343,039
Interest bearing 187,153,692 167,229,668
------------ ------------
Total deposits 213,359,346 190,572,707
Deferred taxes 10,056,183 10,271,914
Accrued interest and other liabilities 2,012,623 2,013,127
------------ ------------
Total liabilities 225,428,152 202,857,748
Stockholders' Equity
Common stock, par value $0.30, 5,000,000 shares
authorized, 1,768,694 and 1,764,336 shares issued
and outstanding at December 31, 1998 and 1997,
respectively 530,608 529,300
Surplus 3,750,044 3,668,006
Retained earnings 18,808,764 15,378,699
Accumulated other comprehensive income 17,484,705 17,836,945
------------ ------------
Total stockholders' equity 40,574,121 37,412,950
------------ ------------
Total Liabilities and Stockholders' Equity $266,002,273 $240,270,698
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 2 -
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income
Loans $13,845,749 $12,323,037 $10,890,677
Investment securities 3,017,698 2,829,841 2,734,704
Interest-bearing deposits 293,710 1,648 3,469
Federal funds sold 197,762 416,973 303,927
----------- ----------- -----------
Total interest income 17,354,919 15,571,499 13,932,777
Interest Expense
Deposits 8,449,973 7,489,044 6,475,388
----------- ----------- -----------
Net Interest Income 8,904,946 8,082,455 7,457,389
Provision for Loan Losses 200,000 80,000 75,000
----------- ----------- -----------
Net Interest Income after
Provision for Loan Losses 8,704,946 8,002,455 7,382,389
Other Income
Service fees 592,421 614,572 672,176
Insurance proceeds -- 205,830 358,694
Net investment security gains 3,001,116 1,065,063 1,053,326
Other 33,837 49,698 36,467
----------- ----------- -----------
Total other income 3,627,374 1,935,163 2,120,663
Other Expenses
Salaries $ 2,173,212 $ 2,077,039 $ 2,178,002
Pension and other employee benefits 743,014 639,535 805,041
Occupancy expense 984,022 1,000,044 1,089,451
Legal and professional fees 146,732 215,619 234,434
Data processing 246,689 245,814 226,005
Separation expenses -- -- 544,322
Pennsylvania bank shares tax 247,544 212,498 201,877
Other 1,496,247 1,543,751 1,551,130
----------- ----------- -----------
Total other expenses 6,037,460 5,934,300 6,830,262
----------- ----------- -----------
Income Before Income Taxes 6,294,860 4,003,318 2,672,790
Provision for Income Taxes 1,831,198 1,006,880 562,651
----------- ----------- -----------
Net Income $ 4,463,662 $ 2,996,438 $ 2,110,139
=========== =========== ===========
Net Income per Share of Common Stock $ 2.53 $ 1.70 $ 1.20
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 3 -
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income Total
-------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 $263,997 $3,850,000 $12,076,974 $ 7,183,103 $23,374,074
Comprehensive Income
Net income 2,110,139 2,110,139
Other comprehensive income, net of tax:
Changes in net unrealized holding
gains (losses) on available-for-sale
securities, net of deferred income tax
of $1,125,282 2,184,371 2,184,371
Change in minimum pension liability,
net of deferred income tax of $4,718 9,158 9,158
Total Comprehensive Income 4,303,668
Cash dividends (809,591) (809,591)
-------- ---------- ----------- ----------- -----------
Balance at December 31, 1996 263,997 3,850,000 13,377,522 9,376,632 26,868,151
Comprehensive Income
Net income 2,996,438 2,996,438
Other comprehensive income, net of tax:
Changes in net unrealized holding
gains (losses) on available-for-sale
securities, net of deferred income tax
of $4,399,723 8,540,638 8,540,638
Change in minimum pension liability,
net of deferred income tax benefit
of $41,380 (80,325) (80,325)
Total Comprehensive Income 11,456,751
Sale of 2,178 shares of common stock 653 82,656 83,309
Dividends
Cash (995,261) (995,261)
Retroactive restatement, 1999
stock dividend in the form of
a two-for-one one stock split 264,650 (264,650) --
-------- ---------- ----------- ----------- -----------
Balance at December 31, 1997 $529,300 $3,668,006 $15,378,699 $17,836,945 $37,412,950
Comprehensive Income
Net income 4,463,662 4,463,662
Other comprehensive income, net of tax:
Changes in net unrealized holding
gains (losses) on available-for-sale
securities, net of deferred income tax
benefit of $545,996 (1,059,874) (1,059,874)
Change in minimum pension liability,
net of deferred income tax benefit
of $25,264 (49,041) (49,041)
Reclassification adjustment due to sale of
securities, net of deferred income tax
of $389,802 756,675 756,675
Total Comprehensive Income 4,111,422
Sale of 4,358 shares of common stock 654 82,692 83,346
Dividends
Cash (1,033,597) (1,033,597)
Adjustment to stock purchase to reflect
retroactive treatment of stock split 654 (654)
-------- ---------- ----------- ---------- -----------
Balance at December 31, 1998 $530,608 $3,750,044 $18,808,764 $17,484,705 $40,574,121
======== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 4 -
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,463,662 $ 2,996,438 $ 2,110,139
Adjustments to reconcile net cash from
operating activities:
Depreciation and amortization 601,686 584,356 584,626
Net amortization/accretion of
premiums and discounts (10,617) (17,366) 17,383
Net investment security gains (3,001,116) (1,065,063) (1,053,326)
Provision for loan losses 200,000 80,000 75,000
Net loss on disposal of fixed assets 43,681 30,349 52,963
Reinvestment of stock dividends (60,669) (74,811) (85,384)
Increase (decrease) in cash due to
changes in assets and liabilities:
Other assets (85,851) 949,711 (642,346)
Accrued interest and other liabilities (109,082) 199,434 159,594
------------ ------------ ------------
Net Cash From Operating Activities 2,041,694 3,683,048 1,218,649
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of
available-for-sale securities 3,545,958 1,370,112 1,926,307
Proceeds from maturities of
held-to-maturity securities 11,125,000 8,800,000 9,250,000
Purchase of held-to-maturity securities (11,333,169) (15,446,563) (2,189,655)
Purchase of available-for-sale
securities (268,094) (84,000) (230,293)
Net sales (purchases) of Federal Home
Loan Bank stock (101,300) (170,700) 32,000
Net loans made to customers (22,537,032) (16,469,278) (22,594,327)
Proceeds from disposal of
premises and equipment 1,969
Purchases of premises and equipment (499,070) (284,949) (743,741)
------------ ------------ ------------
Net Cash Used By Investing Activities $(20,065,738) $(22,285,378) $(14,549,709)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 22,805,838 $ 14,323,109 $ 19,184,441
Proceeds from issuing common stock 83,346 83,309 --
Dividends paid (1,033,597) (995,261) (809,591)
------------ ------------ ------------
Net Cash From Financing Activities 21,855,587 13,411,157 18,374,850
------------ ------------ ------------
Net Change in Cash and Cash Equivalents 3,831,543 (5,191,173) 5,043,790
Cash and Cash Equivalents at Beginning of Year 11,078,534 16,269,707 11,225,917
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 14,910,077 $ 11,078,534 $ 16,269,707
============ ============ ============
SUPPLEMENTAL DISCLOSURES Cash payments for:
Interest $ 8,173,810 $ 7,151,078 $ 6,403,061
Income taxes $ 2,054,842 $ 946,040 $ 611,505
NON-CASH INVESTING AND FINANCING TRANSACTIONS
Recorded unrealized gains on
available-for-sale securities $ 26,687,984 $ 27,147,378 $ 14,207,018
Loans transferred to foreclosed assets
during the year $ 268,697 $ 343,479 $ 176,376
100% stock dividend in the form of a
two-for-one stock split, retroactively
restated to 1997
Common stock $ -- $ 265,304 $ --
Surplus $ -- $ (265,304) $ --
Adjustment due to retroactive restatement to
reflect additional share purchases
Common stock $ 654 $ -- $ --
Surplus $ (654) $ -- $ --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 5 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Peoples Financial Corp., Inc. (the Company) is a bank
holding company for its wholly owned subsidiary, PFC Bank (the Bank). The Bank
is a full-service commercial banking institution. It provides a variety of
financial services to individuals and corporate customers in Armstrong, Butler,
Clarion and Indiana counties through its six branches and main office located in
New Bethlehem, Pennsylvania. The Bank's primary deposit products are
non-interest and interest-bearing checking accounts, savings accounts and
certificates of deposit. Its primary lending products are single-family and
multi-family mortgages and installment and commercial loans. PFC Bank has a
wholly owned subsidiary, PFC Service Corporation. PFC Service Corporation is a
Delaware holding company for the Bank's equity investments.
Principles of Consolidation: The consolidated financial statements include
the accounts of Peoples Financial Corp., Inc., its wholly-owned subsidiary, PFC
Bank, and PFC Service Corporation, a wholly owned subsidiary of the Bank. All
significant intercompany accounts have been eliminated in the consolidation.
Peoples Financial Corp., Inc. transacts no other material business.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. Such estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. Management obtains independent appraisals for significant properties in
determining the allowances for loan losses and the valuation of foreclosed real
estate.
Investment Securities: The Bank classifies its investment securities as
held to maturity, trading or available for sale. Securities which management has
positive intent and ability to hold until maturity are classified as held to
maturity. Held-to-maturity securities are stated at cost, adjusted for
amortization of premium and accretion of discount computed on a level yield
basis. Securities that are bought and held principally to sell them in the near
term are classified as trading securities. All other securities are classified
as available-for-sale securities. Unrealized holding gains and losses for
trading securities are included in earnings. Unrealized holding gains and losses
for available-for-sale securities are excluded from earnings and reported net of
income taxes as a separate component of stockholders' equity until realized. At
this time, management does not intend to establish a trading securities
classification.
Interest and dividends on investment securities are reported as interest income.
Gains and losses realized on sales of investment securities represent the
differences between net proceeds and carrying values determined by the specific
identification method.
Loans Receivable and Allowance for Loan Losses: Loans are stated at unpaid
principal balances, less the allowance for loan losses and unearned discounts.
Unearned discounts on installment loans are recognized as income over the term
of the loans using a method that approximates the interest method.
- 6 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans Receivable and Allowance for Loan Losses (continued): The allowance
for loan losses is maintained at a level that, in management's judgment, is
adequate to absorb potential losses inherent in the loan portfolio. The amount
of the allowance is based on management's evaluation of the collectibility of
the loan portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific impaired loans,
and economic conditions. Allowances for impaired loans generally are determined
based on collateral values or the present value of estimated cash flows. The
allowance is increased by a provision for loan losses, which is charged to
expense, and reduced by charge-offs, net of recoveries. Loans are placed on
non-accrual status when they are 90 days past due, unless they are adequately
collateralized and in the process of collection.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation computed on both the straight-line and accelerated
methods over the estimated useful lives of the assets. Costs for maintenance and
repairs are expensed in the current period. The costs associated with
significant additions or improvements are capitalized.
Other Real Estate Owned (OREO): Real estate acquired in satisfaction of a loan
and in-substance foreclosures are reported in OREO. In-substance foreclosures
are properties in which a borrower, with little or no equity in the collateral,
effectively abandons control of the property or has no economic interest to
continue involvement in the property. The borrower's ability to rebuild equity
based on current financial conditions would also be considered doubtful.
Properties acquired by foreclosure or deed in lieu of foreclosure and properties
classified as in-substance foreclosures are transferred to OREO and recorded at
the lower of cost or fair value, less estimated costs to sell. Costs to maintain
the assets, subsequent write-downs to reflect declines in the fair value of the
properties, and subsequent gains and losses related to their disposal are
included in other income and expenses.
Employee Retirement Plan: The Bank's defined benefit pension plan (see Note
8) is funded in accordance with the Employee Retirement Income Security Act of
1974. Liabilities are recognized based on the actuarially calculated benefits
accrued through the date of the calculation.
Income Taxes: The Company accounts for income taxes using an asset and liability
approach to financial accounting and reporting. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. When necessary, valuation allowances are established to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities. The Company files
consolidated Federal income tax returns with its subsidiary.
- 7 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Share: Earnings per share are calculated using the weighted-average
number of shares outstanding. The weighted average shares outstanding giving
retroactive effect to the stock dividend discussed in Note 14, were 1,765,794,
1,761,126 and 1,759,980 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Cash Equivalents: For purposes of the Statements of Cash Flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. This includes the balance sheet captions
of "Cash and due from banks", "Interest-bearing deposits in banks", and "Federal
funds sold".
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.
NOTE 2 - INVESTMENT SECURITIES
Available-for-sale securities consist of the following:
December 31, 1998
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- -----------
Equity securities $10,673,904 $26,698,406 $10,422 $37,361,888
December 31, 1997
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- -----------
Equity securities $10,921,793 $27,147,378 $ -- $38,069,171
- 8 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 2 - INVESTMENT SECURITIES (continued)
Held-to-maturity securities consist of the following:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $23,967,745 $775,586 $ -- $24,743,331
Obligations of U.S. government agencies 6,774,380 17,427 21,707 6,770,100
Obligations of state and political sub-divisions 1,137,866 5,129 1,745 1,141,250
Corporate notes 748,829 3,881 -- 752,710
----------- -------- ------- -----------
$32,628,821 $802,023 $23,452 $33,407,392
=========== ======== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $27,396,668 $472,555 $ 7,293 $27,861,930
Obligations of U.S. government agencies 1,097,184 7,892 826 1,104,250
Obligations of state and political sub-divisions 1,889,897 6,778 11,669 1,885,006
Corporate notes 1,994,475 16,775 -- 2,011,250
----------- -------- ------- -----------
$32,378,224 $504,000 $19,788 $32,862,436
=========== ======== ======= ===========
</TABLE>
- 9 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated market value of held-to-maturity securities at
December 31, 1998, by contractual maturity, are shown below. Available-for-sale
securities do not have a contractual maturity date as they consist of equity
securities. Expected maturities may differ from contractual maturities because
issuers have the right to call or prepay obligations.
Amortized Cost Market Value
-------------- ------------
Available-for-sale Securities $ 10,673,904 $ 37,361,888
============= ============
Held-to-maturity Securities
Due in one year or less $ 8,803,078 $ 8,858,958
Due after one year through five years 23,849,208 24,523,685
Due after five years through ten years 24,795 24,749
------------- ------------
32,677,081 33,407,392
Step-down due to merger (48,260) --
------------- ------------
$ 32,628,821 $ 33,407,392
============= ============
As a member of the Federal Home Loan Bank of Pittsburgh (FHLB), the Bank is
required to maintain a minimum amount of FHLB stock. The minimum amount is
calculated based on the level of the Bank's assets, residential real estate
loans, and FHLB advances. At December 31, 1998 and 1997, the Bank held $841,500
and $740,200, respectively, of FHLB stock. The Bank also has a line of credit
with the FHLB in the amount of $7.4 million at 5.8% annual interest. The full
amount of the line was available at December 31, 1998.
NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The primary classifications of loans as of December 31 are as follows:
1998 1997
------------- ------------
Mortgage $ 112,915,388 $106,617,350
Installment 23,925,546 25,122,377
Commercial 34,396,565 18,377,724
Student and other 4,714,617 3,537,526
------------- ------------
175,952,116 153,654,977
Less: Unearned discounts 9,683 10,329
Allowance for loan losses 1,238,232 1,248,879
------------- ------------
$ 174,704,201 $152,395,769
============= ============
- 10 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Changes in the allowance for loan losses for the years ended December 31 were as
follows:
1998 1997 1996
---------- ---------- ----------
Balance, beginning of year $1,248,879 $1,253,810 $1,243,619
Provision charged to operations 200,000 80,000 75,000
Loans charged off (246,182) (105,016) (107,354)
Recoveries 35,535 20,085 42,545
---------- ---------- ----------
Balance, end of year $1,238,232 $1,248,879 $1,253,810
========== ========== ==========
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment, which are stated at cost, as of December 31, are as
follows:
1998 1997
---------- ----------
Land $ 368,054 $ 334,554
Buildings and improvements 3,446,544 3,283,694
Furniture and equipment 4,358,121 4,274,178
---------- ----------
8,172,719 7,892,426
Less: Accumulated depreciation 4,841,076 4,433,253
---------- ----------
$3,331,643 $3,459,173
========== ==========
Depreciation expense was $580,950, $544,349 and $515,125 for the years ended
December 31, 1998, 1997 and 1996, respectively.
NOTE 5 - PLEDGED ASSETS
At December 31, 1998 and 1997, assets carried at approximately $31,105,000 and
$28,515,000, respectively, were pledged to qualify for fiduciary powers, to
secure public monies as required by law, and for other purposes.
- 11 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 6 - DEPOSITS
The maturities of time deposits over the next five years and thereafter as of
December 31, 1998 are, as follows:
DEPOSITS - TIME DEPOSIT MATURITIES
Amount Percent
------------ -------
Within one year $ 78,994,956 72.6%
One to two years 13,365,217 12.3
Two to three years 4,638,384 4.3
Three to four years 3,419,788 3.1
Four to five years 6,704,442 6.2
Over five years 1,688,785 1.5
------------ -----
$108,811,572 100.0%
============ =====
NOTE 7 - INCOME TAXES
The provision for income taxes for the years ended December 31 consists of:
1998 1997 1996
---------- ---------- --------
Currently payable $1,781,535 $ 963,936 $522,995
Deferred taxes 49,663 42,944 39,656
---------- ---------- --------
$1,831,198 $1,006,880 $562,651
========== ========== ========
The significant components of temporary differences as of December 31 are as
follows:
1998 1997 1996
-------- -------- ---------
Provision for loan losses $ 3,620 $ 1,677 $ 1,528
Depreciation (90,913) 3,488 97,345
Employee benefits 57,191 (22,299) 52,053
Other 79,765 60,078 (111,270)
-------- -------- ---------
Total $ 49,663 $ 42,944 $ 39,656
======== ======== =========
- 12 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 7 - INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory tax rate to the effective tax rate
applicable to income before income taxes for the years ended December 31 is as
follows:
Percentage of Pre-Tax Income
------------------------------
1998 1997 1996
---- ---- ----
Provision at statutory rate 34.0% 34.0% 34.0%
Effect of tax-exempt income (1.7) (2.5) (4.1)
Dividend received deduction (3.9) (5.5) (7.9)
Other 0.7 (0.8) (0.9)
---- ---- ----
Actual tax expense and effective rate 29.1% 25.2% 21.1%
==== ==== ====
The significant components of the Bank's deferred tax assets and liabilities
recorded on the balance sheet as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Deferred Tax Deferred Tax
---------------------------- ----------------------------
Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Provision for loan losses $ 256,671 $ -- $ 260,291 $ --
Depreciation 187,888 278,801
Pension expense 6,453 102,163
Unrealized gains 9,073,915 9,230,109
Merger adjustment to market value 1,189,426 1,273,351
Additional minimum pension liability 66,653 41,378
Other 109,303 44,034 118,811 12,296
----------- ----------- ----------- -----------
$ 439,080 $10,495,263 $ 522,643 $10,794,557
=========== =========== =========== ===========
</TABLE>
NOTE 8 - EMPLOYEE RETIREMENT PLAN
PFC Bank maintains a qualified non-contributory defined benefit pension plan
which covers substantially all employees meeting minimum age and service
requirements. The plan generally provides benefits based on years of credited
service and final average earnings. The current funding policy of the plan is to
annually contribute the maximum amount that can be deducted for Federal income
tax purposes.
- 13 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 8 - EMPLOYEE RETIREMENT PLAN (CONTINUED)
PFC Bank's operating divisions, Peoples Bank of PA and New Bethlehem Bank,
maintained non-qualified deferred compensation plans with participation
designated by the Board of Directors. The plans were terminated effective
December 31, 1996. The termination and subsequent recovery of the plans' assets
was included in the Bank's results of operations for the year ended December 31,
1996.
Assets for the qualified pension plan and the New Bethlehem non-qualified
deferred compensation plan were primarily U.S. government obligations, corporate
obligations and equity securities whose valuations are subject to fluctuations
of the securities market. Changes in plan asset values attributable to
differences between actual and expected returns on plan assets were deferred as
unrecognized gains or losses and included in the determination of pension cost
over time. The Peoples Bank of PA non-qualified deferred compensation plan was
funded primarily through the purchase of life insurance contracts. Consequently,
no actuarial valuation was used to determine the funded status and related
expenses of the Peoples Bank of PA non-qualified deferred compensation plan.
The following table summarizes financial data for the plan as of December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Change in Projected Benefit Obligation:
Beginning of year benefit obligation $ 1,710,378 $ 1,388,533
Service cost 112,188 68,009
Interest cost 119,322 89,596
Net actuarial gain 131,452 204,190
Less: Benefits paid to participants (110,613) (39,970)
----------- -----------
End of year benefit obligation $ 1,962,727 $ 1,710,358
=========== ===========
Change in the Fair Value of Plan Assets:
Beginning of year plan assets, at fair value $ 1,285,379 $ 1,005,092
Actual return on plan assets 91,921 175,841
Employer contributions 304,735 144,416
Benefits paid to participants (110,613) (39,970)
----------- -----------
End of year plan assets, at fair value $ 1,571,422 $ 1,285,379
=========== ===========
Accrued Pension Expense:
Funded status (projected benefit obligation less plan
assets at fair value) $ (391,305) $ (424,999)
Unamortized transition amount 87,334 92,722
Unrecognized net actuarial loss 670,164 535,926
Additional minimum pension liability adjustment (196,037) (121,732)
Unamortized prior service benefit (459,904) (465,569)
----------- -----------
Accrued pension expense at year end $ (289,748) $ (383,652)
=========== ===========
</TABLE>
- 14 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 8 - EMPLOYEE RETIREMENT PLAN (CONTINUED)
Net periodic pension cost included the following components for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $112,188 $ 68,009 $ 77,482
Interest cost on projected benefit obligation 119,322 89,596 83,503
Net amortization (deferral) (3,063) 114,976 55,491
Less: Actual return on plan assets 91,921 175,841 99,694
-------- -------- --------
Net periodic pension cost $136,526 $ 96,740 $116,782
======== ======== ========
</TABLE>
The projected benefit obligation was determined using an assumed discount rate
of 7.0% for 1998, 7.0% for 1997, and 6.5% for 1996 and an expected rate of
increase in compensation of 4.0%, 4.0% and 5.0%, respectively, for the same
periods. The assumed rate of return on the plan's investment earnings was 7.0%
for 1998, 7.0% for 1997, and 6.5% for 1996.
NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
There are various outstanding commitments and contingent liabilities arising in
the normal course of business that are not reflected in the accompanying
financial statements. These commitments and contingent liabilities represent
financial instruments with off-balance sheet risk. The contract or notional
amounts of those instruments were comprised of commitments to extend credit and
stand-by letters of credit of $11,958,000 and $8,398,000 as of December 31, 1998
and 1997, respectively, and approximate fair value.
The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The same
credit policies are used in making commitments and conditional obligations as
for on-balance sheet instruments. The amount of collateral obtained, if deemed
necessary, upon extension of credit is based on management's credit evaluation
of the party. The terms are typically for a one-year period, with an annual
renewal option subject to prior approval by management.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the loan agreement. These
commitments are comprised primarily of outstanding commercial and personal lines
of credit.
The exposure to loss under these commitments is limited by subjecting them to
credit approval and monitoring procedures. Substantially all of the commitments
to extend credit are contingent upon customers maintaining specific credit
standards at the time of the loan funding. Management assesses the credit risk
associated with certain commitments to extend credit in determining the level of
the allowance for loan losses. Since many of the commitments are expected to
expire without being drawn upon, the total contractual amounts do not
necessarily represent future funding requirements.
- 15 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 10 - DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents: The carrying amount is a reasonable estimate of
fair value.
Investment securities: The fair value of securities is equal to the
available quoted market price. If no quoted market price is available, fair
value is estimated using the quoted market price for similar securities.
FHLB stock: The carrying value of the FHLB stock is a reasonable estimate
of fair value due to restrictions on the securities.
Loans receivable: For most homogeneous categories of loans, fair value is
estimated by comparing rates currently offered on similar loans to the
interest rate yield being realized on existing loans. The fair value of
other types of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
for the same remaining maturities.
Deposit liabilities: The fair value of demand deposits, savings accounts
and money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
by comparing the rates currently offered on similarly maturing deposits to
the interest rate being recognized on existing certificates of deposit.
The estimated fair value of the Company's financial instruments as of
December 31, 1998 is as follows:
Carrying
Amount Fair Value
------------ ------------
Financial Assets
Cash and cash equivalents $ 14,910,077 $ 14,910,077
Investment securities $ 69,990,709 $ 70,769,280
Federal Home Loan Bank stock $ 841,500 $ 841,500
Loans receivable $174,704,201 $174,137,000
Financial Liabilities
Deposits $213,359,346 $212,686,000
The market values of classifications of investment securities are contained in
Note 2.
- 16 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 11 - REGULATORY MATTERS
The Bank pays dividends from its assets. However, the Bank is subject to legal
limitations on the amount of dividends that can be paid to the Company. The
Pennsylvania Banking Code restricts the payment of dividends, generally to the
extent of its retained earnings. Dividends are based on operating results for
the period. Consideration for dividend declarations and payments include
regulatory guidelines and limitations and the capital requirements of the Bank.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios, as set forth below, of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
December 31, 1998 and 1997, that the Bank meets all capital adequacy
requirements to which it is subjected.
As of December 31, 1998 and 1997, the most recent notification from the Federal
Deposit Insurance Corporation (FDIC) categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The Bank's regulatory capital information as of December 31, 1998 and 1997 is,
as follows:
Minimum Well
Capital Capitalized
Actual Requirements Requirements
------ ------------ ------------
Risk-based capital ratio
1998 20.91% 8% 10%
1997 13.10% 8% 10%
Leverage capital ratio
1998 9.48% 3% to 4% 5%
1997 8.33% 3% to 4% 5%
Tier 1 risk-based capital ratio
1998 13.18% 4% 6%
1997 12.30% 4% 6%
- 19 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
Included in the "Cash and due from banks" balance are required federal reserves
of approximately $1,191,000 and $963,000 at December 31, 1998 and 1997,
respectively for facilitating the implementation of monetary policy by the
Federal Reserve System. The required reserves are computed by applying
prescribed ratios to the classes of average deposit balances.
- 20 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 12 - CONCENTRATIONS, RISKS AND UNCERTAINTIES
The Bank primarily grants loans to customers in Armstrong, Butler, Clarion and
Indiana counties of Pennsylvania and maintains a diversified loan portfolio. The
ability of its debtors to honor their contracts is not substantially dependent
on any particular economic business sector.
The Bank has certain risks associated with deposit concentrations. The Bank had
327 accounts greater than $100,000 representing $62.3 million in deposits as of
December 31, 1998 (29.2% of deposits as of December 31, 1998) and approximately
$53.6 million in 237 accounts as of December 31, 1997 (28.1% of deposits as of
December 31, 1997).
A substantial portion of the Bank's investments in municipal securities is
obligations of state or political subdivisions located within Pennsylvania.
At December 31, 1998, approximately $9,000,000 of the Bank's "Cash and due from
banks" and "Interest-bearing deposits in banks" was maintained at various
financial institutions in amounts that exceeded the $100,000 limit on FDIC
insured accounts.
The Company and the Bank are involved in various legal actions from normal
business activities. Management believes that the liability, if any, arising
from such actions will not have a material adverse effect on the financial
position of the Company or the Bank.
NOTE 13 - RELATED PARTIES
At December 31, 1998 and 1997, certain executive officers, directors and
principal shareholders of the Company, and companies in which they have
beneficial ownership, were indebted to the Bank for $480,998 and $415,408,
respectively. During 1998, new loans to such related parties were $172,339 and
repayments were $74,331. Additionally the net amount loaned to related parties
decreased by $32,418 due to changes in the executive officers, directors or
principal shareholders.
Deposits with the Bank by related parties and shareholders' greater than 5% were
approximately $3,739,000 and $4,432,000 as of December 31, 1998 and 1997.
NOTE 14 - SUBSEQUENT EVENT
On January 20, 1999, the Company declared a 100% stock dividend in the form of a
two-for-one stock split on the Company's outstanding common stock. One
additional share of common stock will be issued for each share of common stock
held by shareholders of record as of the close of business on January 20, 1999.
The distribution of new shares began February 10, 1999. The Company has
retroactively restated common stock and surplus for all periods presented to
reflect this stock split. Par value will remain unchanged at $0.30 per share.
The number of shares issued and outstanding at December 31, 1998, after giving
effect to the stock split, was 1,768,694 (884,347 shares issued and outstanding
prior to the stock split). All reference to the number of shares and per share
amounts elsewhere in the consolidated financial statements and related footnotes
have been restated as appropriate to reflect the effect of the stock split for
all periods presented.
- 21 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION
The condensed financial information for Peoples Financial Corp., Inc., Inc. as
of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997
and 1996 is as follows:
BALANCE SHEETS
December 31,
----------------------------
1998 1997
----------- -----------
ASSETS
Cash in bank $ 35,173 $ 173,898
Investment in subsidiary 40,322,888 37,217,593
Available-for-sale securities 216,060 21,459
Other assets -- --
----------- -----------
Total Assets $40,574,121 $37,412,950
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ -- $ --
Stockholders' Equity 40,574,121 37,412,950
----------- -----------
Total Liabilities and Stockholders' Equity $40,574,121 $37,412,950
=========== ===========
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income
Dividends from subsidiary $1,033,597 $1,004,261 $ 822,050
Other 26,113 14,781 7,539
Expenses
Professional fees 45,142 69,860 --
Miscellaneous 3,100 4,200 5,806
---------- ---------- ----------
Income Before Income Taxes and Equity in
Undistributed Earnings of Subsidiary 1,011,468 944,982 823,783
Equity in Undistributed Earnings
of Subsidiary 3,452,194 2,051,456 1,286,356
---------- ---------- ----------
Net Income $4,463,662 $2,996,438 $2,110,139
========== ========== ==========
</TABLE>
- 22 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 1998, 1997 and 1996
NOTE 15 - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,463,662 $ 2,996,438 $ 2,110,139
Adjustments to reconcile net income to
net cash provided by operating activities:
Decrease in cash due to changes
in assets and liabilities
Equity in undistributed earnings
of subsidiary (3,452,194) (2,051,456) (1,286,356)
Other assets -- -- (6,733)
----------- ----------- -----------
Net Cash From Operating Activities 1,011,468 944,982 817,050
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale securities (199,942) (9,000) --
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuing of common stock 83,346 83,309 --
Dividends paid (1,033,597) (995,261) (809,591)
----------- ----------- -----------
Net Cash Used By Financing Activities (950,251) (911,952) (809,591)
----------- ----------- -----------
Net Change in Cash and Cash Equivalents (138,725) 24,030 7,459
Cash and Cash Equivalents
at Beginning of Year 173,898 149,868 142,409
----------- ----------- -----------
Cash and Cash Equivalents
at End of Year $ 35,173 $ 173,898 $ 149,868
=========== =========== ===========
</TABLE>
NOTE 16 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. In addition, certain provisions of this statement will permit, at
the date of initial adoption, the transfer of any held-to-maturity security into
either the available-for-sale or trading category and the transfer of any
available-for-sale security into the trading category. Transfers from the
held-to-maturity portfolio at the date of initial adoption will not call into
question an entity's intent to hold other debt securities to maturity in the
future. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. At this time, the Bank does not hold any
derivative instruments or engage in any hedging activities.
- 23 -
PFC Bank -- incorporated in the state of Pennsylvania.
PFC Service Corporation -- incorporated in the state of Delaware.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report of Form 10-K
of Peoples Financial Corp., Inc. of our report dated February 5, 1999, included
in the Peoples Financial Corp., Inc. and Subsidiary Consolidated Financial
Statements - December 31, 1998, 1997 and 1996.
Edwards, Leap & Sauer
March 22, 1999
Pittsburgh, Pennsylvania
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
ARTICLE 9 FDS FOR FIRST QUARTER 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,743
<INT-BEARING-DEPOSITS> 8,268
<FED-FUNDS-SOLD> 1,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,203
<INVESTMENTS-CARRYING> 32,629
<INVESTMENTS-MARKET> 33,407
<LOANS> 175,942
<ALLOWANCE> 1,238
<TOTAL-ASSETS> 266,002
<DEPOSITS> 213,359
<SHORT-TERM> 0
<LIABILITIES-OTHER> 12,069
<LONG-TERM> 0
0
0
<COMMON> 531
<OTHER-SE> 40,043
<TOTAL-LIABILITIES-AND-EQUITY> 266,002
<INTEREST-LOAN> 13,846
<INTEREST-INVEST> 3,509
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 17,355
<INTEREST-DEPOSIT> 8,450
<INTEREST-EXPENSE> 8,450
<INTEREST-INCOME-NET> 8,905
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 3,001
<EXPENSE-OTHER> 6,037
<INCOME-PRETAX> 6,295
<INCOME-PRE-EXTRAORDINARY> 6,295
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,464
<EPS-PRIMARY> 2.53
<EPS-DILUTED> 2.53
<YIELD-ACTUAL> 7.95
<LOANS-NON> 93
<LOANS-PAST> 434
<LOANS-TROUBLED> 133
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,249
<CHARGE-OFFS> 246
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 1,238
<ALLOWANCE-DOMESTIC> 1,238
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
March 5, 1999
Dear Shareholders:
On behalf of the Board of Directors, I am pleased to invite you to attend
our Annual Meeting of Shareholders to be held on Wednesday, March 31, 1999, at
10:00 a.m., at the Holiday Inn, Route 68 and I-80, Clarion, Pennsylvania 16214.
At the annual meeting, you will have the opportunity to ask questions and to
make comments. We enclose your proxy and the corporation's 1998 Annual Report to
Shareholders with this proxy statement.
The principal business of the meeting is to elect nine (9) directors to
serve for a one-year term, to ratify the selection of Edwards, Leap & Sauer of
Pittsburgh, Pennsylvania, Certified Public Accountants, as the auditors of the
corporation for 1999, and to transact any other business that is properly
presented at the annual meeting. The notice of meeting and proxy statement
accompanying this letter describe the specific business to be acted upon in more
detail.
You will notice that our proxy statement is written in "plain english." We
hope that our shareholders like the new format and find the proxy statement
easier to read.
I am delighted you have chosen to invest in the corporation, and I hope
that, whether or not you plan to attend the annual meeting, you will vote as
soon as possible by completing, signing and returning the enclosed proxy in the
envelope provided. The prompt return of your proxy will save the corporation
expenses involved in further communications. Your vote is important. Voting by
written proxy will ensure your representation at the annual meeting if you do
not attend in person.
I look forward to seeing you on March 31, 1999, at the corporation's annual
meeting.
Sincerely,
Raleigh B. Robertson, President and
Chief Executive Officer
<PAGE>
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
OF PEOPLES FINANCIAL CORP., INC.
TO BE HELD ON MARCH 31, 1999
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that Peoples Financial Corp., Inc. will hold its
Annual Meeting of Shareholders on Wednesday, March 31, 1999, at 10:00 a.m., at
the Holiday Inn, Route 68 at I-80, Clarion, Pennsylvania 16214, to consider and
vote upon the following proposals:
1. Election of nine directors: Frank T. Baker, Darl Hetrick, Francis E.
Kane, Raleigh B. Robertson, Raleigh B. Robertson, Jr., Timothy P.
Reddinger, J. Jack Sherman, Howard H. Shreckengost, and William H. Toy,
each for a term of one year.
2. Ratification of the selection of Edwards, Leap & Sauer, Certified
Public Accountants, of Pittsburgh, Pennsylvania, as independent
accountants for the corporation for 1999.
3. Transaction of any other business properly brought before the Annual
Meeting.
Shareholders, as of March 1, 1999, may vote at the annual meeting, either
in person or by proxy. If you plan to attend the annual meeting, please mark the
appropriate area when you vote on your proxy.
Management welcomes your attendance at the annual meeting. Whether or not
you expect to attend the annual meeting in person, we ask you to complete, sign,
date and promptly return the enclosed proxy in the accompanying postage-paid
envelope. Prompt return of your proxy saves the expense involved in further
communications. Even if you return a proxy, you may vote in person if you give
written notice to the Secretary of the Corporation and attend the annual
meeting. We urge you to mark, sign, date and promptly return your proxy in the
enclosed envelope so that proxyholders may vote your shares in accordance with
your wishes and so that we may assure the presence of a quorum.
The corporation's Board of Directors distributes this Proxy Statement, form
of proxy and Peoples Financial Corp., Inc.'s 1998 Annual Report on or about
March 5, 1999.
By Order of the Board of Directors,
Raleigh B. Robertson, President and
Chief Executive Officer
Ford City, Pennsylvania
March 5, 1999
YOUR VOTE IS IMPORTANT. TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE
ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID RETURN
ENVELOPE.
<PAGE>
FREQUENTLY ASKED QUESTIONS AND ANSWERS
Q: WHO IS ENTITLED TO VOTE?
A: Shareholders as of the close of business on the record date, March 1,
1999, may vote at the meeting. Each share of common stock entitles a
shareholder to one vote.
Q: HOW DO I VOTE?
A: There are two methods. You may vote by completing and mailing your
proxy or by attending the annual meeting and voting in person. More
details are on page 3 of this proxy statement.
Q: HOW DOES DISCRETIONARY AUTHORITY APPLY?
A: If you sign your proxy but do not make any selections, you give
authority to Raleigh B. Robertson and Timothy P. Reddinger, as proxy
holders, to vote on the two proposals and on any other matter that may
arise at the meeting.
Q: IS MY VOTE CONFIDENTIAL?
A: Yes. Only the Judge of Elections and the proxy holders will have access
to your proxy. All comments will remain confidential unless you ask
that your name be disclosed.
Q: WHO WILL COUNT THE VOTES
A: William Strong, Esquire will tabulate the votes and act as the Judge of
Election.
Q: WHAT DOES IT MEAN IF I GET MORE THAN ONE PROXY?
A: Your shares are probably registered differently or are in more than one
account. Sign and return all proxies to ensure that all your shares are
voted. Please have all of your accounts registered in the same name and
address. You may do this by contacting Timothy Reddinger, Secretary of
the Corporation at (814) 275-3133.
Q: WHAT CONSTITUTES A QUORUM?
A: As of March 1, 1999, 1,768,694 shares of common stock were issued and
outstanding. A majority of the outstanding shares, present or
represented by proxy, constitutes a quorum. If you vote by proxy or in
person, we will consider your shares as part of the quorum.
Q: WHAT PERCENTAGE OF STOCK DO THE DIRECTORS AND OFFICERS OWN?
A: Approximately 36.01% of our common stock as of March 1, 1999. More
details are on page 11 of this proxy statement.
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Proxy Statement Page
----
<S> <C>
General Information......................................................................................1
o Date, Time and Place of the Annual Meeting.............................................1
o Description of the Corporation.........................................................1
Voting Procedures........................................................................................1
o Solicitation and Voting of Proxies.....................................................1
o Quorum and Vote Required for Approval..................................................2
o Revocability of Proxy..................................................................3
o Methods of Voting......................................................................3
Board of Directors and Executive Officers.........................................................................4
Governance...............................................................................................4
Executive Officers of the Corporation....................................................................4
Executive Officers of the Bank...........................................................................5
Committees and Meetings of the Corporation's Board of Directors..........................................5
Qualifications and Nomination of Directors...............................................................6
Directors Meetings ......................................................................................8
Compensation of Officers and Directors...................................................................8
o Cash Compensation Table................................................................8
Certain Relationships and Related Transactions...........................................................9
Beneficial Ownership of the Corporation's Stock Owned by
Principal Owners and Management.............................................................................10
Principal Shareholders..................................................................................10
Share Ownership by the Directors, Officers and Nominees.................................................11
Proposals........................................................................................................12
Election of Directors..................................................................................12
Ratification of Selection of Independent Accountants....................................................13
Executive Compensation...........................................................................................13
Shareholders' Proposals for 2000 Annual Meeting..................................................................14
Other Matters That May Come Before the Annual Meeting............................................................14
</TABLE>
<PAGE>
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS OF
PEOPLES FINANCIAL CORP., INC.
TO BE HELD ON MARCH 31, 1999
GENERAL INFORMATION
Date, Time and Place of Annual Meeting
Peoples Financial Corp., Inc., a Pennsylvania business corporation and
registered bank holding company, is furnishing this proxy statement in
connection with the solicitation by the Board of Directors of proxies to be
voted at the Annual Meeting of Shareholders of the corporation. The annual
meeting will be held at Holiday Inn, Route 68 and I-80, Clarion, Pennsylvania
16214, on Wednesday, March 31, 1999, at 10:00 a.m., Eastern Standard Time. The
principal executive office of the corporation is located at Ford Street and
Fourth Avenue, Ford City, Pennsylvania 16226. The telephone number for the
corporation is (724) 763-1221. All inquiries should be directed to James L.
Kifer, Executive Vice President of the corporation at (814) 275-3133.
Description of the Corporation
The bank incorporated Peoples Financial Corp., Inc. in 1984 to act as a
holding company under the laws of Pennsylvania. PFC Bank is a wholly-owned
subsidiary of the corporation.
The corporation is mailing a copy of the Annual Report for the fiscal year
ended December 31, 1998, with this Notice. You may obtain a copy of the
corporation's Annual Report for the 1997 fiscal year at no cost by contacting
Timothy Reddinger, Corporate Secretary, Peoples Financial Corp., Inc., 363 Broad
Street, New Bethlehem, Pennsylvania 16242, telephone (814) 275-3133.
We have not authorized anyone to provide you with information, therefore,
you should rely only on the information contained in this proxy statement or
referred to in this proxy statement. Although we believe we have provided you
with all the information you need to vote, events may occur at Peoples Financial
Corp., Inc. subsequent to printing this proxy statement that might affect your
decision or the value of your stock.
VOTING PROCEDURES
Solicitation and Voting of Proxies
The Board of Directors solicits this proxy for use at the 1999 Annual
Meeting of Shareholders. The directors, officers and other employees of the
corporation or bank may solicit
(1)
<PAGE>
proxies in person or by telephone, telecopy, telegraph or mail, but only for use
at the annual meeting. The corporation will pay the cost of preparing,
assembling, printing, mailing and soliciting proxies and any additional material
that the corporation sends to shareholders. The corporation will make
arrangements with brokerage houses and other custodians, nominees and
fiduciaries to forward proxy solicitation materials to the owners of stock held
by these persons. The corporation will reimburse these persons for their
reasonable forwarding expenses.
Only shareholders of record as of the close of business on Monday, March 1,
1999, may vote at the annual meeting. The corporation's records show that, as of
the March 1, 1999, 1,768,694 shares of the corporation's common stock were
outstanding. The number of outstanding shares includes shares issued on February
10, 1999, pursuant to a 100% stock dividend. All tables in this proxy statement
are adjusted to reflect the stock dividend. On all matters to come before the
annual meeting, shareholders may cast one vote for each share held. Cumulative
voting rights do not exist with respect to the election of directors. See
"Principal Shareholders" on page 11 for a list of the persons known by the
corporation to be the beneficial owner of five percent (5%) or more of the
corporation's common stock.
By properly completing a proxy, you appoint Raleigh B. Robertson and
Timothy P. Reddinger as proxy holders to vote your shares as specified on the
proxy. Any proxy not specifying to the contrary will be voted as follows:
FOR the election of Frank T. Baker, Darl Hetrick, Francis E. Kane,
Raleigh B. Robertson, Raleigh B. Robertson, Jr., Timothy P. Reddinger,
J. Jack Sherman, Howard H. Shreckengost, and William H. Toy, each for a
term of one year; and
FOR the ratification of the selection of Edwards, Leap & Sauer, as the
independent accountants of the corporation for 1999.
Quorum and Vote Required For Approval
In order to hold the annual meeting, there must be a "quorum" of
shareholders present. Under Pennsylvania law and the Bylaws of the corporation,
the presence, in person or by proxy, of the holders of a majority of the shares
entitled to vote is necessary to constitute a quorum for the transaction of
business at the meeting. We count votes withheld and abstentions in determining
the presence of a quorum for the particular matter. Broker non-votes are not
counted in determining the presence of a quorum for the particular matter as to
which the broker withheld authority.
Assuming the presence of a quorum, the nine nominees for director receiving
the highest number of votes cast by shareholders entitled to vote for the
election of directors will be elected. Votes withheld from a nominee and broker
non-votes will not be cast for such nominee.
Assuming the presence of a quorum, ratification of the selection of
independent auditors requires the affirmative vote of a majority of all votes
cast by shareholders. Abstentions and broker non-votes are not deemed to
constitute "votes cast" and, therefore, do not count either for or against
ratification. Abstentions and broker non-votes, however, have the practical
effect
(2)
<PAGE>
of reducing the number of affirmative votes required to achieve a majority for
the matter by reducing the total number of shares voted from which the required
majority is calculated.
Revocability of Proxy
Shareholders who sign proxies may revoke them at any time before they are
voted by:
o delivering written notice of the revocation to Timothy Reddinger,
Secretary of the Corporation, at 363 Broad Street, New Bethlehem,
Pennsylvania 16242; or
o delivering a properly executed proxy bearing a later date to
Timothy Reddinger, Secretary of the Corporation, at 363 Broad
Street, New Bethlehem, Pennsylvania 16242; or
o attending the meeting and voting in person after giving written
notice to the Secretary of the Corporation.
You have the right to vote and, if desired, to revoke your proxy any time
before the annual meeting. Should you have any questions, please call Timothy
Reddinger, Secretary of the Corporation, at (814) 275-3133.
Methods of Voting
Proxy Voting
- ------------
1. Mark your selections.
2. Date your proxy and sign your name exactly as it appears on your proxy.
3. Mail to Peoples Financial Corp., Inc. in the enclosed, postage-paid
envelope.
Voting in Person
- ----------------
1. Attend the Annual Meeting and show proof of eligibility to vote.
2. Obtain a proxy.
3. Mark your selections.
4. Date your proxy and sign your name exactly as it appears in the
transfer books of the corporation.
(3)
<PAGE>
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
Executive Officers of the Corporation
The following table sets forth selected information about the principal
officers of the corporation, each of whom is elected by the Board of Directors
and each of whom holds office at the discretion of the Board of Directors:
<TABLE>
<CAPTION>
Position Held Employee Age as of
Name Position Since Since March 1, 1999
- ---- -------- ----- ----- -------------
<S> <C> <C> <C> <C>
Raleigh B. Robertson President 1996 1996(1) 70
Timothy P. Reddinger Secretary 1998 (2) 39
Frank T. Baker Chairman of 1997 (2) 63
the Board
James L. Kifer Exec. Vice 1997 1995(3) 37
President
</TABLE>
(1) Was an employee of New Bethlehem Bank from 1987 until December 31, 1994
and was a consultant to the Bank until he was appointed Chairman and
CEO on April 17, 1996, then President and CEO on April 8, 1997.
(2) Not an employee of the Bank.
(3) Was employee of New Bethlehem Bank from 1984 until the merger
(effective 4/1/95) of New Bethlehem Bank with and into the Bank.
[Intentionally left blank]
(4)
<PAGE>
Executive Officers of the Bank
The following table sets forth selected information about the principal
officers of the bank, each of whom is elected by the Board of Directors and each
of whom holds office at the discretion of the Board of Directors:
<TABLE>
<CAPTION>
Position Held Employee Age as of
Name Position Since Since March 1, 1999
- ---- -------- ----- ----- -------------
<S> <C> <C> <C>
Frank T. Baker Chairman of the 1997 (2) 63
Board
Raleigh B. Robertson President 1996 1996(1) 70
Timothy P. Reddinger Secretary 1998 (2) 39
James L. Kifer Exec. Vice 1997 1995(3) 37
President
</TABLE>
(1) Was an employee of New Bethlehem Bank from 1987 until December 31, 1994
and was a consultant to the Bank until he was appointed Chairman and
CEO on April 17, 1996, then President and CEO on April 8, 1997.
(2) Not an employee of the Bank.
(3) Was employee of New Bethlehem Bank from 1984 until the merger
(effective 4/1/95) of New Bethlehem Bank with and into the Bank.
Committees and Meetings of the Corporation's Board of Directors
The corporation's Board of Directors does not have committees. The entire
Board meets to discuss the corporation's business.
Qualification and Nomination of Directors
The Board of Directors nominated the nine persons named below to serve as
directors until the 2000 annual meeting of shareholders or until their earlier
death, resignation or removal from office. All of the nominees are presently
members of the Board of Directors and all have consented to serve another term
as a director if re-elected. If any of the nominees should be unavailable to
serve for any reason, a majority of the Board of Directors then in office may
fill the vacancy until the expiration of the term of the class of directors to
which he or she was appointed.
(5)
<PAGE>
The proxy holders intend to vote such proxy for the election of each of the
nine nominees named below, unless you indicate that your vote should be withheld
from either or all of them. Each nominee elected as a director will continue in
office until his successor has been duly elected and qualified, or until his
death, resignation or retirement.
The Board of Directors is proposing the following nominees for election as
Directors at the annual meeting:
o Frank T. Baker
o Darl Hetrick
o Francis E. Kane
o Timothy P. Reddinger
o Raleigh B. Robertson
o Raleigh B. Robertson, Jr.
o J. Jack Sherman
o Howard H. Shreckengost
o William H. Toy
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE
ABOVE-NAMED NOMINEES FOR ELECTION AS DIRECTORS.
Set forth below is the principal occupation and certain other information
regarding the nominees and other directors whose terms of office will continue
after the annual meeting. You can find information about the share ownership of
the nominees and other directors on page 11.
Directors (to serve until 1999)
and
Nominees for Directors (to serve until 2000)
Frank T. Baker -- Director since 1973
Mr. Baker serves as the Chairman of the Board of the corporation and of the
bank. Mr. Baker is a former professor at Indiana University of Pennsylvania. He
is currently retired. Mr. Baker has been a director of the corporation since
1984 and of the bank since 1973 and serves as Chairman of the Board of the bank.
Raleigh B. Robertson -- Director since 1993
Mr. Robertson is the President and Chief Executive Officer of the
corporation and the President and Chief Executive Officer of the bank. He was
elected to the Board of Directors in connection with the merger of New Bethlehem
Bank, where he was a director since 1985. He has been a member of the bank's
Board of Directors since 1993.
(6)
<PAGE>
Darl Hetrick -- Director since 1993.
Mr. Hetrick has been a director of the corporation and a director of the
bank since 1993. He was elected to the Board of Directors in connection with the
merger of New Bethlehem Bank, where he was a director since 1983. He is the
owner of Hetrick's Farm Supply (a farm machinery distributor, located in New
Bethlehem, Pennsylvania.)
Francis E. Kane -- Director since 1955.
Mr. Kane has been a director of the corporation since 1984 and a director
of the bank since 1955. He is currently retired.
Timothy P. Reddinger -- Director since 1998.
Mr. Reddinger has been a director of the corporation and a director of the
bank since 1998. He is the Secretary of the corporation and President of TDK
Coal Sales, Inc. (a coal broker, located in Clarion, Pennsylvania.)
Raleigh B. Robertson, Jr.-- Director since 1995.
Mr. Robertson has been a director of the corporation and a director of the
bank since 1995. He was elected to the Board of Directors in connection with the
merger of New Bethlehem Bank, where he was a director since 1994. He is a
partner in R. B. Robertson & Son, (an oil and gas business located in New
Bethlehem, Pennsylvania.)
J. Jack Sherman -- Director since 1995.
Mr. Sherman has been a director of the corporation and a director of the
bank since 1995. He was elected to the Board of Directors in connection with the
merger of New Bethlehem Bank, where he was a director since 1994. He is
President of Sherman Enterprises, located in Tionesta, Pennsylvania.
Howard H. Shreckengost -- Director since 1995.
Mr. Shreckengost has been a director of the corporation and a director of
the bank since 1995. He was elected to the Board of Directors in connection with
the merger of New Bethlehem Bank, where he was a director since 1994. He is
Manager of Char-Val Candy Company (a candy manufacturer, located in New
Bethlehem, Pennsylvania.)
William H. Toy -- Director since 1992.
Mr. Toy has been a director of the corporation and a director of the bank
since 1992. He is the owner of Spic & Span Cleaners and Sail Care (dry cleaning
and sail maintenance businesses, located in Ford City, Pennsylvania.)
(7)
<PAGE>
Directors Meetings
Each of the directors attend at least seventy-five percent (75%) of the
total number of Board of Directors meetings for the corporation and the bank.
Compensation of Officers and Directors
The following table sets forth all cash compensation for services in all
capacities paid by the corporation and the bank during 1998 to the Chief
Executive Officer and up to four of the most highly compensated executive
officers of the corporation and the bank to the extent that these officer's
aggregate cash compensation exceeds $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation 1996-1998
Other Annual
Name and Principle Position Year Salary($) Bonus($) Compensation($)
- --------------------------- ---- ---------- -------- ---------------
<S> <C> <C> <C> <C>
Raleigh B. Robertson, 1998 144,235.08 72,000 83,358.16(1)
President/CEO
1997 130,893.00 72,000 83,308.50(1)
1996 62,330.00 40,000 47,084.00(2)
</TABLE>
- ------
(1) Contingent compensation paid in 1997 and 1998.
(2) Includes $38,000 appraisal fees and $9,084 in Director's fees.
- --------------------------------------------------------------------------------
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------
The corporation did not grant stock options or stock appreciation rights in
1998.
- --------------------------------------------------------------------------------
(8)
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL
YEAR AND FY/END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SAR's Options/SAR's
at FY-End(#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized($)(1) Unexercisable Unexercisable
---- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Raleigh B. Robertson 4,358 $25,603.25 0/4,358 $0/$83,346.75
President and CEO
</TABLE>
- -----------------------------
(1) Calculated from information received from market maker in the corporation's
securities.
Certain Relationships and Related Transactions
The corporation and the bank have not entered into any material
transactions, proposed or consummated, with any director or executive officer of
the corporation and the bank, or any associate of the foregoing persons. The
corporation and the bank have engaged in and intend to continue to engage in
banking and financial transactions in the ordinary course of business with
directors and officers of the corporation and the bank and their associates on
comparable terms with similar interest rates as those prevailing from time to
time for other customers of the corporation and the bank.
Total loans outstanding from the corporation and the bank at December 31,
1998, to the corporation's and the bank's officers and directors as a group,
members of their immediate families and companies in which they had an ownership
interest of ten percent (10%) or more amounted to $480,998, or approximately
1.19% of the total equity capital of the bank. The bank made these loans in the
ordinary course of business, were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not involve more than the
normal risk of collection or present other unfavorable features.
(9)
<PAGE>
BENEFICIAL OWNERSHIP OF THE
CORPORATION'S STOCK OWNED BY
PRINCIPAL OWNERS AND MANAGEMENT
Principal Shareholders
The following table sets forth, as of March 1, 1999, the name and address
of each person who owns of record or who is known by the Board of Directors to
be the beneficial owner of more than five percent (5%) of the corporation's
outstanding common stock, the number of shares beneficially owned by such person
and the percentage of the corporation's outstanding common stock so owned.
<TABLE>
<CAPTION>
Percent of
Outstanding
Shares Common Stock
Name and Address Beneficially Owned(1) Beneficially Owned
---------------- --------------------- ------------------
<S> <C> <C>
J. Jack Sherman 204,126 11.54%
P. O. Box 324
Tionesta, PA 16353
CEDE & CO 166,396 9.41%
c/o The Depository Trust
P. O. Box 222
Bowling Green Station
New York, NY 10274
Howard Shreckengost 127,014(2) 7.18%
406 Vine Street
New Bethlehem, PA 16242
C. Edward Dunmire 125,504 7.10 %
R.D. #7, Box 302A
Kittanning, PA 16201
</TABLE>
- ---------------------------
(1) For the definition of "beneficial ownership" see footnote 1 below under the
caption entitled "Share Ownership by the Directors, Officers and Nominees.
(2) Mr. Shreckengost holds the shares jointly with his spouse.
(10)
<PAGE>
Share Ownership by the Directors, Officers and Nominees
The following table sets forth, as of March 1, 1999, and from information
received from the respective individuals, the amount and percentage of the
common stock beneficially owned by each director, each nominee and all officers,
directors and nominees of the corporation as a group.
Name of Individual or Amount and Nature of Percent of
Identify of Group Beneficial Ownership (1)(3) Class
- ----------------- -------------------- -----
Frank T. Baker 79,988(4) 4.52%
Darl Hetrick 73,305(5) 4.14%
Francis E. Kane 12,592(6) .71%
Timothy Reddinger 13,543(7) .77%
Raleigh B. Robertson 33,046(8) 1.87%
Raleigh B. Robertson, Jr. 55,510(9) 3.14%
J. Jack Sherman 204,126 11.54%
Howard H. Shreckengost 127,014(2) 7.18%
William H. Toy 56,898(10) 3.22%
(All officers and Directors as
a Group, 10 Persons in total) 636,910 36.01%
(1) Beneficial ownership by an individual is determined in accordance with
the definitions of "beneficial ownership" set forth in the General Rules
and Regulations of the Securities and Exchange Commission and may
include securities owned by or for the individual's spouse and minor
children and any other relative who has the same home, as well as
securities to which the individual has or shares voting or investment
power or has the right to acquire beneficial ownership within 60 days
after March 1, 1999. Beneficial ownership may be disclaimed as to
certain of the securities.
(2) See footnote 2 above under the caption "Principal Beneficial
Owners of the Corporation's Stock".
(3) Information furnished by the directors of the corporation.
(4) Mr. Baker holds 71,210 shares jointly with his spouse and
she holds 4,658 individually.
(5) Mr. Hetrick holds 60,094 shares jointly with his spouse, 10,479 shares
jointly with his son, and his spouse and son hold 2,732 shares jointly.
(6) Mr. Kane holds 12,592 shares jointly with his spouse.
(7) Mr. Reddinger holds 399 shares jointly with his spouse.
(11)
<PAGE>
(8) Mr. Raleigh B. Robertson holds 100 shares individually, 7,688 shares
jointly with his spouse, 19,616 shares jointly with his son, Raleigh B.
Robertson, Jr., 4,910 shares jointly with his son, Richard W. Robertson,
and his spouse holds 732 shares individually.
(9) Mr. Raleigh B. Robertson, Jr. holds 22,316 shares jointly with his
spouse, 6,484 shares jointly with his son, 6,482 shares jointly with his
daughter, 19,616 shares jointly with his father, Raleigh B. Robertson,
and his son and daughter own 612 shares jointly.
(10) Mr. Toy holds 56,898 shares jointly with his spouse.
PROPOSALS
1. ELECTION OF DIRECTORS.
Nominees for election this year are:
o Frank T. Baker (director since 1984)
o Darl Hetrick (director since 1993)
o Francis E. Kane (director since 1984)
o Timothy P. Reddinger (director since 1998)
o Raleigh B. Robertson (director since 1993)
o Raleigh B. Robertson, Jr. (director since 1995)
o J. Jack Sherman (director since 1995)
o Howard H. Shreckengost (director since 1995)
o William H. Toy (director since 1992)
Each has consented to serve a one-year term. (See pages 6 and 7 for more
information.)
If any director is unable to stand for re-election, the Board may
designate a substitute. Proxy holders will vote in favor of a substitute
nominee. The Board of Directors has no reason to believe the nine (9) nominees
will be unable to serve if elected.
Cumulative voting rights do not exist with respect to the election of
directors. The affirmative vote of the majority of shares present (in person or
by proxy and entitled to vote at the annual meeting) is needed to elect a
director.
The Board of Directors recommends a vote FOR the election of the
nominees as Directors.
(12)
<PAGE>
2. RATIFICATION OF EDWARDS, LEAP & SAUER, AS INDEPENDENT ACCOUNTANTS.
The bank's Audit Committee and the Board of Directors of the corporation
and the bank believe that Edwards, Leap & Sauer's knowledge of the corporation
and the bank is invaluable. Edwards, Leap & Sauer, advised the corporation that
none of its members has any financial interest in the corporation. Edwards, Leap
& Sauer, served as the corporation's independent auditors for the 1998 fiscal
year. They assisted the corporation and the bank with the preparation of their
federal and state tax returns and provided assistance in connection with
regulatory matters, charging the bank for such services at its customary hourly
billing rates. The corporation's and the bank's Board of Directors approved
these non-audit services after due consideration of the accountants' objectivity
and after finding them to be wholly independent.
In the event that the shareholders do not ratify the selection of Edwards,
Leap & Sauer, as the corporation's independent auditors for the 1999 fiscal
year, the Board of Directors may choose another accounting firm to provide
independent public accountant audit services for the 1999 fiscal year.
Representatives of Edwards, Leap & Sauer, will attend the annual meeting to
answer questions.
The affirmative vote of the majority of shares present (in person or by
proxy and entitled to vote at the annual meeting) is needed to ratify Edwards,
Leap & Sauer, as independent accountants for 1999.
The Board of Directors recommends a vote FOR the ratification of Edwards,
Leap & Sauer, as independent accountants.
EXECUTIVE COMPENSATION
The Board of Directors of Peoples Financial Corp., Inc. governs the
corporation and its subsidiary, PFC Bank. In fulfilling its fiduciary duties,
the Board of Directors acts in the best interests of the corporation's
shareholders, customers and the communities served by the corporation and its
subsidiary. To accomplish the strategic goals and objectives of the corporation,
the Board of Directors engages competent persons who undertake to accomplish
these objectives with integrity and in a cost-effective manner. The compensation
of these individuals is part of the Board of Directors' fulfillment of its
duties to accomplish the corporation's strategic mission. Officers of the
corporation are not compensated. The bank provides compensation to the employees
of the bank.
General labor market conditions, the specific responsibilities of the
individual, and the individual's contributions to the bank's success influence
total compensation opportunities available to the employees of the bank.
Individuals are reviewed annually on a calendar year basis. The bank strives to
offer compensation that is competitive with that offered by employers of
comparable size in our industry. Through these compensation policies, the bank
strives to meet its strategic goals and objectives to its constituencies and to
provide compensation that is fair and meaningful to its employees.
(13)
<PAGE>
SHAREHOLDERS PROPOSALS FOR 2000 ANNUAL MEETING
Any shareholder who, in accordance with the corporation's Bylaws, wishes to
submit a proposal for inclusion in the corporation's proxy statement for its
2000 Annual Meeting of Shareholders must deliver such proposal in writing to the
Secretary of Peoples Financial Corp., Inc. at its principal executive office,
363 Broad Street, New Bethlehem, Pennsylvania 16242, not later than November 5,
1999.
OTHER MATTERS THAT MAY COME BEFORE THE ANNUAL MEETING
The Board of Directors knows of no matters other than those referred to in
the accompanying Notice of Annual Meeting of Shareholders that properly may come
before the annual meeting. However, if any other matter should be properly
presented for consideration and voting at the annual meeting or any adjournments
of the meeting, the persons named as proxy holders will vote the proxies in what
they determine to be the best interest of the corporation.
(14)
<PAGE>
PEOPLES FINANCIAL CORP., INC.
PROXY
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MARCH 31, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Raleigh B. Robertson and
Timothy P. Reddinger and each or any of them, proxies of the undersigned, with
full power of substitution to vote all of the shares of Peoples Financial Corp.,
Inc. that the undersigned may be entitled to vote at the Annual Meeting of
Shareholders to be held at Holiday Inn, Route 68 and I-80, Clarion, Pennsylvania
16214, on Wednesday, March 31, 1999, at 10:00 a.m. prevailing time, and at any
adjournment or postponement thereof as follows:
1. ELECTION OF DIRECTORS TO SERVE FOR A ONE-YEAR TERM.
[ ] FOR all [ ] WITHHOLD AUTHORITY
listed below (except to vote for all nominees
as marked to the contrary below) listed below
The Board of Directors recommends a vote FOR these nominees.
Frank T. Baker Raleigh B. Robertson, Jr.
Darl Hetrick J. Jack Sherman
Francis E. Kane Howard H. Shreckengost
Timothy P. Reddinger William H. Toy
Raleigh B. Robertson
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, WRITE THAT NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.)
- -----------------------------------------------------------------------------
(15)
<PAGE>
2. RATIFICATION OF THE SELECTION OF EDWARD, LEAP & SAUER, CERTIFIED PUBLIC
ACCOUNTANTS, OF PITTSBURGH, PENNSYLVANIA, AS THE INDEPENDENT AUDITORS
FOR THE YEAR ENDING DECEMBER 31, 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
- ---------------------------------------------------------------------------
3. In their discretion, the proxy holders are authorized to vote upon such
other business as may properly come before the meeting and any
adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY SIGNED AND DATED, WILL BE VOTED IN THE MANNER DIRECTED
BY THE UNDERSIGNED SHAREHOLDERS. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR ALL NOMINEES LISTED ABOVE AND FOR PROPOSAL 2.
Dated: ______________________, 1999 ______________________________
Signature
---------------------------------
Signature
Number of Shares Held of Record
on March 1, 1999
- ----------------
THIS PROXY MUST BE DATED, SIGNED BY THE SHAREHOLDER AND RETURNED
PROMPTLY TO THE CORPORATION IN THE ENCLOSED ENVELOPE. WHEN SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE
FULL TITLE. IF MORE THAN ONE TRUSTEE, ALL SHOULD SIGN. IF STOCK IS HELD
JOINTLY, EACH OWNER SHOULD SIGN.
(16)
